Borrowing During Marriage Can Put Your Separate Property at Risk

Many couples get married without a premarital agreement (also known as a prenuptial agreement), but with the desire to keep their separate property separate. However, once finances are commingled, even to the slightest degree, things can get tricky.  One of the main impediments to keeping separate property separate is the idea that the proceeds of loans are community property if the lender relied on community property to make the loan.

It is not uncommon to get confused in this area of the law because people think the issue is the responsibility for the debt. In this case, however, it is the character of the loan proceeds that creates the problem.  Take Betty, for example. Betty owned a successful packing company prior to marrying Bob. During the marriage, Betty goes to the bank and obtains a line of credit for $300,000 to allow her to expand her business by purchasing more land.  The bank relies on the land as collateral, but it also relies on the community’s credit, which includes her salary and distributions from the business.

It is likely that a court would find that the proceeds of the loan would be community property. Betty is now using community property to expand her separate property business. If she deposits the community property funds in separate property accounts, she will have a complex tracing problem if she gets divorced.  The longer this goes on, the more complex the accounting issues become.  If Betty had obtained a revolving line of credit, the tangle of funds might be impossible to unwind.  It is very difficult to run a business without financing so it would not be practical to advise Betty not to borrow during her marriage to Bob.  It is also very difficult to borrow without a bank relying on community earnings.  The only way to avoid the impact of borrowing is to enter into a premarital or postmarital agreement. Walzer & Melcher drafts these agreements to protect business owners.

For more information about protecting your assets during your marriage, contact the expert family lawyers at Walzer Melcher today.