the not-so-DH has racked up thousands of credit card debt- update and a request for advice

[Guestmama123]

Update and a request for advice is at the bottom of post #1.

A brief background... I've been struggling with/wanting to leave my marriage for a while, but have held off until the kids start school so I can support myself and them without having to cover daycare costs.

My husband runs his own business, of which I am 50% owner (it seemed like a good idea at the time, due to the tax benefits of having a partnership over a sole proprietorship. Things were good between us then), although I have almost nothing to do with the business. In the past year or so he has taken the business in a direction I haven't felt comfortable with. His plan was to invest more heavily in the business so that the expansion would bring in more revenue. I felt this was risky given the current economy. When this first happened I asked to change the terms of the business so I was no longer a partner; then he could do what he wanted to do without it impacting me.

He never did this.

Yesterday I found out that he funded the business's expansion with credit cards. I am not sure the total, but it is at least 25K, which is a lot for a one-person, small business. Although the cards are in the business's name, the terms of virtually all credit cards are that the owner has personal liability if the debts aren't paid. Meaning if the business cannot pay the debts, the credit card companies can go after our personal assets. We are not in a community property state, but my understanding is that because I am an owner of the business (50% as reported to the IRS), they can go after not just our joint assets, but things that are in my name only. If I wasn't on the business, accounts and assets in my name only would be protected.

We are barely making the mortgage, negative equity in the house, no health insurance broke. Our 'assets' include my IRA from my pre-children working life and the kid's 529 plan that their grandparents pay into (the account is in my name).

I asked again to be taken off the business ASAP and he said it would cost too much money in legal fees to solve a 'theoretical problem.' He assured me there's always enough money to pay the minimum balance. He's 200% convinced he will be able to pay them off once his lucky break comes in or the economy turns around, or in enough time, or something. Yeah. OK.

I need help figuring out my options. This is what I see:

1) Continue on as is for a few more years, hoping the business continues to be able to pay the minimum (I can't even dare to hope it would ever be able to pay more than that) . Then get out once the kids start school (2 years from now).

2) Forget waiting until the kids are in school and I can financially support the three of us; file now for a legal separation and get myself off the business in the process.

There must be something else I'm not seeing, can anyone else help me out with other possibilities?

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Update, 9/30

It's been a few months since I posted this. There have been positives and negatives. H has refused to take me off the business so I called a lawyer myself and found out I am not liable for any credit card debt because I didn't sign the application and the account isn't in my name. However, he is liable, so our joint assets are potentially at risk. The more immediate issue is that the debts are increasing, the business is becoming less profitable, and he refuses to change strategies. Last month he had to borrow from a credit card to make payroll; this month he's only able to pay himself half of what he normally does... so not enough to cover our expenses. He's hopeful money will come in... from somewhere... within a few weeks. Basically he's 'working' almost all the time (doing what he loves, but not what generates income), and his ability to support the family is rapidly diminishing.

The better news is that my work-at-home income is increasing and although I don't yet make enough to cover much daycare (so I work late at night and early in the AM), I'm getting much better situated to move into working fulltime with a reasonable income once my younger child starts school in a year.

I've watched all this unfold in horror, not sure what to do. Then yesterday it dawned on me that we're ripe candidates for credit counseling. A neutral person might help him see better ways to run the business and help him understand that ever increasing credit card debt is really serious. And might even help us out of this mess.

Now I'm looking for help finding a good credit counseling agency, one that works with small businesses as well as personal finance. Any good recommendations? I have no idea where to begin with this.

Edited by Guestmama123 - 9/30/12 at 4:48pm

[crunchy_mommy]

Can't you get yourself off the business somehow?? I don't really know much about owning a business but if you are 50% owner, you should (theoretically) have 50% of the responsibility in taking yourself off as owner too, right?

I guess I'm thinking that your second option really is two options: get legally separated now, or just get out of the business now & deal with the separation later when you feel it's a better time.

Does your DH know you are planning on leaving him in a couple of years?

[zebra15]

Why didn't your DH incorp as opposed to partnership.  Having an LLC removes the liability from a person and keeps the company a separate unit.

You mama need to get an atty fast.

[kellylynn]

I understand your situation and it sounds like you do need advise.  If there is a way to work within your marriage to fix things that is your best option.  If you are leaving reguardless, you can opt out of the business by signing a contract releasing control of your portion of the business. And your husband assuming all liability (he must agree to it of course). Go to an attorney have the contract drawn up, signed and notarized. Notify all creditors, irs and state that you are no longer responsible for further debts.

Prepare! Start getting credit cards (preferably low interest, but even prepaid) in your name only.  Take $1000 out of your ira, go to a local bank, put it in a savings.  Take out a loan of $1000 secured by your savings.  Make a couple of payments, then pay it off. Do this with 3 different banks.  You will have perfect credit in no time.

Your credit rating and financial status will be some of the most important issues, when seperating. It really helps when you have to find a new place to live with your children, when you apply for a new job, so forth and so forth.

Women don't normally think about these things when leaving.  We believe we will get the house, support, etc.. It doesn't always happen that way.....

[Guestmama123]

Originally Posted by crunchy_mommy 

Can't you get yourself off the business somehow?? I don't really know much about owning a business but if you are 50% owner, you should (theoretically) have 50% of the responsibility in taking yourself off as owner too, right?
I guess I'm thinking that your second option really is two options: get legally separated now, or just get out of the business now & deal with the separation later when you feel it's a better time.
Does your DH know you are planning on leaving him in a couple of years?

The business is really my husband's thing. I only signed as a partner for the tax benefits; I never shared the work, decision-making, or interest in it, so it made sense to ask him to change the terms first. I can definitely get myself off the business, as Kellylynn described below. Doing that will cost a fair bit in attorney's fees, then put my husband through a lot of work to reconfigure the legal arrangement of the business, but I'm prepared to do it if I have to. Because my husband sees it as totally unnecessary, incurring that sort of expense would cause such disharmony between us that marital separation would be inevitable, likely before I'm ready for it. But again, I am prepared to do it.

Originally Posted by zebra15 

Why didn't your DH incorp as opposed to partnership.  Having an LLC removes the liability from a person and keeps the company a separate unit.

You mama need to get an atty fast.

It is an LLC. However, business credit card contracts require a guarantor, which is my husband. So if the business can't pay the bills, my husband is personally responsible. LLC's are advised to use credit cards sparingly because of this. It may be that because my husband signed the credit card contract and I didn't, I may be protected. But our joint accounts are at risk. Putting all the LLC's debts onto a credit card completely defeated the purpose of setting up an LLC.

Originally Posted by kellylynn 

I understand your situation and it sounds like you do need advise.  If there is a way to work within your marriage to fix things that is your best option.  If you are leaving reguardless, you can opt out of the business by signing a contract releasing control of your portion of the business. And your husband assuming all liability (he must agree to it of course). Go to an attorney have the contract drawn up, signed and notarized. Notify all creditors, irs and state that you are no longer responsible for further debts.

Thanks, knowing exactly what to do to get off the business is extremely helpful.

I'm thinking what I might do is give him a certain amount of time to fix the situation, either get the debts into a form that doesn't have one of us as a personal guarantor (i.e., take out a loan to pay off the credit cards and use the business assets as the guarantee)  or change the form of the business so I am no longer a partner. Maybe there's something else I'm not aware of. And if he doesn't fix it by the end of that time, then I'll do as you, kellylynn, have described. Chances are, his response to all this will let me know if I want to separate at that point or hang in a little longer.

[littlest birds]

I just went through changing an LLC from a partnership to a sole proprietorship-- I am the remaining sole owner.  This is not extremely complicated to do.  And taxes are much easier as a sole proprietorship. 

[Guestmama123]

Originally Posted by littlest birds 

I just went through changing an LLC from a partnership to a sole proprietorship-- I am the remaining sole owner.  This is not extremely complicated to do.  And taxes are much easier as a sole proprietorship. 

This is good to know, I will look up the information about what is involved. I know some states do not allow sole proprietorship LLC's so I will check this out, too. Did you need a lawyer to do this or were you able to do it yourself? Were there fees involved?

[MacroMama]

Just wanted to jump in and say I don't think that credit card companies can take money from IRAs or 529 savings plans to repay debt.

You may end up having to declare bankruptcy to get rid of all the debt and start again once you are separated.
 

[littlest birds]

We used a lawyer for the transfer of ownership/bill of sale only.  The rest of it I did do it myself.  I have probably done some things incorrectly, but to tell the truth the professionals often do things differently from one another and I have been given some completely incorrect advice on multiple occasions.

We did not get a new EIN either as per advice we received from the IRS.  There were no extra fees.   

The thing with an LLC for us at least is that the LLC identity of the business undergoes no change at all--all you are doing is removing a member. 

An LLC with two owners is a partnership by default, while an LLC with one is a sole proprietorship by default, and therefore the default automatically changed.  I did an extra set of taxes for the year it changed.  One set of partnership taxes for 10 months and the schedule C (sole proprietor) for the other 2 months.  They were filed as if they were two distinct tax years.  Each tax return was filed with a letter of explanation.

[honeybunmom]

Be careful about the business organization advice you are receiving here.  Unless the statute of the state under which your LLC was organized has the same rules as the state under which the people giving advice have, the advice is irrelevant.  What you are able to do will depend on what the laws say for your LLC's state of organization and what the operating agreement states (if one was drawn up at all).  While there are great similarities in the statutes from state to state, there are certainly some differences as well.

[Buzzer Beater]

Even if you get "off" the business, his debts during the marriage are still half yours. If he has signed his name for the cards, that will impact you even if you divorce.

[laohaire]

Originally Posted by Buzzer Beater 

Even if you get "off" the business, his debts during the marriage are still half yours. If he has signed his name for the cards, that will impact you even if you divorce.

It depends on the state. In some states, the debt in his name alone can stay in his name alone.

[Buzzer Beater]

Originally Posted by laohaire 

It depends on the state. In some states, the debt in his name alone can stay in his name alone.

Even in states that are not community property the judge will rely on equitable distribution of assets and debts. Unless her husband willingly takes the business debt a judge may assign her some of it, especially since her name was on the business.

[Guestmama123]

Originally Posted by MacroMama 

Just wanted to jump in and say I don't think that credit card companies can take money from IRAs or 529 savings plans to repay debt.

You may end up having to declare bankruptcy to get rid of all the debt and start again once you are separated.
 

Originally Posted by littlest birds 

We used a lawyer for the transfer of ownership/bill of sale only.  The rest of it I did do it myself.  I have probably done some things incorrectly, but to tell the truth the professionals often do things differently from one another and I have been given some completely incorrect advice on multiple occasions.

We did not get a new EIN either as per advice we received from the IRS.  There were no extra fees.   

The thing with an LLC for us at least is that the LLC identity of the business undergoes no change at all--all you are doing is removing a member. 

An LLC with two owners is a partnership by default, while an LLC with one is a sole proprietorship by default, and therefore the default automatically changed.  I did an extra set of taxes for the year it changed.  One set of partnership taxes for 10 months and the schedule C (sole proprietor) for the other 2 months.  They were filed as if they were two distinct tax years.  Each tax return was filed with a letter of explanation.

Thank you. I have looked into how to do this in my state and it doesn't seem complicated. It may even be possible to do without a lawyer, though I'd prefer to have one look over everything before submitting it.

Originally Posted by honeybunmom 

Be careful about the business organization advice you are receiving here.  Unless the statute of the state under which your LLC was organized has the same rules as the state under which the people giving advice have, the advice is irrelevant.  What you are able to do will depend on what the laws say for your LLC's state of organization and what the operating agreement states (if one was drawn up at all).  While there are great similarities in the statutes from state to state, there are certainly some differences as well.

At this point I'm looking for options. I think there are enough similarities among states that different options are applicable, even if the actual process is slightly different. When it comes time for action I'll definitely make sure I'm doing everything correctly for my state.

Originally Posted by Buzzer Beater 

Even in states that are not community property the judge will rely on equitable distribution of assets and debts. Unless her husband willingly takes the business debt a judge may assign her some of it, especially since her name was on the business.

This is just one bridge I'm going to have to cross when I get to it. I'm not in a community property state so that's going to work in my favor here. But until I sit down with a lawyer and talk through all the details, I'm not going to have a sense of what a judge might decide.

[JudiAU]

I think you are probably stuck.  

If the business is a partnership (why!! why!) and you were a partner when the debt was incurred, you may not be able to walk away from the debt if the business fails and they go after him for personal lability. However, you can probably limit the damage to removing yourself from the partnership now because it sounds like DH will incur more debt in the future.

I am assuming that it was structured as a partnership because he couldn't qualify for financing as an LLC. (Which btw, is a good reason not to open a business.) It is easier to get financing for a partnership because they have you on the hook. You need real business prospects to get financing with a more sheltered LLC or corp.

Does DH know of your plans for the future? I am not sure how you can convince him to let you shield yourself if you don't have a good reason like "I don't want to incur any more debt for your dumb business since I am not in it for the long haul."

If the business continues to coast and the debt level remains the same it isn't a horrible amount. Not really. If you are really concerned about the level of debt get a part time job while DH can provide some easy childcare in the evening.

[Guestmama123]

Originally Posted by JudiAU 

I think you are probably stuck.  

If the business is a partnership (why!! why!) and you were a partner when the debt was incurred, you may not be able to walk away from the debt if the business fails and they go after him for personal lability. However, you can probably limit the damage to removing yourself from the partnership now because it sounds like DH will incur more debt in the future.

I am assuming that it was structured as a partnership because he couldn't qualify for financing as an LLC. (Which btw, is a good reason not to open a business.) It is easier to get financing for a partnership because they have you on the hook. You need real business prospects to get financing with a more sheltered LLC or corp.

Does DH know of your plans for the future? I am not sure how you can convince him to let you shield yourself if you don't have a good reason like "I don't want to incur any more debt for your dumb business since I am not in it for the long haul."

If the business continues to coast and the debt level remains the same it isn't a horrible amount. Not really. If you are really concerned about the level of debt get a part time job while DH can provide some easy childcare in the evening.

Well, the business isn't coasting. The debt is increasing, it's even gone up since I started the thread. I do work; I have two at-home jobs that I do when the kids are sleeping, or when I hire a mother's helper. At the moment I'm maxed out with how much money I can earn and still get a reasonable amount of sleep. That's why this is stressful- 25K is a lot of money when it's increasing and there's no mean to pay it back.

[SunRise]

I dunno, entrepreneurs have to be optimistic and they have to believe in what they are doing and, as the old adage goes, "you gotta spend money to make money". As for risks, so long as he can make the payments for the time being....

Is this the only reason you want to leave, because of the business & debt? Did you stop believing in him? If he was making money would it be ok? (what about "the good and the bad")? People go into debt (100K) for a school degree, so maybe 25K to get a business back up isnt that much.

I understand it is stressful, but is there away to let him handle what he is doing and you take a back seat, do your job, look after your family and support him,listen too him but let him take care of business. Let him do the worrying. Of course, if there are other reasons you want to leave... then that's a different story.

[Guestmama123]

Originally Posted by SunRise 

I dunno, entrepreneurs have to be optimistic and they have to believe in what they are doing and, as the old adage goes, "you gotta spend money to make money". As for risks, so long as he can make the payments for the time being....

Is this the only reason you want to leave, because of the business & debt? Did you stop believing in him? If he was making money would it be ok? (what about "the good and the bad")? People go into debt (100K) for a school degree, so maybe 25K to get a business back up isnt that much.

I understand it is stressful, but is there away to let him handle what he is doing and you take a back seat, do your job, look after your family and support him,listen too him but let him take care of business. Let him do the worrying. Of course, if there are other reasons you want to leave... then that's a different story.

No, this has nothing to do with why I want to leave. I'd still want to leave if he was making money. I'm trying to focus on the practical financial issues, and this is a problem to solve whether I leave or not. The whole family will benefit if at least some of our money is separate from the business liabilities.

I understand the need to invest (wisely), but this hasn't been wise. As a business partner, I have access to the bank statements, balance sheets, profit and loss statements, knowledge about the seasonal variations in income, and a background in bookkeeping. I've talked to our accountant. All the evidence is that this is a financially precarious situation.

[Guestmama123]

Bumping for advice, see post 1.

[Basylica]

I didn't read full thread, but I wanted to interject that regardless of wether the CCs are in your name or not, you ARE liable for the debt.

we had 3 CCs and they were in my ex's name and they were community debt.

that being said the sooner your bail the better. it's just like with custody issues, but NOT doing something you are passively agreeing and therefore it looks like you are OK with the situation even if you are not.

since you are 50% owner of the company, your best bet is to goto court and argue ex should assume 100% of debt and you'll give over your 50% stake in the company.

But again, the sooner the better.

I was totally liable for my ex's CC debts, incl the fact he took out huge cash advance to pay for lawyers!

I am however, far smarter than ex....so I worked that to my advantage during mediation. :)