My wife is starting a business with a friend of hers. Both us and her friend and friend's husband, own homes. However, since we are in Texas, the homes are in our combined names, i.e, our home is in mine and my wife's name and same is for her friend. My wife is taking a bank loan for the business. If her business fails, can the bank come after our house since my wife's name is on the house? What if her business is a class C corporation? Can they still do that?
If she is required to sign personally (ie: provide a personal guarantee), and not as an officer of the company (ie: for the company), then yes, any and all of her assets are at risk. This is true regardless of the entity structure. Lenders are not keen on new businesses without personal guarantees and the resulting collateral to guarantee the loan, if the amount requires that. That being said, the home is (probably) mortgaged, and they'd fall in at lease second place, if not farther down the road if/when that time comes.
The thing to do is to be absolutely sure that everyone understands the legal implications of signing any document. If they don't have an attorney, get them to find one to review the documents if they aren't sure what they are signing or where they stand with the liability. They may also need the attorney down the road for other legal matters, so it's quite helpful to have someone "on-board" from an early point.
As a former commercial loan officer at a major bank, we NEVER loaned money to a small business without the personal guarantee of the owners of the business. Often, the personal guarantee was included in the note as a second signature, but many were handled with a separate document of Personal Guarantee, signed by those that owned the corporation. It is the rule, not the exception, that principals of each business are all required to guarantee the corporation's debt when using institutional debt. For example, my company has a merchant account (a credit card processing account), but I had to personally guarantee repayment of chargebacks should our checking account not have adequate balances to cover a chargeback.
Here is the rule: If there is a way for the bank to reduce its risk, it will take it. If risk is too high, the loan will be declined. Collateral, joint property ownership, joint and several guarantees, personal guarantees, assignments of receivables, notes, inventory, etc. are all ways that banks reduce their risk. When risk is reduced, interest rates are lowered because interest charges include the "credit risk" of each loan. Were this not the case, all notes would be "signature notes" only and the interest rates would be much higher because the risk is higher. It's simple and logical.
FWIW. TEXAS is one of the nine community property states. So, it would be in your best interests to discuss this situation with a competent Texas attorney.
1) Is it possible to take my wife's name out of my the deed/title of my house? She is willing to give me the power of attorney to do that.
2) Does "community property state" mean that both husband and wife should jointly own a residential property?
How the property is titled isn't an issue in a community property state. Half of "hers" is half of "yours". Half of "yours" is half of "hers".
Is there equity in the house (value - debt) that makes this an issue at all. Because another lender, especially one without a claim on the house, would probably not try to go after the house for a small amount of equity.
All parties involved should talk to an attorney - understand the risk involved - and if you decide to move foreword with this business venture, make sure you succeed.
Yes, there is equity in the house. Also, my credit is very good now and I want to protect it with everything possible. "Half of "hers" is half of "yours". Half of "yours" is half of "hers"". I understand this but as far as a creditor is concerned, she doesn't have any asset if the house is not in her name. Are you saying that a creditor can come after all my assets just because she is married to me eventhough she doesn't own any of these assets?
I don't think that matters under community property laws - but a quick chat with an attorney should settle what some creditors can possibly take.
Again, I wouldn't put too much worry in this, and if you are, then drop the project if the risk is that great or if the *sureness* of your abilities to make it work are not there.
After all, the goal is not to keep the house if the business fails - it's to not let the business fail in the first place.
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