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?
I would really appreciate a response.
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.
Good luck in your enterprise
I have 2 questions:
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.
BeanSmart.com is a site by and for consumers of financial services and advice. We are not affiliated with any of the banks, financial services or software manufacturers discussed here.
All logos and trade names are the property of their respective owners.
Tax and financial advice you come across on this site is freely given by your peers and professionals on their own time and out of the kindness of their hearts. We can guarantee
neither accuracy of such advice nor its applicability for your situation. Simply put, you are fully responsible for the results of using information from this site in real life situations.