MCA Debt and Divorce: The Personal Guaranty Requires Its Own Resolution

The divorce papers gave the business to him and made him responsible for the merchant cash advance and other debts he’d signed on behalf of the business. At the same time, his ex-wife had signed off on some of these debts, saying she’d repay them if he stopped. The merchant cash advance company hadn’t signed the divorce papers, so as far as it was concerned, she was still a guarantor. The only clean way out of that is to pay off the merchant loan, refinance it with a loan company willing to take over that financing, or make them agree to release that particular part of the deal.

Even though your divorce papers, or yours and your ex-spouse’s signatures on them, clearly spell out what is going on in the divorce and who is responsible for what, the merchant loan company, as a third party, doesn’t have to abide by this. It can sue for the money, and whether it goes after you or your ex-spouse is up to the loan company. Basically, if someone is a cosigner or has guaranteed a debt, it doesn’t end that part of the bargain just because the other spouse agrees to pay in the divorce agreement. If the person stops paying, the lender is still going to look to you, the ex.

During the discovery phase, in the lawsuit over the divorce, you need to track down every single instance where you might have signed on, or guaranteed the repayment of, a debt. Pull your credit report, then go through your financial statements and bank statements and figure out what debt you may have, or what you’ve signed off on. Your tax returns may also offer some insight. If you are the one coming up with the list of business assets in divorce, and you are the one who knows the finances, you have to make sure the debts are all accounted for correctly, both business and personal. To be clear, any agreement between the two of you should list specifically which debts will be paid off by your spouse and which ones you will take care of.

The problem with including a clause in the settlement agreement in which the two of you agree that you are not responsible for the bad debt is that it’s only a promise between the two of you. Third parties can continue to try to collect those debts, can continue to harass you, and can harm your credit, even when the two of you have a signed agreement saying you won’t hold each other responsible. This clause is basically something that you agree to in the course of resolving the divorce, and you can use it to force your ex to pay for those damages afterward, but it won’t do anything to halt them beforehand.

A ”hold harmless” clause may seem nice and promise that neither of you will do anything that will harm the other party, but in practice, this isn’t good enough. Instead, try to lay out clearly the terms of the debt you are dividing up between you, allowing a specific amount of time to notify that something is wrong, another amount of time to address it, and then it’s a breakdown of that agreement, and you can sue to make sure the other party meets what was promised. The language should also state who pays the other’s attorney fees if one side violates the terms of the agreement.

Whether it’s possible to have one spouse take over responsibility for the merchant cash advance debt, such as in the case of a business where the merchant loan has been taken out under that business’s name, depends on the funding company. The problem is that the business loan wasn’t just a divorce problem, it was also a money problem that may be making it hard for your spouse, or you, to run the business profitably. If the merchant loan financing company isn’t willing to talk to you, there’s really not much you can do to force it to accept the change.

Make sure that the agreement sets clear deadlines for paying off, or managing, the debt, and also allows for enough time to force the issue with the merchant cash advance lender. The divorce agreement needs to address what will happen if the funding company fails to act on a request to remove you from the agreement. It might say that if there’s no agreement by the deadline, then the two of you agree to sell the business and divide the proceeds to get rid of that debt.

Although it would be nice to believe that your ex will abide by the terms of the divorce agreement, even without a signed, legally valid release of liability from the company holding the loan, it’s wise to keep close tabs on that situation and to make sure that your ex is handling that problem correctly. You can’t turn your attention away from the issue, trusting that your ex-spouse is making the payments on time, until that debt has been paid off and the account closed, or until the loan or cash advance company agrees to release you from the loan. It’s smart to get copies of statements of that account, or to get online access, so you can keep track of how much has been paid on the loan. Make sure that your divorce agreement spells out that your spouse will be responsible for this, and that if he or she does fail to pay for whatever reason, that you’ll be notified. Your divorce should also spell out that your ex-spouse won’t take on any new debt while you’re still on hook for the merchant cash advance or other loans. Unless you specifically bar this, your ex can take on debt after the divorce, leaving you to bail him or her out later.

If your ex files for bankruptcy later, the chapter matters. While Chapter 7 bankruptcy won’t wipe out those debts owed to you under the divorce, including to cover the merchant loan or cash advance, Chapter 13 bankruptcy can wipe those out after completion of all the plan payments. Make sure you run the details by a bankruptcy attorney, as well as your tax counselor, before you finish your divorce.

Make sure that you clearly understand how these loans work, your state’s rules on how this is handled, and get that release of liability agreement from the lender as quickly as possible, if you can.