ARTICLE

Protect Your Loan Portfolio Against the Perils of Divorce

by: Smith and Howard

January 12, 2016

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Many successful small businesses are run by married couples. But when divorce strikes, business performance may suffer. Lenders can help divorcing borrowers set aside hurt feelings, remind them about the importance of keeping their personal and business lives separate, and recommend a financial advisor to identify and work around potential roadblocks. In some cases, collaborative divorce arrangements are a creative solution to minimize costs and business disruptions — and teach former spouses how to work together after they’ve parted ways personally.

Overcoming obstacles

Borrowers appreciate lenders who stick with them through hard times. But that doesn’t mean you should take sides in a divorce. Instead, stay rational and focused on financial matters, rather than emotional ones. Among the most important recommendations you can provide is the name of a financial advisor who specializes in divorce consulting. An experienced professional can help defuse the situation, which can become contentious especially if one spouse controls the business and the other takes a more passive, behind-the-scenes role. 

A spouse who controls a business sometimes may be reluctant to release certain information, such as financial statements, tax returns, business plans, contracts and marketing materials. Or he or she may argue that giving an appraiser access to this information breaches security and interrupts business operations. Some dishonest spouses may even go as far as to hide assets or understate profits by deferring income or exaggerating expenses until the divorce settles.

For example, when valuing a mom-and-pop business to help settle a divorce, a financial expert noticed that a company’s professional fees and administrative salaries had spiked in recent years. The expert discovered that the spouse who controlled the business had been using company funds to pay her personal attorneys’ fees. Additionally, the company was paying the office manager (who was also the owner’s new “love interest”) more than triple the amount that other companies in the city paid employees in similar administrative positions.

Such financial manipulations aren’t just inequitable to spouses who have less active roles in the business. They also drain company resources, prolong divorce proceedings and impair a borrower’s ability to repay debt.

Making Amends

Divorce doesn’t have to get ugly, however. Collaborative divorce has emerged as a way to split up marital estates amicably and creatively, all the while minimizing professional fees and court costs.

In collaborative divorce, the parties contractually agree to settle their breakup out of court and to openly exchange all relevant financial information. Each side hires his or her own attorney — then the parties meet regularly to brainstorm settlement options. The only court appearance occurs when the attorneys present their final settlement agreement to the judge.

Why does collaborative divorce save time and money — especially when a business interest is at stake? Simple — it requires only one neutral financial expert.

For example, suppose the husband owns a private business interest. In a traditional divorce case, two experts would be hired and educated about how the business operates. Each expert would prepare an independent appraisal of the business. This process is time-consuming and may disrupt normal business operations. In addition, two experts rarely arrive at exactly the same value conclusion, requiring them to critique each other’s report and reconcile the differences. But with one expert, these problems are eliminated.

Collaborative divorce isn’t for every divorcing couple. Trust and honesty are key prerequisites. But those who successfully collaborate stand to benefit: The goals are to maximize the “pie” before slicing it up — and to minimize hard feelings. The latter is especially important when the parties intend to jointly operate a business after the dust settles.

Supporting borrowers through thick and thin

When one of your borrowers announces that he or she is getting divorced, avoid the urge to panic. Sure, it can get ugly and expensive — and potentially put your loan at risk if customers or employees decide to leave. But a divorce also can be an opportunity to fortify your banking relationship.

For more information, contact Mark E. Abrams at 404-874-6244 or fill out our form for more information. 

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