Business owners considering bankruptcy often wonder how a business bankruptcy would affect their personal credit. When business owners file a business bankruptcy, it only affects their personal credit if they are personally liable for business debts.
Are You Personally Liable for Your Business’s Debts?
Whether or not you are personally liable for your business’s debts depends on the tax liability determined by the business’s structure combined with whether you have ever signed a personal guarantee agreeing to accept responsibility for business debts. Before filing, it’s best to meet with an experienced bankruptcy attorney to make sure you understand the available options and the consequences associated with each one.
When a Sole Proprietor Files a Business Bankruptcy:
If you are a sole proprietor and file a business bankruptcy, your bankruptcy filing will appear on your credit file. Filing business bankruptcy as a sole proprietor could harm your personal credit score. When set up as a sole proprietor, bankruptcy law and tax law both consider you and your business as the same entity, so attempting to eliminate or pay off your business debts through Chapter 7 or Chapter 13 bankruptcy will leave a record of the bankruptcy on your personal credit report for up to 10 years.
When a General Partnership Business Files a Business Bankruptcy:
If your business is set up as a general partnership, the ramifications of a business bankruptcy get a bit more interesting. When there is a general partnership in place, each partner is personally responsible for paying back business debts. If one (or both) partner/s fails to pay back business debts, the creditor can choose to report the accounts as past due on the personal credit reports of both partners. If one partner in the business decides to file a personal bankruptcy and the other chooses to file, the non-filing partner remains legally responsible for the business debts. Additionally, if personal property is liquidated to pay off business debt, the partners remain liable for debts not fully paid by the generated funds.
Some Business Structures Don’t Typically Impact Personal Credit:
Some business structures don’t generally affect the personal credit of business owners. Businesses structured as a corporation, limited liability corporation, or limited partnership separate company finances from the finances of their owners. This separation benefits those seeking to avoid feeling the consequences on their personal credit, but there are disadvantages, as well. For example, these business structures do not receive a bankruptcy discharge, and companies with this type of business structure also allow creditors to file lawsuits against the business’s owners.
Exceptions that Leave Business Owners’ Credit Feeling the Consequences:
A couple of exceptions could mean a business bankruptcy affects a business owner’s personal credit even when there is a corporation, limited liability corporation, or limited partnership in place.
- If someone signed a personal guarantee when receiving funds for the business from one of their creditors. Filing a business bankruptcy will not wipe out the legal responsibility for the debt associated with the personal guarantee, so a failure to pay this debt will likely harm the business owner’s personal credit.
- If a business owner owes certain taxes (i.e., payroll taxes, sales tax), they are not dischargeable in bankruptcy.
If you are a small business owner in Georgia or Tennessee and are nervous about how filing bankruptcy could affect your personal credit, reach out to Kenneth C. Rannick P.C., Tennessee, and Georgia bankruptcy attorney. We help good people through bad times.