A common and vital question, whether starting a small business or large chain corporation is, “Does business bankruptcy affect personal credit?” The short answer is, yes, it can.

Employees are only affected due to being laid off. In other words, there is no chance of staff being personally responsible of any assets and debts after a business goes under. Unlike with an owner, bankruptcy can affect personal credit score.

The bankruptcy business can be confusing. Let’s dive in to exactly when and why bankruptcy affects credit personally for business owners.

How Does Business Bankruptcy Affect Personal Credit?

The most crucial factor of starting a business is understanding liability. Liability depends on different factors.

Did you sign a personal guarantee for the business debt?

If so, bankruptcy can affect your personal credit. By signing a personal guarantee, you have agreed to take responsibility for all business debt payments.

What type of business entity do you hold?

Unfortunately, the type of business entity is a deciding factor. 

Sole proprietorships

As a result of being the sole proprietor of a bankrupted company, you are personally liable and it can affect credit personally. Reason being, the law sees a proprietor and the business as one entity. Learn how to get rid of your liability for all business debts.

Partnerships

With a partnership, each person contributes different amounts of labor, money, property, and/or skill. Since the profits and losses are shared together, personal credit may not be affected.

Corporations (C or S)

Potential shareholders create a corporation through the exchange of money and/or property. In turn, each shareholder owns a portion of capital stock. Yes, personal credit can be affected by a corporation bankruptcy.

Limited Liability Company (LLC)

LLCs give more protection to the business owner. Yet, they are only allowed by state statute and not all businesses can be an LLC. Someone can sue an LLC, but not sue the owner personally for assets or other damage. In short, no, personal credit will not be affected.

What is your company’s tax liability?

Liability can be determined by looking at the business structure used when the business was initially formed. The amount of taxes owed is based on the present income of the business. Therefore, how much your business is taxed determines how much bankruptcy will affect you personally.

Ramifications of Bankruptcies

Expect a creditor to file the debt on a business credit report.

Interest from a corporation, partnership, or LLC could affect your individual credit report.

Similarly, unpaid taxes become an even stronger financial strain when a business (or person) files for bankruptcy. For example, have you withheld a tax from your employees’ salaries? Have you withheld a sales tax from customers or clients? These taxes are not cleared in bankruptcies.

Business Bankruptcies: Get the Help you Deserve

Declaring corporate bankruptcy or small business bankruptcy can be embarrassing, stressful, and exhausting. Don’t let your business going under turn into a black hole of personal bankruptcy whirlwind. Do you feel hopeless about your business credit or your personal assets?

Get out of the dark and get the legal help you need by hiring a licensed insolvency trustee (LIT). An LIT is a skilled legal professional who will provide advice and services to businesses (and individuals) with debt or bankruptcy issues.

Charles M. Clapp of CMC Law is the premier bankruptcy and debt lawyer of the Atlanta area. Whether you are filing for Chapter 7, Chapter 11, Chapter 13, your financial woes will be in the right hands with a skilled attorney.

Asking important questions like, “Does business bankruptcy affect personal credit?” is only one part of bigger issues. Owning a company or brand is a big responsibility. Make sure you are on the right path before it’s too late. Contact CMC Law now to protect your personal credit.