When a business can no longer meet its financial obligations, owners may assume that filing bankruptcy for the company will protect their personal finances. That assumption can be costly if they have signed personal guarantees.
The key distinction is that a business and its owner may be separate legal persons, but a personal guarantee can create an independent obligation for the owner.
What Happens When the Business Files Bankruptcy?
The result depends on the business structure and the bankruptcy chapter involved.
A corporation or limited liability company may file bankruptcy in its own name. Depending on the chapter, the process may involve liquidating assets or reorganizing debts. A sole proprietorship is different because the owner and business are not separate legal entities for bankruptcy purposes.
Even when a company files bankruptcy, a lender may still have a claim against an owner who personally guaranteed the debt. The company’s filing does not automatically discharge that separate obligation.
What If You File Personal Bankruptcy?
An individual may be able to discharge qualifying personal liability under a guarantee through Chapter 7 or address debts through a Chapter 13 repayment plan. Eligibility, available exemptions, the type of debt, and potential exceptions to discharge all matter.
For example, a business owner may have guaranteed a commercial lease. If the business closes and stops paying rent, the landlord may pursue the owner under the guarantee. Personal bankruptcy may provide relief from qualifying liability, but it does not automatically resolve every claim or protect every asset.
Can Both the Business and Owner File?
In some situations, separate business and personal bankruptcy proceedings may be considered. The appropriate approach depends on the entity, its debts, the owner’s personal obligations, and the available restructuring or liquidation options.
Do not transfer assets to relatives, move money out of the business, or repay selected creditors simply because bankruptcy is being considered. Such actions can create additional legal issues.
How Abii & Associates Can Help
Abii & Associates can help you review business debts, personal guarantees, and the distinction between company and personal liability. Understanding those issues before filing can help you assess your options more clearly.
If your business is struggling and you personally guaranteed its debts, contact Abii & Associates to discuss the potential consequences for both your company and your personal finances.
Final Thoughts on Business Bankruptcy vs. Personal Bankruptcy: What Happens When You Personally Guarantee Business Debt?
Business bankruptcy and personal bankruptcy serve different purposes. A company filing may address its own debts without eliminating the owner’s liability under a personal guarantee. Before choosing a path, understand which obligations belong to the business, which belong to you, and what relief may be available.