For many businesses struggling with debt, filing for bankruptcy is one of the best strategies to obtain relief. Bankruptcy can help you to reorganise debt, keep the venture running and achieve financial freedom.
Bankruptcy may affect your personal credit depending on a number of factors, including your business structure – whether it’s a corporation, sole proprietorship or partnership.
Here is some information to keep in mind regarding business bankruptcy and personal credit:
Typically, a corporation will dissolve unless all debts are repaid at the time of bankruptcy. If your business is incorporated, you are not personally liable for any business debts. By law, incorporated businesses are considered an independent legal entity. In other words, creditors cannot seize your personal assets to settle business debt unless you have committed those assets as security for the debt. However, certain assets of your corporation may be forfeited to the trustee to distribute to creditors.
Additionally, company shareholders are not liable for the business debt – unless in the case of shareholders that also act as directors of the corporation.
Sole proprietorship and partnerships
If your business entity is registered as a sole proprietorship, your personal assets may be used to fulfil the obligations of your business venture. In other words, you may be personally liable to meet any business debts because the law recognises you and your business as a single entity. To eliminate debt for your sole proprietorship, you will need to file for personal bankruptcy.
If you are in a partnership, your business may continue to operate under bankruptcy. However, if your partnership is made up of two people, and one declares bankruptcy, the partnership dissolves. In this case, the fact that your partner filed for bankruptcy should not reflect on your credit report because it is not a personal bankruptcy. In cases of partnerships with more than two individuals, the business is not liable for a partner’s personal bankruptcy – however, this is dependent upon an agreement between all partners.
Guarantor or cosigner
If you have personally guaranteed or cosigned a business debt and the bankruptcy does not clear the debt, you may be liable. This is very common in small businesses where creditors require the owners to sign a personal guaranty.
If your business is facing financial hardship, seek the advice of a licensed insolvency trustee to learn more about how business bankruptcy can affect your personal credit.