Will Business Bankruptcy Affect Me Personally?
According to the latest data from the American Bankruptcy Institute (ABI), there were more than 32,000 commercial bankruptcies filings in 2020 alone. Before filing for bankruptcy protection, a business owner needs to be sure that it is the decision for the company and for themselves. This raises an important question: How does a business bankruptcy affect the business owner personally? The answer depends on the specific situation. In this article, our New York business bankruptcy attorneys highlight the three most important issues that will determine if a business bankruptcy will affect you personally.
Issue #1: The Type of Business Entity is Filing for Bankruptcy Protection
The type of legal entity filing for business bankruptcy protection will play a significant role in determining the personal impact, or lack thereof. The primary question that needs to be answered: Is your business a separate legal entity from your personal finances? You may be considering filing for bankruptcy protection for:
Sole proprietorship;
Business partnerships; or
A corporation.
From a bankruptcy perspective, there is no difference between you and your sole proprietorship. With this type of business, your business bankruptcy is also a personal bankruptcy. On the other end of the spectrum, a corporation is a distinct legal entity. A corporation can file for bankruptcy without it having any direct financial impact on the company owner’s personal finances.
Issue #2: Any Personal Guarantees Made on Loans, Leases, or Other Debts
The next issue that needs to be considered is whether or not any personal guarantees were made on the business debts. In some cases, small business owners must personally guarantee a loan in order to get funding. When they do so, they become personally liable for the debt. If the business goes into bankruptcy—potentially relieving itself of the debt—the business owner is still legally liable for their personal guarantees. Before filing for business bankruptcy, it is crucial that business owners review any personally guaranteed debts.
Issue #3: A Creditor’s Ability to ‘Pierce the Corporate Veil’
Last but certainly not least, business owners should be aware of a legal doctrine that allows creditors to ‘pierce the corporate veil’ in certain situations. Essentially, state and federal laws let creditors go beyond the normal business bankruptcy protections and hold a business owner personally liable for a debt if that business owner engaged in some type of fraudulent or otherwise improper conduct. While it is somewhat difficult for creditors to pierce the corporate veil, they can try to do so. If successful, a creditor can take action directly against a business owner.
Contact Our Business Bankruptcy Lawyers for Immediate Assistance
At Pierce / McCoy, our New York bankruptcy attorneys have the skills, expertise, and industry knowledge that you can rely on. If you have any questions about the personal effect of business bankruptcy, we are here to help. For a completely confidential, no-commitment business bankruptcy consultation, please contact our team today. We provide top quality business bankruptcy services in New York, Texas, and Virginia.