Cause a Bankruptcy Filing to Impact Your Personal Credit Report
If your business is going under, the last thing you want is for it to affect your personal credit. Will it? This is a question we receive a lot and it’s usually a concern for a lot of our clients. Many of the owners we talk to at Delancey Street also worry about losing their home. An LLC is supposed to keep your personal and business assets separate. So at a minimum, it should insulate you from your company’s debts. But there are circumstances that could cause a bankruptcy filing to impact your personal credit report. How much is at risk is all a matter of how your business is set up.
The first way is the personal guarantee. An LLC acts like a shield: it protects your personal assets from your business liabilities. However, if you sign personal guarantees on business loans, you’re writing a contract saying you’ll personally pay the company’s debts if it fails to do so. The LLC’s debts will be reported on your personal credit report. They could damage your credit score if the debts aren’t repaid on time.
The second way follows from the first, and it goes beyond your credit score. A personal guarantee makes you personally liable for the business’s debts if the business is unable to pay. The guarantee not only becomes a liability on your personal credit report, it also becomes a debt you personally owe. Debts you signed for yourself don’t stay in the business box.
The third way catches owners who never signed a guarantee at all. We’ve heard from business owners who believe that they should be insulated from the bankruptcy of their business. If the business doesn’t do well, that shouldn’t harm their personal credit. After all, that’s the whole point of forming an LLC. Even so, without any personal guarantee in place, the bankruptcy itself can still appear on your credit report. It can lower your credit score even without any debt showing up. For a lot of owners, that may seem unfair: You formed an LLC to protect yourself, you never signed any guarantee, and now you can see a bankruptcy on your credit report even if your personal assets weren’t seized.
The fourth way shows up later, when you go looking for money again. With a poor credit score it might be difficult to find another lender willing to give you a loan. Some owners we talk to are surprised to hear this. That surprise often comes from a misunderstanding of what’s protecting them from the bankruptcy. While an LLC does “protect” your personal assets from your business’s debts and liabilities, it’s more accurate to say that it separates those assets. It keeps your business and personal assets in separate legal boxes.
The fifth way is what happens when those boxes leak. It’s important to understand that an LLC doesn’t magically hold your personal assets safe just because it exists. If you use the business as a personal piggy bank, mixing personal and business funds, you might end up liable for the LLC’s debts and liabilities as well. In other words, your personal assets may be at risk. The fix is not glamorous. Keep your personal and business bank accounts separate. Then stick to those accounts. Don’t switch between them. Deposit all business income into the business account and pay all business expenses out of it, which keeps personal assets from being used to pay business debts in the bankruptcy.
The sixth and last way applies to the owners of a business that operates without incorporating or maintaining an LLC. When you buy or operate a business without incorporating or creating an LLC, the company is a “sole proprietorship.” That means you are legally one and the same as the business. Some sole proprietors buy liability insurance and assume that protects their personal assets, even though they haven’t incorporated or set up an LLC. Their assets may be at risk. Insurance can help cover the cost of damages awarded in a lawsuit. Even if you do have an insurance policy and the company goes bankrupt, those personal assets are still at risk. And calling the business an LLC is not enough; to create one, you have to file paperwork with the state where you operate.
Things You Can Do to Minimize the Impact
None of this means the damage is out of your hands. There are things you can do to minimize the impact of a business bankruptcy on your personal credit. If you’re starting a new business, the best way to avoid tainting your personal credit is to be prepared. That starts with choosing the business structure that gives you the protection you need. Then, as you go forward, watch out for leaks, to make sure you keep your personal and business assets separate. And always read the fine print when you start a new business relationship.
If the business is already in trouble, the next step is different. Make sure you consult with an attorney about how a company bankruptcy might affect you personally. A good bankruptcy attorney can help you work with creditors and arrange the best possible scenario as you proceed. And if you know how the LLC itself can become an issue, you can be better prepared to handle that. You’ll also be able to talk to your lawyer more efficiently.
At Delancey Street we are not a law firm, and we will not pretend to be one. That means we will not advise you on the law. So this post is not a substitute for a conversation with an attorney about your situation. But it is a start towards understanding the situation that you will be discussing with your lawyer.
Business Debt Settlement
Where we come in is the debt itself. We are a business debt settlement company, which means we can help you work with your creditors to lower those debts. Because your personal assets can be tied to your company’s debt, what gets reported on your personal credit report is very much at stake. Our senior advisors negotiate with merchant cash advance funders and lenders for less than the full balance owed, without selling you another loan. Our services will not make a business bankruptcy disappear from your credit report. If bankruptcy is the better path for you, we will say so on the first call, and we can also refer you to attorneys so you can handle the bankruptcy. The first step is to request a free consultation.
