Filing for small business bankruptcy could affect your personal credit---if you personally guaranteed loans made to the business. Most banks and credit unions lending to small businesses require the owners to personally back the loans by pledging collateral, such as their primary residences, or by adding their signature as a guarantor on the loan. If you are responsible, the bank will expect you to pay the business debt following the bankruptcy.
Credit Report
Review your credit report to determine if you're personally responsible for the business debt. Business debt showing up on your credit report indicates the bank is also holding you responsible. Obtain a free copy of your credit report through AnnualCreditReport.com. The website makes free credit reports available under the terms of the Fair Credit Reporting Act. The website is endorsed by the Federal Trade Commission, and you're entitled to three free credit reports each year, one from each of the thee major credit bureaus: TransUnion, Equifax and Experian.
Structure
Your business can file for bankruptcy only if it is a distinct legal entity, such as a limited liability company, partnership or corporation. These business structures allow for the owner's finances and expenses to be completely separate from those of the business. However, a bank can still require you to personally guarantee a loan made to a corporation.
Sole Proprietorship
Many businesses are formed as sole proprietorships, meaning the owner includes business income and expenses on her personal federal tax return. You are completely responsible for the business debt if you have this type of structure. Business bankruptcy is not possible for sole proprietors. A sole proprietor can eliminate business debt only through personal bankruptcy, which obviously hurts credit.
Impact
Bankruptcy information remains on credit reports for 10 years, making it difficult to obtain new credit at competitive rates. Chapter 7 is considered the simplest form of personal bankruptcy, and eliminates unsecured debt in just a few months. Chapter 13, another form of personal bankruptcy, requires a payment plan lasting three to five years. If you are personally responsible for the business debt, it may be better to avoid bankruptcy by closing the business and paying off the debt over time. Unsecured business accounts can often be settled for around half the balance or even less. You can also sell off assets that aren't tied to loans to payoff debt. An experienced bankruptcy attorney will review your debts and business structure before recommending the best strategy for you.
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