When a business gets into debt, creditors can attempt to go after personal accounts, depending on how the business is set up. By the same token, some creditors can attempt to go after a business to pay off a personal debt. Success depends upon whether the business accounts are legally separated from personal accounts.
Pre-Collection
Some businesses use debt collectors to operate pre-collection accounts. The debt collector keeps track of the payment history on the account, and if he feels you might not be paying on the account, a preliminary letter gets sent out, notifying you of the debt collector's interest. Even before a debt collector threatens to go after your business accounts, some of them try to get a head start on the collection process.
Court
Although a debt collector might threaten you with seizing your personal assets, he usually has to go before a judge to get a garnishment order. During the proceedings, he has to prove the debt is valid, and in many states, such as New York, you can also be at the hearing to present your side of the case. At that time, the judge will also examine the bank accounts in question to determine whether or not the accounts are exempt from garnishment.
Sole Proprietorship
One form of business is known as a "sole proprietorship." While one advantage to operating as a sole proprietor has the advantage of simplicity, it also has the disadvantage of the business being viewed as an extension of the sole proprietorship. For example, when filing for taxes, the business does not have to file a separate tax return. The business is viewed as an extension of the individual. In a sole proprietorship, the individual has personal liability for business debts and the business has liability for personal debts. This means a debt collector can go after the business assets to pay off a personal debt.
LLCs
If a business operates as a limited liability company, there is protection given between the business and the owners of the LLC. The business is viewed as an entity separate from the individuals owning it. This protects the business assets from being seized during personal debt issues, and it also protects the personal assets from being seized during business debt issues. However, if it is determined that funds have been moved from a personal account into a business account to prevent them from being seized, it can open the business account to garnishment.
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