Does Business Bankruptcy Affect Personal Credit? 5 Ways It Reaches the Owner's Report

Business bankruptcy alone doesn’t usually show up on your credit report because business and personal credit reports are completely separate. However, the real question is not whether a business has entered bankruptcy: the real question is whether you personally are liable for that business’s obligations, and whether any accounts are reported to your personal credit bureaus. It takes a lot to connect you personally with a debt or bankruptcy if it’s not in your name, but there are five ways it can happen.

The biggest, most basic piece of the puzzle has to do with exactly what your business is. When your business goes bankrupt, different kinds of ownership face different personal risks. In a sole proprietorship, there is no business as a separate entity. As a sole proprietor, you are personally liable for paying your business debts, so your own personal assets are a part of a bankruptcy. There is no LLC, there is only you: so when the proprietorship files bankruptcy, you file bankruptcy. Even a simple partnership can put partners’ personal assets in play. For stockholders in a corporation, generally only the shares in the business and the money already invested are on the line. When an LLC enters bankruptcy, the idea is that the company files, not you personally, and the company’s debts are its own. However, that is just a starting point, not a promise or a guarantee.

The second way you could find yourself connected to a business’s debt is by signing a personal guarantee for it. Small business owners often sign personal guarantees, which say that you will personally pay the debt if the business can’t. Personal guarantees are separate and legally enforceable contracts between a business owner or partner and the lender.

If you personally guaranteed a business debt, your guarantee does not end when the business goes bankrupt. The company is protected from the lender during bankruptcy, but you aren’t. If they take collateral but the sale gets less than the debt, you can owe the balance. As long as you are personally liable on a loan, you may be hearing from the lender, and any defaults can still show up on your personal credit history for the usual 7 years.

Under Chapter 7, the company liquidates, and that is not a Chapter 7 discharge, so the debt and your guarantee are both still live. The Chapter 11 bankruptcy can let the company continue under a plan; that still doesn’t change your guarantee. If you close down a business, that does not cancel loans, leases or taxes: the obligations still stand. Dissolving a company does not erase your personal guarantees: the money is still due from you personally.

Businesses don’t always use the phrase “personal guarantee,” but if you sign, you could still be on the hook. Look for guarantor, guaranty, jointly and severally liable. Check whether you signed for the business only, or as an individual as well.

The third way the balance can become yours personally is if the account itself is in your name, not your business’s. Your name on the debt means that you are personally liable for it, even if it’s for the business. If you charge business expenses on your personal credit cards, to a joint account, or on a loan made to you individually, missed payments get reported under your name even though the money helped the business. These debts were always your personal responsibility. Watch out for the fine print on a business credit card. You could be signing a personal guarantee that makes you personally liable for paying the card on top of any company obligation. Signing for a spouse’s business debts can make the debt show up on your credit, too.

The fourth way to get stuck on a business’s debts: when an employer takes payroll tax money from employees’ pay but doesn’t pay it over to the IRS, it can trigger the Trust Fund Recovery Penalty. The penalty is charged against each responsible and willful person. How much? 100% of the unpaid trust fund tax. There are rules for who is personally responsible for making payroll and handling payroll taxes, whatever kind of company you own.

The fifth way is that you can also be liable for company debts even without a personal guarantee. Commingling funds is the act of mixing your personal and business money and using the same funds for both. If your personal funds ever get mixed with your business accounts, it becomes harder to enforce the legal separateness of your accounts. In some cases, mixing funds can backfire if it causes the court to decide your business is a sham. Piercing the corporate veil is a court decision based on all the facts about how the business and the business owner acted, and it varies by state. But one misstep is not going to automatically lose you the protection of the corporate structure, and the business structure never shields you from the consequences of fraud or illegal acts you personally commit. Separate bank accounts help keep the lines clear between what is business, and what is personal. Track cash and check deposits; label loans to the business; sign contracts as the company through its own representatives.

Personal Bankruptcy

If a business problem moves you into personal bankruptcy, that filing stays on your credit history for up to 10 years. Co-signers get some protection in Chapter 13, but not on commercial debts. How much a Chapter 7 will hurt your credit score varies, because there are a lot of ways to score you. But the further away in time you get from bankruptcy, and the better your new payment history gets, the sooner that black mark starts to lose power.

Start with a list of each debt, who signed for it, what collateral backs it, and the linked bank account. Check your personal credit reports, then dispute anything that is reported wrong. Save every record, every receipt, and every bill. Stop paying company bills from personal accounts or you will blur the line between company money and personal. As you work through the process, do not hide, move, or sell any assets to hide them from creditors.

You must still deal with what the lender demands, your own financial condition, and whether your own bankruptcy might be the right answer. Workouts, dissolutions, and Chapter 7 and Chapter 11 serve different purposes.

A company’s bankruptcy alone doesn’t guarantee your credit will stay the same. Missing paychecks could make lenders nervous about lending to you, and closing a business account can mean one less line of open credit for them to see. Watch for mistakes, and explain accurately about any failed business venture to lenders.