Does Business Bankruptcy Affect Personal Assets? 6 Ways Owners Remain Exposed

When it comes to business bankruptcy, if your business is an LLC, corporation or another recognized business entity, your personal assets should be safe. But, there are some exceptions where you could still be liable. As the business owner, you run the most risk of being held accountable if your business goes bankrupt and creditors seek compensation. If you’ve signed a personal guarantee for any of the debt, it will still be valid. You are still liable for this debt even if the company can’t pay it anymore. A bankruptcy discharge doesn’t release anyone else on the debt (e.g., guarantors and co-signers) from paying it. Also, in Chapter 7, a corporation or partnership won’t receive any discharge at all.

When a business files Chapter 7, the trustee sells off its assets and pays whatever creditors it can. If few assets are left over after that, the corporation may end up remaining liable for unpaid debts.

Personally Liable for the Business Debt

If you’re a sole proprietor, and your business fails, you are personally liable for the business debt. If you operate as a partnership and you are a general partner (not a limited partner), your business’s creditors can go after your personal assets. Even if the business has no money left in its name, you’re still responsible. If you’re a sole proprietor, you may file for Chapter 7 or Chapter 13 bankruptcy. In an individual Chapter 7 bankruptcy, you may be able to keep the property that is exempt under applicable law. However, the trustee may sell the non-exempt property. Chapter 13 bankruptcy has debt limits. As of April 1, 2025, the Chapter 13 limit was $526,700 for your unsecured debt, like credit cards and medical bills, along with a separate amount for secured debts.

Your Personal Assets Can Be at Risk

Another way your personal assets can be at risk is when you signed a personal guarantee for your business’s loan, even if the loan is in the LLC’s name. If your LLC can’t pay the loan, the lender can pursue you as the person who guaranteed it. This happens frequently with SBA 7(a) loans. If you own 20 percent or more of your company, you’re typically asked to provide a personal guarantee for this type of loan.

A third way is if you incurred the business debts in your own name. For instance, if you used your own personal credit cards to pay for your business expenses, took out personal loans for your business or pledged your personal property as collateral for a business loan, you’re the one who owes those debts. The lender doesn’t care that you used the funds for the business. You’re still the borrower and are legally responsible for paying the debt. You may also face personal liability if you signed a commercial lease personally.

For example, the owner of a small construction company LLC may borrow to buy new equipment, using a personal guarantee. And if things get tight with cash flow, the owner may put payroll or supply expenses on personal credit cards. If the business assets aren’t enough, the person who signed the guarantee or co-signed the loan is still responsible for paying the difference.

The fourth way is if you are responsible for payroll taxes that have been withheld from your employees. If you willfully fail to pay them, the IRS Trust Fund Recovery Penalty makes you personally liable for 100% of the amount of the unpaid trust fund taxes. Responsible persons for this purpose can include corporate officers, shareholders, partners, LLC members or managers with significant control over which creditors get paid. When a corporation goes bankrupt, that doesn’t stop the IRS from pursuing responsible persons who still owe payroll tax payments.

The fifth way is if a court determines that the LLC didn’t actually operate as a separate entity, or that you committed serious misconduct, and chooses to ignore your limited liability protection. This is called piercing the corporate veil, and it depends on the state’s law. Serious misconduct can include mixing personal and business assets.

Finally, the bankruptcy trustee can “claw back” money paid on existing debts to insiders like owners within a year before filing for bankruptcy, if the business was insolvent at the time and the insider got more than they would have received had it been a Chapter 7 bankruptcy. Also, fraudulent transfers of money from the business to you within the 2 years before the bankruptcy filing can be clawed back, too.

When you’re trying to decide what’s the right move for you, it helps to review all of the personal loans, leases, credit agreements and business loans you have. See who signed them, what you agreed to guarantee or pledged as collateral for them, and who else is named on the agreement. It’s also important to know your payroll tax situation. Check back on any payments, transfers, or loans within the last two years. And try to figure out what debts are actually in the business’s name and what debts are in your own name. The problem may be for your personal finances, the business’s, or both.