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Business Debts and Personal Liability

One question that our South Florida bankruptcy defense attorneys often encounter is: ”Will I be held personally responsible for the debts of my business?.” For those who own businesses facing a mounting burden of debt or bankruptcy, there are two factors that will determine if they are personally liable: a written personal guarantee and the type of business structure.

Personal Guarantee

Having signed a personal guarantee warrants personal liability for business debts. Such documents are usually signed when the entity itself does not own enough assets when asking the banks for credit. Because the business will most likely be unable to repay the debt on its own, the bank or loan supplier will require the business owner(s) to be accountable for the debt personally. This serious legal agreement will usually be presented when a business takes out a loan to buy real estate, signs a lease for office space, leases or purchases equipment using credit, or purchases materials on terms, or for many other reasons. If a business is unable to pay the loan, then the owner will be held liable as guarantor.

Business Structure

Under different business structures, there are various clauses addressing whether or not the business owner will be held personally liable for business debts. For sole proprietors as well as partnerships, the principals will be held accountable if the business procures debt. Alternatively, corporate business formations, such as an LLC, as well as any hybrid organizations can protect owners (including stockholders) from liability. While not personally obligated to repay the debts, business owners and partners are typically responsible for the tax obligations that result from the business failing.

Avoiding Personal Business Liabilities

Filing for Chapter 7 bankruptcy is one of the most common ways for owners and partnerships to avoid absorbing the business debt and avoid the financial repercussions. While there are personal income caps that prohibit debtors from filing for a Chapter 7 discharge, those facing personal liability for business debts will still be able to qualify. Filing for business bankruptcy removes the revision for an income-qualifying Chapter 7 means test. There are also limitations on the amount of property that can be kept in a Chapter 7. Even after utilizing all applicable exemptions, you may still have excess assets that cannot be protected. This is why you need a seasoned and experienced attorney. With an expert, a successful negotiation will be crafted in order to lower the total business debt or the amount of money specified in the personal guarantee. 

Talk to an Expert

Business owners and partners involved with a company facing serious debt can be held personally liable, which can result in a personal financial crisis. In order to avoid the complex legal proceedings as well as the headache of navigating the negotiation process alone, give our seasoned bankruptcy defense attorneys a call today to schedule a free consultation.