Personal Risks in a Small Business Bankruptcy

If you are thinking about filing for bankruptcy and you own a small business, it is important to understand definitively whether your business bankruptcy case is likely to affect your personal finances. In other words, if you file for business bankruptcy, could you also be filing for personal bankruptcy? Or, if you file for business bankruptcy and have made a personal guarantee on a loan, what does that mean for your financial situation as a consumer? Could you ultimately need to file for personal bankruptcy in order to manage the debts associated with your business? A recent article in Fortune explains how many business debtors might not be thinking carefully about how a business bankruptcy could impact their personal situation. The following are some important facts you should consider as you make plans to speak with an Illinois bankruptcy lawyer.

Business Bankruptcy for Sole Proprietors is the Same as Personal Bankruptcy
Depending upon how your small business is structured, if you file for Chapter 7 bankruptcy for your business, you could also be filing for personal bankruptcy if your business is a sole proprietorship. To be clear, when a business is structured as a sole proprietorship, the business and the owner are in effect the same legal entity. What this means is that a business bankruptcy is also a personal bankruptcy—the two cannot be separate. Other types of business structures, however, such as partnerships, LLCs, and corporations, can file for bankruptcy as business entities without necessarily worrying about personal finances becoming involved in the process.

However, there are situations in which a business bankruptcy can implicate the business owner personally. We will explain more below. First, we want to clarify one of the major risks of business bankruptcy for a sole proprietorship.

Owners of Sole Proprietorships Could Lose Their Homes in a Business Bankruptcy
If a sole proprietorship files for Chapter 7 bankruptcy—a liquidation bankruptcy—then the owner of the sole proprietorship could be at risk of losing his or her home in Illinois. Since Chapter 7 bankruptcy is a liquidation bankruptcy, all non-exempt assets will be liquidated in order to repay creditors. Illinois only has a $15,000 homestead exemption (or $30,000 if you file for bankruptcy with a spouse), which means that you will likely not be able to keep your home if it has more in equity than the exemption allows.

Personal Guarantees for Business Loans
Now, even if you do not own a sole proprietorship but have borrowed money through an SBA business loan or another lender that required a personal guarantee, you could be personally on the hook for money that the business owes. For example, if you have a partnership or an LLC—a separate entity from the owners that can file for bankruptcy as an entity without personally impacting the owners—an owner will be personally responsible for an outstanding loan with a personal guarantee.

Contact an Oak Park Bankruptcy Lawyer
If you have questions or concerns about filing for bankruptcy, it is important to discuss your situation with a bankruptcy attorney in Oak Park as soon as you can. Contact the Emerson Law Firm today to get started.


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