How Does Filing Business Bankruptcy Affect Your Personal Credit When You Have Personal Guarantees?

What You Need to Know About Business Bankruptcy and Personal Credit
When a business faces serious financial problems, many business owners wonder, “Does filing business bankruptcy affect your personal credit?” If you have signed a personal guarantee for a business, it can. This can lead to major issues with your personal credit if the business files for bankruptcy and cannot cover the debts.
If a creditor cannot get the money from the business, they may turn to you to cover the debt. If you cannot pay, the unpaid debt may appear on your credit report, lowering your score and possibly leading to collection efforts or lawsuits. Our Portland bankruptcy attorney can help you understand your legal rights and how bankruptcy can impact your personal finances.
Quick Summary:

• Business bankruptcy helps companies manage debts when they can’t pay their bills. Chapter 7 allows businesses to close and sell assets to pay creditors. Chapter 11 lets companies stay open and reorganize their debts. Sole proprietors can use Chapter 13 to keep assets and repay debts over time.
• A personal guarantee in business bankruptcy is a promise made by an individual to take on responsibility for the business’s debts if the business cannot pay. By signing a personal guarantee, the individual agrees to repay the loan or debt if the company defaults. Lenders often require personal guarantees for added security, knowing they can recover money from the business owner if needed. Personal guarantees are typically used for business loans, leases, or credit lines.
• Filing for business bankruptcy can impact the owner’s personal credit. Personal guarantees make the owner responsible for business debts. If the business can’t pay, creditors may go after personal assets. This can lower the owner’s credit score and cause financial hardship. Bankruptcy stays on credit reports for years, making it harder to get new loans.
• Filing for business bankruptcy can significantly affect personal credit. The type of bankruptcy, terms of personal guarantees, creditor strength, value of business assets, and state and federal laws influence this impact. To protect personal credit, avoid personal guarantees, separate business and personal finances, and negotiate with creditors.

What is Business Bankruptcy?
Business bankruptcy is a legal process that helps companies deal with their debts when they can no longer pay their bills. This process offers a way for businesses to either close down or reorganize their financial situation. Understanding business bankruptcy can help owners make better decisions during tough times.
There are several types of business bankruptcy:

• Chapter 7 Bankruptcy: Chapter 7 bankruptcy allows businesses to close down and liquidate their assets. This means that the business sells its property to pay off creditors. After the process, most of the business’s debts are wiped away, allowing the owner to start over. However, this option is usually for companies with no way to continue operations.
• Chapter 11 Bankruptcy: Chapter 11 bankruptcy is more common for businesses that wish to stay open. This option allows companies to restructure their debts while continuing operations. Under Chapter 11, a business creates a plan to pay back creditors over time. The court must approve this plan to help businesses regain financial stability.
• Chapter 13 Bankruptcy: While Chapter 13 is often associated with personal bankruptcy, some sole proprietors can use it. This option allows individuals to reorganize their debts and make a repayment plan that lasts three to five years. It works well for small businesses that want to keep their assets while managing debts.

What is a Personal Guarantee in Business Bankruptcy?
A personal guarantee in bankruptcy refers to a promise made by an individual to take responsibility for a business’s debts. When someone signs a personal guarantee, they agree to repay a loan if the business cannot. This promise can become very important when a business files for bankruptcy. Lenders and creditors often require personal guarantees because it gives them more security. They know that if the business cannot pay, they can turn to the owner to get their money back.
Personal guarantees are common for business loans, leases, or credit lines. For example, when a business takes out a loan, the bank might ask the owner to guarantee it personally. If the business cannot pay the loan, the bank can hold the owner personally responsible. This makes personal guarantees a big responsibility for business owners because they are putting their personal finances at risk.
What Happens to My Personal Credit in a Business Bankruptcy with Personal Guarantees?
Filing for business bankruptcy can be a tough choice for many business owners. This process helps a business deal with its debts and start over. However, it can also have a big effect on the owner’s personal credit. In some cases, personal credit can be affected if the owner has personal guarantees or if business and personal finances are mixed. Here’s what you need to know:

• Personal Responsibility for Business Debt: When owners sign personal guarantees for business loans, they take on personal responsibility for those debts. If the business goes bankrupt and cannot pay, creditors may pursue the owner’s personal assets. This can lead to significant financial trouble and damage the owner’s personal credit score.
• Decrease in Credit Score: Bankruptcy can lead to a drop in the owner’s credit score. The credit score reflects how likely someone is to repay debts. A bankruptcy filing signals to lenders that the individual might be a risk. This can result in a lower credit score, making it harder to get loans or credit cards in the future.
• Negative Information on Credit Reports: Bankruptcy stays on a personal credit report for several years. For example, Chapter 7 bankruptcy can remain for up to ten years, while Chapter 11 stays for about seven years. These negative marks can affect creditworthiness. 
• Challenges in Getting New Credit: Getting new credit can be difficult after filing for bankruptcy. Many lenders may refuse to approve applications. Those who do may charge higher interest rates due to the perceived risk. This situation can limit access to funds for personal or business needs.
• Creditor Actions Against Personal Assets: When personal guarantees are in place, creditors may take action against personal assets. If the business fails to pay its debts, creditors might garnish wages or place liens on property. These actions can further harm personal credit and add stress to the owner’s finances.

What are the Factors Affecting the Impact of Business Bankruptcy on Personal Credit?
Filing for business bankruptcy can significantly affect personal credit, especially for business owners. When a business goes bankrupt, personal credit scores may change. Understanding the factors that affect this impact can help individuals prepare for the consequences.  

• Type of Bankruptcy Filed: The type of bankruptcy filed can affect personal credit differently. Chapter 11 may have less impact on personal credit, depending on the success of the business after filing. On the other hand, Chapter 7 bankruptcy can lead to a more significant negative impact on personal credit, especially if personal guarantees are involved.
• Terms of the Personal Guarantee: Personal guarantees specify what happens if a business cannot pay its debts. The terms may outline what creditors can pursue. If a personal guarantee is broad and covers many types of debt, personal credit could face a bigger impact during bankruptcy.
• Strength of the Creditor’s Case: The strength of a creditor’s case can determine how much impact bankruptcy has on personal credit. If creditors prove that a business owner is personally liable for debts through personal guarantees, personal credit may suffer more. A strong case may lead to collection efforts on personal assets, which can further damage credit scores.
• Value of Business Assets: The value of the business’s assets plays a role in how bankruptcy affects personal credit. If the business has valuable assets, creditors may focus on those first. If the assets do not cover the debts, personal liability could increase, negatively affecting credit scores.
• State and Federal Laws: Laws regarding bankruptcy and personal liability vary by state and federal regulations. These laws can influence how personal credit is affected. Some states may offer better protection for personal credit than others. Understanding these laws can help business owners navigate bankruptcy more effectively.

What are the Ways on How to Protect Personal Credit?
Protecting personal credit is essential for business owners, especially when facing financial challenges. A few strategies can help keep personal finances safe from business debts. These options can help business owners make informed choices:

• Avoid Personal Guarantees: If possible, avoid signing personal guarantees on your business loans. This will help limit your personal liability.
• Separate Your Business From Your Personal Finances: Forming a limited liability company (LLC) or corporation can help protect your personal assets from business debts.
• Negotiate with Creditors: If you’re struggling to pay your business debts, you may be able to negotiate a settlement or payment plan with your creditors. This can help to protect your personal credit.

How Our Portland Bankruptcy Attorney Can Help You Navigate Business Bankruptcy and Personal Credit
Filing for business bankruptcy can be a stressful and confusing time. Many business owners wonder, “Does filing business bankruptcy affect your personal credit?” The answer is yes, and the impact can be significant. When personal guarantees are involved, the stress can increase as you worry about how this decision will affect your personal credit. That’s where our Portland bankruptcy attorney can help.
At Northwest Debt Relief Law Firm, we can explain how filing for business bankruptcy can impact your personal credit and what steps you can take to protect yourself. Our Oregon bankruptcy law firm can provide personalized advice based on your specific situation. We will review your personal guarantees and help you explore your options. This includes strategies to minimize your personal liability and protect your credit. With our guidance, you can make informed decisions about how to proceed.
Don’t wait to get the support you need. Contact us now for a free debt solution consultation, and let us help you make the best decision for your business and personal finances. We are here to help you every step of the way.