Will Business Bankruptcy Affect My Credit?

Whether a business bankruptcy will affect your personal credit depends on whether you are personally liable for the business debt.

By , Attorney · University of the Pacific McGeorge School of Law

A business bankruptcy could affect your individual credit score if you're personally liable for the business debt. Your liability will depend on the type of business entity used for your business, whether you signed a personal guarantee for the business debt, and the company's tax liability. Learn how filing for Chapter 7 or Chapter 11 bankruptcy will affect a small business and a small business owner.

The Business Entity Type and Your Credit Score

Some business owners are responsible for the business's debts, and if you're a responsible party, you can expect a creditor to report the debt on your credit report. You'll determine your liability in part by looking at the business structure used when forming the business.

  • Sole proprietorship. If you're a sole proprietor, the law considers you and the business the same. You're personally responsible for all of the business debts. To discharge or wipe out your liability for the business debts, you must file either a personal Chapter 7 or Chapter 13. Filing for bankruptcy can affect your credit report for up to ten years.
  • General partnership. A partner is personally responsible for all of the business debt along with the partnership, and the creditor can report these debts to the credit bureaus under the partner's name. The best way to get rid of business debt is usually to negotiate with creditors or for each general partner to file for personal bankruptcy (although filing will still affect your credit report). Filing a business bankruptcy on behalf of a partnership can be tricky because even though the business owns its assets if all partnership debts aren't paid from liquidating the partnership property, the partners will remain responsible for the unpaid debt.
  • Limited partnerships, limited liability companies, and corporations. If you're a limited partner or do business as a corporation or a limited liability company, under most circumstances, you aren't legally responsible for business debts. Each entity can file for bankruptcy in its own right, and the business bankruptcy shouldn't affect your credit. However, it isn't necessarily a good idea, so you'll want to find out about LLCs and corporations in bankruptcy before pursuing that avenue. With limited exceptions discussed below, neither the business bankruptcy nor the business debts should appear on your credit report.

Even if the business structure itself doesn't confer business debt responsibility, other ways to be responsible for business debt exist. If one applies, which they tend to more often than not, your credit could be affected.

Other Ways a Business Bankruptcy Can Affect Credit

In a few instances, your responsibility to pay a business debt can affect your individual credit report. In the first instance, you agree to be responsible when you wouldn't otherwise. In the second, statutory law creates your obligation to pay a business debt.

  • Personal guarantee. Often, a creditor will require the owners or officers of a small business to sign a personal guarantee before extending credit to the business. By signing, you agree to be responsible for paying the business debt. If the business files for bankruptcy, you'll remain obligated for the debt, and if unpaid, it could be reported to the credit bureaus as an unpaid obligation. If it is, it will most certainly affect your credit. Many business owners file for bankruptcy individually after a business closure to eliminate the responsibility of paying a personal guarantee. Learn about small business owners and bankruptcy in Chapter 7 vs. Chapter 13 for Small Business Owners. You'll find a section discussing whether you or the business should file for bankruptcy.
  • Certain types of business taxes. If unpaid, some tax could become your responsibility. A tax that you withhold from employees' salaries or that you collect from others, such as sales tax, is often referred to as trust fund tax, and these taxes aren't usually discharged in bankruptcy. Although the business is responsible for transmitting these taxes to the government, the money used to pay the tax belongs to the employee or the customer. You're charged with personal responsibility if you collect these taxes but fail to transmit them to the taxing authority. This debt will affect your credit, especially if a tax lien is filed against you and recorded in the public records.

In either of these situations, a failure to pay the business's obligation after a business bankruptcy could result in a credit bureau report and affect your credit.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we want to ensure you find what you need. Below, you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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Helpful Bankruptcy Sites

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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