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
- if 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 debts of the business—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 would have to 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 a 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 of the partnership debts aren’t paid from the liquidation of 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 if you do business as a corporation or a limited liability company, under most circumstances, you aren’t legally responsible for business debts. Each of these entities can file for bankruptcy in their own right, and the business bankruptcy shouldn’t affect your credit (although it isn’t necessarily a good idea—find out why). With limited exceptions (discussed below), neither the business bankruptcy nor the business debts should show up on your credit report.
Exceptions That Might Affect Your Credit
In a few instances, interest in an LLC, corporation, or limited partnership bankruptcy might affect your individual credit report.
- Personal guarantee. Often a creditor will require the owners or officers of a small business to sign a personal guarantee before they will extend credit to the business. By signing, you agree to be responsible for the payment of the business debt. If the business files for bankruptcy you’ll need to pay the debt, or it could get reported to the credit bureaus as an unpaid obligation. If it is, it will most certainly affect your credit.
- 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 taxes—and these taxes aren’t usually discharged in bankruptcy. Although it is the responsibility of the business to transmit these taxes to the government, the money used to pay the tax belonged 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.