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Are personal assets at risk during or after a business bankruptcy?

On Behalf of | Oct 4, 2023 | Business Bankruptcy

Entrepreneurs who operate their businesses as sole proprietorships, simple partnerships or limited liability companies (LLCs) with a single member have a lot of responsibility to work for the success of their organization. They may spend years working long shifts trying to build a company’s reputation and make it profitable.

Sadly, even those with excellent ideas and dedication to an organization’s success may find their companies floundering. One of the many steps that a business owner might take to protect the company or themselves would involve filing for business bankruptcy. A Chapter 7 bankruptcy could allow the business to discharge certain debts before closing, while a Chapter 11 bankruptcy could allow the business to restructure and continue operating despite its obligations.

All too often, those who would derive crucial protection from a business bankruptcy filing defer taking action because they fear the possible consequences of doing so. For example, they may have heard that a sole proprietor, LLC owner or business partner should worry about their personal assets being at risk because of a business bankruptcy.

Creditors can sometimes hold owners accountable

One of the most common reasons that people create LLCs or more structured business entities is often to reduce their personal liability should the business fail or face some kind of sizable legal claim. Those who have taken precautions in the business formation stage won’t have to worry much about their personal assets during a business bankruptcy. The company is a separate legal entity, so their resources aren’t at risk.

However, small mistakes and oversights can lead to financial vulnerability. Creditors can ask the courts to pierce the corporate veil when there are signs of financial misconduct and the business itself does not have the resources to pay what the company owes. Actionable forms of misconduct might include commingling personal and business resources, misappropriating business resources or failing to maintain adequate financial records for the organization.

If the courts allow creditors to pierce the corporate veil, then a business owner’s personal assets could be at risk to creditor claims. However, often business owners have access to protection for their personal assets and can keep them entirely separate from business bankruptcy proceedings. Ultimately, reviewing business records and personal financial documents with an attorney can help people better evaluate their level of vulnerability should they decide to pursue a business bankruptcy filing.