What Happens to Your Personal Assets in a Small Business Bankruptcy?

 Posted on December 06, 2024 in Bankruptcy

If your small business is struggling, you may be wondering whether filing bankruptcy is the right option for you. Specifically, you may be concerned about whether filing for bankruptcy as a small business will affect your personal assets. This is a valid question, and the answer generally depends on how your business is structured and whether you personally guaranteed any payments. An experienced Charlotte, NC small business bankruptcy attorney can offer guidance tailored to your specific situation.

How Does Your Business’s Organizational Structure Impact Your Personal Liability?

Sole Proprietorship

If you have structured your business as a sole proprietorship, your personal assets may be affected. With sole proprietorship, there is no legal distinction between business and personal assets.

Partnership

Whether your personal assets will be affected if you have a partnership will depend on the terms of the partnership agreement. Specifically, general partners are usually personally liable for business debts, whereas limited partners may be protected to an extent.

Limited Liability Company (LLC) 

LLCs are known for their protection of personal assets. If your business is structured as an LLC, your personal assets are likely protected from business debts, with exceptions including personal guarantees and fraud.

Corporation

In most circumstances, the officers, directors, and shareholders of a corporation do not bear personal liability for business debts.

Personal Guarantees and Bankruptcy

A personal guarantee is a written promise signed by you as an individual stating that you will be personally responsible for a debt. If you have personally guaranteed a debt, your personal assets will not be protected in bankruptcy.

How Can You Protect Your Personal Assets from Bankruptcy?

There are several ways you can work to protect your personal assets if you need to file bankruptcy for your small business. These include:

• Structure your business as an LLC or corporation to maximize protection for your personal assets.

• Remember that your home may be eligible for some bankruptcy protection under North Carolina’s homestead exemption.

• Avoid giving personal guarantees or pledging your personal assets as collateral for loans.

• Keep personal and business finances separate.

Benefits of Filing for Bankruptcy

It is important to remember that whether you file for business or personal bankruptcy, there are benefits and protections, including for your personal assets:

• The automatic stay: When you file for bankruptcy, you receive an automatic stay. This means that creditors cannot collect on your business or personal debts while you are in bankruptcy court, with some exceptions.

• Unsecured debts: Some debts such as medical bills and credit card debts are discharged if you file personal bankruptcy.

• Debt is discharged: At the end of the bankruptcy proceeding, once you complete a repayment plan, your debt will be discharged.

Contact a Mecklenburg County, NC Bankruptcy Attorney 

If you are a small business owner who is considering bankruptcy and concerned about the potential impact that filing can have on your personal assets, a Charlotte, NC bankruptcy lawyer can help. At Blossom Law PLLC, attorney Rashad Blossom can advise small business owners on bankruptcy issues and has experience as a former small business owner herself. If you are a small business owner facing financial distress, contact us at 704-256-7766 to schedule a complimentary consultation today.