People tend to think of their businesses as separate from their personal finances. Most people set up their small business as an LLC or similar. They may think that whatever debt the business incurs wouldn’t affect them personally if things went south. Unfortunately, that’s rarely true.
Personal Guarantees on Business Debt
One of the sneaky ways your business debt can affect you personally is through the personal guarantee. For example, if you signed a lease for business space, chances are the landlord had you sign a personal guarantee of the lease. This puts you and your personal assets on the hook in the event of default on the lease.
Credit cards are another area where “business debt” can sneak into your personal life. Many people mistakenly believe they have a “business credit card” when in fact they have a personal obligation for that card. Credit card companies rarely will accept an application that doesn’t include the personal guarantee of the individual. If they asked for your social security number during the application process, chances are you are on the hook.
There are some exceptions to this. But they typically involve the business having its own credit history, tax ID number, etc.
There are numerous other scenarios in which an individual might be on the hook for their business debt. For example, equipment leases, certain taxes, and other issues can arise. So when the business closes, the fallout begins.
You may find yourself fending off credit card debt collectors, landlords and others. If this happens, there are a few important steps you should take.
Evaluating and Negotiating Business Debt
First, you really need to have a licensed attorney review all of your business documents, leases, etc. to determine if you do in fact have personal liability. Occasionally, the personal guarantee is executed improperly, and you may have a way out. If you don’t have personal liability, and the business has closed, there may not be much more to do. But often, there will be some personal exposure.
This is when it’s important to develop a game plan. Many of these debts can be negotiated without the need for bankruptcy. We can help you evaluate your options and determine the best path forward. If bankruptcy is the best solution, we’ll let you know that too. But there are several possible paths we could recommend, depending on your circumstances.
The bottom line is this. If you’re business is failing, it’s always better to be proactive in addressing the debt and have a plan in place. If you wait too long, you could end up with seizures, judgments, garnishments, etc., making bankruptcy more likely.