Going through bankruptcy as a business owner can generate feelings of uncertainty regarding the future. What’s more, that worry is compounded when questions arise regarding your personal assets and financial situation. One of those concerns is whether or not your business filing for bankruptcy can alter your personal credit score. In some situations, it might. Here are the instances where your personal credit may be affected.
If your finances and your business finances commingle
Many businesses form as limited liability companies (LLCs) to protect the individual business owner. However, if your business finances under the LLC and your personal finances are connected, your personal credit score may be affected.
Keep in mind that commingling assets under an LLC business and an individual may also go against state guidelines, causing other issues. To avoid the potential of your LLC bankruptcy affecting your personal credit situation, it’s best to keep assets separate.
You used a personal credit card to pay for business expenses
Another potential issue arises when you use your personal credit cards to cover expenses with your business. Although you might be tempted to use your credit card when starting a business, it can cause potential issues if you later face bankruptcy.
When a business owner has personal credit card debt as a result of using their credit for business costs, they are personally liable for that debt. Therefore, in this situation, your personal credit would be affected when your business faces bankruptcy.
You personally guaranteed business debts
If you backed business debts to creditors under a personal guarantee, you are responsible as an individual for that debt. Therefore, in the event of business bankruptcy, you still need to pay the outstanding debt. If you don’t, your unpaid debt then gets reported to credit bureaus and thereby causes issues with your personal credit.
Other situations that may influence your personal credit
In addition to the aforementioned scenarios, how you set up your business may also influence your personal credit. Some examples of types of businesses that an individual is held accountable include sole proprietorships and general partnerships.
Under these types of business formations, the business owner and the business are considered the same entity. In cases of bankruptcy, the sole proprietor or partner would need to file personal bankruptcy, thereby resulting in a negative impact on their credit for years to come.