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Dear Bankruptcy Adviser,
My husband and I have a limited liability company,
or LLC, and business loans we cannot repay. If
we file bankruptcy for the business debts, will
our personal credit be affected?
-- Vickie
Dear Vickie,
If you are not personally liable for the LLC's
debts, then bankruptcy could be a viable option.
And your credit report should not be harmed because
strictly business lines of credit or loans usually
will not be reported to your personal credit report.
This is not a hard rule, but if the lender extended
credit using your LLC's Tax Identification Number,
or TIN, and the business name only, then the trade
line of credit may not even show up on your credit
report.
However, I wanted to write on your
question for another reason. Many people have
a common misconception about the protections granted
by a limited liability company. Many people believe
that debts incurred for the operation of the business
are business debts and not personal debts. However,
few lenders will ever give business credit without
first obtaining a personal guarantee from the
LLC members (i.e., you).
Let me be clear, I do not know the specific facts in your case. In some cases, LLC debt is purely the debt of the
business. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the
company.
However, most LLCs have little or
no assets at inception. People form them quickly
and may invest some savings for the initial costs
associated with starting a business. Lenders understand
this and typically are not going to recklessly
extend credit to the LLC members simply based
on an idea and a snazzy business plan.
You need to be 100 percent positive that you have not personally guaranteed the debt you incurred trying to run the
business. I have had numerous consultations with people who want to file bankruptcy for their LLC and avoid personal bankruptcy. I always
ask for a copy of one credit card or line of credit application. In the vast majority of consultations, the prospective client had no idea
that he or she personally guaranteed all the LLC debts.
For example, I worked as a loan officer for a large bank and we would almost never approve business credit applications
without a personal guarantee from one of the LLC members. The business had to have a minimum of $1,000,000 in annual sales and then we
would consider a loan or line of credit to the business for 10 percent of their annual sales!
Before wasting the time and money filing a bankruptcy for your LLC, you need to know whether you have significant personal
exposure for those debts. People rarely read the loan application's fine print. Invariably, it comes as a huge shock to learn that all
debts were personally guaranteed.
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