debt

File bankruptcy as LLC or personally?

Justin HarelikDear Bankruptcy Adviser,
I have a very small limited liability company, or LLC, which has no debt associated with it. I personally have debt because of the time and money I've invested into my business. I am considering filing bankruptcy on my own. I am married (for a second time) and we file joint returns, but all of the debt is mine personally (in my name only). Can I file bankruptcy without involving my husband? If so -- should it be through the LLC or me personally?
--Angela

Dear Angela,
Yes, you definitely can file bankruptcy on your own, but you would have to involve your husband. While he does not have to file bankruptcy, he does have to provide proof of assets and income.

People set up an LLC for their small business because of the tax benefits. All your business losses, profits and expenses flow through the company to you. The LLC also gives you the same liability protections of a corporation. Members of the LLC cannot be held liable for debts unless they have signed a personal guarantee.

That's the key: the personal guarantee. You state that you agreed to be personally liable on the debts even though you incurred those debts during the operation of the LLC. While you will be able to write off the expenses associated with maintaining those debts against the LLC revenue, you pledged your personal assets as collateral in the event you do not pay.

Lenders generally will not bother going after the LLC when you are personally liable. The vast majority of LLCs have no assets, so the lender knows you -- the individual -- might have assets. The owner usually has assets such as a car, house or other personal property. This is what the creditors want. So it would appear filing for the LLC is not necessary; you'll have to file an individual bankruptcy anyway.

As for your husband, while he may not need to file bankruptcy and may have assets that are separate property, he will still have to disclose all of his assets and income. The court-appointed bankruptcy trustee must make sure your household is eligible to receive bankruptcy protection, even though you are the only one filing.

Your bankruptcy filing will not impact his credit unless you have jointly held loans. In that case, you may have to file a document while your bankruptcy is active in order to protect his credit.

He must be willing to cooperate with your bankruptcy case, or you may not be eligible to receive bankruptcy protection. While I know you do not want to file, knowing that your husband should not be impacted may help you make the final decision.

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