Dear Bankruptcy Adviser,
My hubby and I, unknowingly, personally guaranteed an LLC (limited liability company) franchise business. Now the business is in so much debt, because the franchise agreement worked in the past but would hardly keep its head above water these days. We wish to opt out now, but the agreement states 20 years with the franchiser. After reviewing the contract, we found that we personally guaranteed the business even though no collateral was involved.

Can personal and LLC bankruptcies discharge us completely from this business?
— Teekay

Dear Teekay,
I have written on this subject once before, but your scenario is becoming more and more common today and is worth another visit. Most people believe that setting up a limited liability company, also known as LLC, or a corporation shields them from personal liability for debts the LLC or corporation has incurred. It’s possible but not very likely.

The problem is that most people, like you and your husband, believe that you can start a business, incur debt for the business, but walk away from the debt if the business fails. Now, you are learning the harsh reality that no franchiser, bank or other lending institution would ever give money to a business without a personal guarantee from the franchisee or borrower.

Obviously, there are exceptions, such as when the business is adequately capitalized, meaning the business has a lot of money in reserve. Lenders will give money directly to the business without personal guarantees from the principals (aka you). However, the average LLC or corporation never has adequate capital to receive funding without personal guarantees from the principals. Lenders want to protect themselves and usually require the borrower to be personally liable for business debts.

While there is probably very little “good news” for you, hopefully I can save you a little money. You and your husband may need to consider filing personal bankruptcy, but you probably do not need to waste money on filing an LLC bankruptcy. Typically, LLCs have little or no assets, while you may be the ones with a home, cars paid in full and other valuable assets.

You need to find out about filing personal Chapter 7 bankruptcy and eliminate your personal liability. Based on the value of your business or other personal assets, Chapter 7 might not be available to you. However, it is important that while you do not need an attorney to file bankruptcy, you want to make sure you know the potential issues in your case. A consultation with an attorney would be prudent.

The attorney might tell you that in some cases, clients have been able to file for personal bankruptcy protection and still keep the business active. There are many issues to be concerned about, but the option may exist. You already received one shocking bit of information when you learned you are personally liable for this debt. Don’t waste any more time; seek professional help immediately.