Does a Business Bankruptcy Affect Your Personal Assets?

If your business falls into distress and you’re contemplating bankruptcy, you are naturally concerned about protecting your home and other personal assets from business creditors. Your ability to do so, whether your business is seeking Chapter 7 or Chapter 11 relief, depends in large measure upon the legal structure of the enterprise.

If you own the business as a sole proprietorship, there is no legal distinction between you and the business, even if you run it under an assumed name. Your personal and business assets are typically considered one and the same. As a result, filing for bankruptcy as a sole proprietor may expose your personal property, such as homes, vehicles, and personal savings, to creditors’ claims.

If the business is a partnership, the impact of bankruptcy on your personal assets depends on your ownership status. In a general partnership, the personal assets of each partner may be at risk to satisfy business debts. Limited partnerships, however, provide some protection for partners who are not actively involved in the management of the business.

If the business is a limited liability company (LLC), each owner’s personal assets are generally shielded from creditors if the company files for Chapter 11 protection. However, there might be exceptions. If the LLC is found to be an alter ego of its owner, a court may decide to pierce the corporate veil, exposing the members’ personal assets to creditors.

The following are factors the court may consider in determining whether an LLC owner’s assets are protected during bankruptcy:

• Whether the owner has personally guaranteed a business loan or other debt, as frequently occurs when the LLC itself has insufficient collateral
• Whether the LLC owners have commingled personal and business assets, such that there is no clear distinction between the two
• Whether the LLC owners have engaged in illegal or improper activities, such as using the LLC to defraud creditors

In the foregoing situations, creditors may petition the court to allow them access to the owner’s personal assets.

An experienced business bankruptcy attorney can advise you on taking the steps needed to maintain a clear separation between personal and business finances so that you can protect your personal assets should a bankruptcy filing become necessary. There are also ways to exempt your home and certain personal property from access by creditors during a bankruptcy case.

The Law Offices of Michael Jay Berger in Beverly Hills represents California businesses and individuals in bankruptcy proceedings. To schedule a free consultation, call 310-271-6223 or contact me online today.