How You Can Expect Business Bankruptcy to Affect Your Credit

How You Can Expect Business Bankruptcy to Affect Your Credit

July 6, 2019

Business bankruptcy could have a significant effect on your credit score if you are personally liable for any of the debts incurred by your company. The type of business entity/structure you have and the company’s own tax liability will have a lot to do with whether or not personal liability applies to you.

Here’s some information you should be aware of before you make the decision to file for business bankruptcy in Montgomery County, TX.

Business entities

If you’re responsible for the debts associated with your business, you can bet that the creditor will report those debts on your credit score. Here’s a look at how each type of business structure affects this:

  • Sole proprietorship: For sole proprietors, the individual and the business are considered the same in essence under the law, which means the sole proprietor is responsible for all business debts. This means filing for bankruptcy would significantly affect the sole proprietor’s credit report, and the bankruptcy filing would remain on their credit report for a period of up to 10 years.
  • Partnership: Partners are typically personally responsible for business debts with the partnership. Creditors can report these debts to credit bureaus under your name, meaning they would show up on your credit report and that they could do some damage to your numbers there. It can be difficult to file business bankruptcy on behalf of a partnership, because if the partnership debts aren’t paid off from liquidation of the business property, the partners are still responsible for what’s left over. For this reason, most partners will file bankruptcy individually rather than as a business entity.
  • LLCs and corporations: If your liability is limited because of LLC or corporate status, you will likely not be responsible for your business debts. Each of these entities is capable of filing for bankruptcy on its own, and that means the bankruptcy will not affect your credit score. This doesn’t necessarily mean that filing for business bankruptcy is going to be your best path, but you can at least expect that the business bankruptcy will not affect your credit in most cases.

With LLCs and corporations, it’s important to note that there are some exceptions in which your credit score could be affected. If you signed a personal guarantee or other similar contract, for example, you agreed to be responsible (at least in part) for paying business debts, which means your credit could be affected by a business bankruptcy.

There are also some types of business taxes that you might be responsible for if they’re unpaid. Any taxes withheld from employees’ salaries or collected from others (such as sales tax) is the responsibility of the business to send to the government, and if you collect those taxes but fail to send them to the government, you could become personally responsible for them, opening you up to a big hit to your credit score.

For more information about the various ways in which filing for business bankruptcy in Montgomery County, TX may or may not affect your credit, contact James R. Jones, Attorney at Law today.

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