The Effect of Corporation Bankruptcy on Personal Credit

Understand the effect of corporate bankruptcy on your personal credit.

If you established a corporation for your business venture, you may reach a point at which you face serious financial problems. You may conclude that the best course of action is to file for a commercial bankruptcy. Understanding this prospect, you may wonder what impact the bankruptcy of your corporation would have on your personal credit.

Types

There are two types of bankruptcies available to your corporation. You can elect to file a Chapter 7 bankruptcy. Through a Chapter 7 bankruptcy, your corporation stops operation. The debts of your business are discharged. The alternative is to pursue a Chapter 11 bankruptcy. A Chapter 11 bankruptcy allows you the chance to reorganize the operations of your business and to restructure your debt. Your business continues operating during and after the bankruptcy proceedings.

Corporate Shield

You probably established a corporation to enjoy the benefits associated with that type of business organization. Provided you correctly followed the law of your state in establishing and maintaining your corporation, what is known as a corporate shield exists. The shield protects you, in most cases, from being personally liable for the debts and other liabilities of your corporation. The corporate shield remains in place even if the corporation ends up in bankruptcy.

Effects

Assuming legal compliance with corporate laws, filing for bankruptcy of your corporation would have no effect on your personal credit. The debt problems of your corporation generally remain limited to the business and do not extend beyond it.

Misconceptions

The most common misconception is that the shield is absolute. In fact, an exception exists if you were required to personally guarantee certain debts of the corporation. In some cases, the owner or primary shareholder of a closely held corporation must sign a personal guarantee for certain loans, particularly until the business establishes its own financial history. In such a situation, a corporate bankruptcy might negatively affect your personal credit.

Expert Assistance

Protecting your business and personal interests in a corporate bankruptcy is a complex task. Therefore, consider retaining the services of an experienced lawyer to assist you in pursuing a corporate bankruptcy. Local and state bar associations maintain directories of lawyers in different practice areas, including bankruptcy law. Contact information for these organizations is available through the American Bar Association at:

American Bar Association
321 N. Clark St.
Chicago, IL 60654-7598
312-988-5000
abanet.org

References

• Cornell University Law School: U.S. Bankruptcy Code
• ""The Glannon Guide to Bankruptcy"; Nathalie Martin; 2006
• "Corporation Law"; Stephen M. Bainbridge; 2008
• Cornell University Law School: Bankruptcy Overview

Resources

• American Bar Association: Directory of State and Local Bar Associations
• American Bar Association: Bankruptcy & Insolvency Litigation Committee