LLC Bankruptcy Vs. Personal Bankruptcy

If you're facing bankruptcy and you own an LLC, you need to understand your options.

Personal bankruptcy will resolve your personal debts, such as your credit cards, medical bills, personal loans, auto loans and home mortgage. LLC bankruptcy, on the other hand, will resolve the LLC's business loans and obligations.

LLC Entity

When you create a limited liability company you create a new legal entity that is separate and distinct from you as an individual. This means that the LLC has its own legal obligations that are separate from your personal obligations.

Crossover

Generally, there is no crossover between your personal loans and your LLC's business loans. You are not responsible for LLC obligations, and the LLC is not responsible for your personal obligations.

Exception

Sometimes, though, personal liability extends into the LLC arena because a personal guarantee, or a pledge of personal property, is required to fund the LLC. In those circumstances, you would need to file LLC bankruptcy to relieve the LLC of any obligation, and you would also need to file personal bankruptcy to eliminate your personal pledge.

Types

Individuals and LLCs can file for Chapter 7 liquidation bankruptcy. Only individuals can file for Chapter 13 repayment bankruptcy, while only business entities like an LLC can file for Chapter 11 reorganization bankruptcy.

Internal Obligations

If you loaned money to your LLC, or conversely if your LLC borrowed money from you, then bankruptcy on either side would eliminate that loan. Most often, though, entrepreneurs don't loan money to the LLC, but instead simply invest the money without a specific obligation for the LLC to repay the money.

References

• U.S. Courts: Federal Courts--Bankruptcy Basics