Can the Bankruptcy of a Subchapter S Corporation Damage My Credit?
A subchapter S corporation is a type of business ownership that offers certain benefits to its shareholders. Since a corporation is its own entity, it is permitted to obtain credit in its own name, independent of its shareholders. Still, it can be difficult to keep corporate financial affairs from affecting the shareholders, particularly if the corporation is going through bankruptcy.
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S Corporation: Limited Liability
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By its nature, a subchapter S corporation has limited liability for the owners, or shareholders of the company. If an owner of a subchapter S corporation signs a loan document as the president or CEO of the corporation, he is not liable for the corporation's debt. Consequently, the corporation's debt should not be listed on his personal credit report, nor should it have any impact on his personal credit score.
Using Personal Credit for Corporate Expenses
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Some owners or shareholders use personal credit cards and other sources of personal credit to finance business operations. If the corporation declares bankruptcy, any money that the owners have charged on their own credit cards or borrowed in their name will be their sole responsibility to repay. Any agreement by the corporation to repay these debts would be an unsecured loan, and would be paid through the liquidation of the corporate assets, if at all. If the owner was not able to pay on these debts, it could have a serious affect on his credit.
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Personal Guarantee
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An owner or shareholder of a corporation may sign a personal guarantee for any debts that the corporation takes on, particularly before the corporation has established credit on its own. A bankruptcy of the S corporation in this case could affect the owner's personal credit. The bankruptcy may be listed under the specific debt on the owner's credit report. This could cause confusion with present or potential creditors, who may see this as a sign of financial problems with the owner of the corporation. Also, responsibility for payment of this debt would now fall to the owner because of this guarantee. If she is unable to pay, the delinquent payments would have a serious effect on her credit.
Options
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If the owner of a corporation sees the company in financial trouble, he should work to separate his own finances from the corporation as much as possible. If he has personally guaranteed debts that will be difficult for him to pay on his own, he should contact the creditor as soon as possible and close the accounts, while trying to work out an acceptable payment arrangement. This will minimize the impact of a default or bankruptcy on his personal credit.
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