Does Filing a Business Bankruptcy Take One's Home?

By Heather Frances J.D.

Depending on how your business is structured and what type of bankruptcy you file, filing bankruptcy on business debts could cause you to lose your home. Generally, if you own a portion of a business that does not provide personal liability protection, such as a sole proprietorship or partnership, personal assets including your home could be taken in a Chapter 7 bankruptcy proceeding.

Types of Bankruptcy

Businesses can file several types of bankruptcy, depending on the business structure. Corporations and limited liability companies can file Chapter 11 bankruptcy, which is a reorganization of the business. All types of businesses can file Chapter 7 bankruptcy, which is a liquidation, or sale, of assets to pay debts. Owners of sole proprietorships and partnerships can file Chapter 13 bankruptcy to create a repayment plan for their debts.

Sole Proprietorships and Partnerships

Sole proprietorships and regular partnerships do not offer liability protection to their owners. Legally, there is no distinction between the business and the owner or partner, so the owner or partner is personally liable for the debts of the business. Consequently, if the business files Chapter 7 bankruptcy, both personal and business assets are available for the court to liquidate to pay business or personal debts. If an owner or partner chooses Chapter 13, he must create a repayment plan including business and personal debts. However, Chapter 13 does not involve liquidating any assets, so it is unlikely that he will lose his home simply because he filed for Chapter 13 bankruptcy.

Get a free, confidential bankruptcy evaluation. Learn More

Corporations and LLCs

Corporations, LLCs and other similar businesses that must register with the state typically offer liability protection to the owners. Generally, the owners are not responsible for the debts of the business since the business is considered a separate legal entity. Thus, the bankruptcy court cannot take the owner’s personal assets to pay the business’s debts, regardless of the type of bankruptcy the business files. If the business files under Chapter 7, the court can only liquidate business assets.

Crossing Corporate Lines

In some cases, however, owners can make themselves liable for business debts even though the business structure should protect the owner from liability. When the owner personally guarantees a loan, provides personal assets as collateral for a business loan or personally cosigns for a loan, he is exposing himself to liability. In such cases, the business’s bankruptcy can affect the owner’s personal finances to the extent the owner made himself personally liable. If the corporation or LLC is a sham created to protect the owner’s assets, rather than a legitimate business, a creditor can go after the owner’s personal assets. This is called “piercing the corporate veil,” and requirements vary by state law. Generally, if the owner has not maintained corporate formalities or has used the corporate structure fraudulently, a court can pierce the corporate veil and make the owner’s personal assets available to satisfy business debt.

Get a free, confidential bankruptcy evaluation. Learn More
How to Protect Business Assets in an S Corporation vs. Partnership
 

References

Related articles

Sole Proprietorship & Investment Accounts

The sole proprietorship is a very common form of small business, and beyond running their underlying business, sole proprietors are free to make investments and hold assets in investment accounts. These accounts can be used to augment savings for the business, to speculate on specific investment opportunities or to offset financial risks encountered in the sole proprietorship's business operations.

LLC Vs. SP

A “sole proprietorship” is a business structure in which one person operates a company with no partners and unlimited liability for business debts. A limited liability company, or LLC, is an entity created by state law that allows one or more individuals to carry on a business and limit their liability in much the same way as corporations do. Whether a sole proprietorship or an LLC is the best structure for your business depends on several factors.

LLC & Bankruptcy

A limited liability company (LLC) is a form of business organization created by the laws of the state that organized it. Although it is treated as a partnership for tax purposes, it is treated as an independent legal entity for bankruptcy purposes. Failing LLCs generally choose one of two main types of bankruptcy, Chapter 7 or Chapter 11. Creditors may force an LLC into bankruptcy.

Bankruptcy

Related articles

LLC Bankruptcy Laws

The bankruptcy laws pertaining to limited liability companies are hazy. The United States Bankruptcy Code contains no ...

What Will Happen to My Business If I File a Personal Bankruptcy?

Bankruptcy may be a viable solution if your have more debt than you can handle. However, if you are involved in a ...

Can Business Assets Be Touched if You File Personal Bankruptcy?

If you are self-employed and think you might need to file for personal bankruptcy protection, your case is probably ...

Can I Run My Sole Proprietorship After My Bankruptcy Filing Date?

If you operate a business as a sole proprietorship and you file for Chapter 7 bankruptcy, it is not likely you will be ...

Browse by category
Ready to Begin? GET STARTED