Bankruptcy may seem like a golden ticket when you are looking at clearing debts from your creditors – but there are many things to think about before you file for bankruptcy, especially if you are doing so for your corporation.
One such concern is whether or not declaring corporate bankruptcy will affect your personal credit.
When it comes to owning a corporation, as opposed to a sole-proprietorship or partnership, you are not legally responsible for business debts. However, there are exceptions for which you can be personally liable. Before explaining these exceptions, it’s best to understand the difference between corporate bankruptcy and personal bankruptcy.
Corporate Bankruptcy versus Personal Bankruptcy
Because both individuals and corporations can own assets, they are both able to file for bankruptcy under the Bankruptcy and Insolvency Act.
The process is fairly similar, which a few key differences:
- When declaring personal bankruptcy, all assets and liabilities are considered personal.
- When declaring corporate bankruptcy, an incorporated entity is considered a legal “person” according to the Bankruptcy and Insolvency Act. This means that while some debts may be eliminated under bankruptcy, there are those exceptions that you may be held personally liable for.
The process of declaring bankruptcy is similar as well. The individual or corporate business owner must meet with a Licensed Insolvency Trustee (LIT) to file for bankruptcy. Once the bankruptcy is filed, creditors are notified and not permitted to contact you regarding the debt.
From the date of filing, you are eligible to be discharged from the bankruptcy after 9 months. However, the bankruptcy will remain on your or your business’s credit history for at least 6 years.
Before making any decisions about bankruptcy, talk to a trusted advisor at Liu & Associates to consider alternative solutions to your financial problems.
How Corporate Bankruptcy Can Affect Your Personal Credit
As mentioned above, there are special circumstances in which filing for corporate bankruptcy could affect your personal credit. These circumstances include making personal guarantees on loans or credit and the company’s tax liabilities.
It’s possible that when you apply for a loan or credit, the lender or creditor will require the corporate business owner to sign a personal guarantee for the credit. This is an agreement that you, as an individual, will take full responsibility for the payments.
Should you file for corporate bankruptcy, this debt then becomes your financial responsibility. If the debt is unpaid, it affects your personal credit.
Unpaid business taxes are not typically cleared through corporate bankruptcy. This includes any taxes withheld from employee salaries or sales tax (also known as trust fund taxes). You are personally responsible if you collect these taxes but fail to forward them to the taxing authority. This unpaid debt will directly affect your personal credit.
Bankruptcy As a Last Resort
Before you file for corporate bankruptcy, it is recommended that you seek professional assistance to discuss all of your options.
Even if you have no debts that could be held against your personal credit, there are considerations that should be made before declaring corporate bankruptcy:
- The business will be finished.
- Your employees will lose their jobs.
If your corporation has run into financial difficulties, there may be an alternative to your situation. Our expert accountants at Liu & Associates can review your corporate finances to determine if there is a better path for you, your business and your employees.
Contact us today to discuss your options. We are more than happy to help you save your business!