How Does a Personal Guarantee Affect an LLC Bankruptcy? - Westgate Law

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How Does a Personal Guarantee Affect an LLC Bankruptcy?

At times individuals need to consider what would be best for them: filing for a personal bankruptcy or filing for a bankruptcy through an LLC. In many cases, small business owners will find their personal finances in ruins due to the extensive investment (of both time and money) creating a successful business can require. The credit of the LLC may be perfect, but when it comes right down to it, is it more beneficial to file bankruptcy personally or through the LLC?

LLCs are set up due to the associated tax benefits. Business losses, profits and expenses flow through the company to you. Having the LLC allows you to have the same liability protections of a corporation. That means that members of the LLC can’t be held liable for debts associated with the business unless they have signed a personal guarantee.

The personal guarantee is key to this issue. If you agreed to be personally liable for debts that were accrued during the operation of the LLC there are two important things to remember: 1. You can write off the expenses associated with the maintenance of those debts against the LLC revenue and 2. In the event that payment is not made, you pledged your personal assets as collateral.

If you are personally liable, lenders usually won’t even bother going after the LLC. Most LLCs have no assets worth claiming and the lender knows that you might have assets. Most individuals who find themselves in this situation have some type of asset: a car, a house, personal property, etc. And the creditors want those assets in order to offset the debt.

If this is the case and a personal guarantee is in place, there’s no need to file for bankruptcy through the LLC, it won’t be useful. Simply file for a personal bankruptcy because that’s where the protection will be needed.

If you’re looking for protection as a result of a personal guarantee in place for your LLC, contact Westgate Law today. We can guide you through the bankruptcy process and help you get your debt discharged as quickly as possible.

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About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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