Bankruptcy Can Mean “Double Whammy” For Struggling Business Owners

An article in today’s Wall Street Journal points out the one of the perils of starting a business is that sometimes your personal assets become collateral for loans you take out for the business. When business gets soft, you may end up filing a personal bankruptcy case to save your home from your business creditors.

Sole proprietors are on the hook for all the debts incurred running their business. Any debt you accumulate in the business name may still go after you as the owner of the business. This leaves your personal assets, such as your home, cars, even your furniture at risk.

Most entrepreneurs who start out as sole proprietors will incorporate into limited liability corporations or limited liability partnerships.  These structures offer some protection for your personal property, but in the current economic climate many banks have begun asking business owners to sign personal guarantees for business loans. These guarantees are usually very broadly written and will allow the bank to come after your personal property should you not be able to make the payments.

Bankruptcy filings were up 36 percent to 711,550 in the first six months of 2009. In the same period last year, there were only 522,205 bankruptcies filed.

With the economy recovering slowly, I think that it may be a long road ahead for many small business owners. Consulting with an experienced personal bankruptcy attorney could help you understand your options if you are having a hard time keeping everything afloat in the current economic climate.