What is a personal guarantee and why does it matter?

A personal guarantee is a separate contract in which the business owner promises to pay the company's debt if the company defaults. Most small-business loans, credit lines, equipment leases, commercial leases, and SBA-backed loans require personal guarantees. When the company fails, the guarantee survives and the lender can sue the owner individually. A guarantee is a separate obligation, not erased by the company's bankruptcy.

Does the company filing bankruptcy discharge my personal guarantee?

No. A corporate or LLC bankruptcy discharges only the company. Under 11 USC § 524(e), the discharge of the principal does not release a co-obligor or guarantor. Lenders routinely collect on personal guarantees after the company files. To discharge personal liability you must file your own personal bankruptcy under Chapter 7, Chapter 13, or Chapter 11.

Can I file Chapter 7 personally and keep the business running?

Sometimes. If the business is an LLC or corporation, the entity is separate, and a personal Chapter 7 trustee may liquidate your ownership interest if it has value. If the business has no equity, the trustee will likely abandon the interest and the company can continue. For a sole proprietor the business and the debtor are the same; the trustee's reach is wider.

Am I personally liable for unpaid payroll taxes?

Yes for the trust-fund portion. The trust-fund recovery penalty under 26 USC § 6672 makes responsible persons individually liable for the employee withholding portion of unpaid 941 taxes. That liability is not dischargeable in bankruptcy. Sales taxes collected from customers create similar personal exposure in most states. Pay trust-fund taxes before any other creditor when the business is failing.

What if the company has no money to pay its debts?

An insolvent company has three main exits: an out-of-court wind-down, a state-law assignment for the benefit of creditors, or a bankruptcy filing under Chapter 7 or Chapter 11. The owner's personal exposure depends on the personal guarantees and tax liabilities described above, not on the cleanup method chosen for the company itself.

Business Owner Personal Liability in Bankruptcy

It depends on the entity type and what you signed. Sole proprietors are personally liable for all business debts because the business and the owner are the same legal person. LLC members and corporation shareholders generally have limited liability for business debts, but personal guarantees, owner taxes, fraud, and piercing-the-veil claims can override that protection. Read every loan, lease, and credit application before signing.

When Business Owners Are Personally Liable

The corporate form (LLC, corporation) generally protects owners from personal liability for business debts. But there are important exceptions:

Personal guarantees: The most common source of personal liability. Banks, landlords, and major vendors often require personal guarantees. A guarantee survives the business's bankruptcy.
Piercing the corporate veil: If you failed to maintain corporate formalities (commingling funds, no operating agreement, undercapitalization, treating business assets as personal), courts may hold you personally liable.
Trust fund taxes: If you failed to remit employee payroll taxes (income tax withholding, employee FICA), you are personally liable under 26 U.S.C. Section 6672. These cannot be discharged in bankruptcy.
Fraud: Personal liability for fraud committed through the business entity.
Tort liability: Personal participation in negligent or harmful acts.

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