How Do I Avoid Personal Liability When My Corporation Is Facing Bankruptcy?

Owning and operating your own business is a dream for many. However, most small businesses are funded by personal assets and personal credit guarantees. These guarantees waive your limited liability of personal assets to corporate creditors. While it is best to structure business financing completely separately from the very beginning to avoid possible liabilities, there are a few ways to protect your personal assets when your business is facing bankruptcy proceedings.

Meet with a bankruptcy attorney to determine your options. A Chapter 11 bankruptcy filing restructures the debt to help the company try to work through difficult financial periods, possibly negotiating debts. Chapter 7 bankruptcy liquidates all assets in the corporation to pay debtors. Decide which works best for your situation.

Read More: Who Pays for Bankruptcy?

Create a game plan to negotiate with debtors prior to filing bankruptcy paperwork. Itemize debts that have a personal guarantee on them versus the debts that are entirely owned by the corporation.

List all assets the corporation has.

Review the list of assets with the bankruptcy attorney and show him which debts are personally guaranteed and which debts are corporate. Ask him what options you have to liquidate corporate assets and pay down the personally guaranteed debts prior to filing. Get his advice before doing this, since each state has different requirements and bankruptcy judges may not look favorably on maneuvers made just before filing.

File the bankruptcy documents for either Chapter 7 or 11. The bankruptcy documents should include a plan that focuses on paying corporate debts with corporate assets or restructuring things to pay the debt over time without infringing on personal assets. You may not protect all personal assets, but you might be able to protect the majority.


  • Courts will request all documents of personal asset transfers six months to a year prior to filing bankruptcy if the corporation has any personal guarantees. Gifting or selling personal assets to a family member may result in harsh penalties. Discuss these alternatives with your bankruptcy attorney prior to taking any action.

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