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Are your personal assets at risk in a business bankruptcy?

If your New Jersey small business is struggling financially, you may wonder if filing for bankruptcy is a wise decision, or, more to the point, if filing for bankruptcy would jeopardize your personal assets. Intuit QuickBooks explores circumstances in which your assets may be at risk and what you can do to protect them in the event that your business defaults.  

The article suggests that you should only consider filing for bankruptcy on behalf of your business if your personal assets are at stake. If you do not have personal assets at stake, it may be best to close your businesses doors and walk away. Creditors then may seize your company's assets, but because you no longer run the company, it causes you no real harm.

You can help protect your personal assets by forming a Limited Liability Company or other limited liability entity. If you own a partnership or sole proprietorship, your personal assets are likely at risk, in which case, bankruptcy may be wise.  

Your assets may be at risk regardless if you failed to separate your personal and business finances. This is an extremely common issue with small businesses, as owners see no qualms about using their business account to make a mortgage payment, or using a personal account to fund payroll. When this occurs, the courts may determine that there is no distinction between personal and business assets and allow creditors to pursue personal assets to pay off business debts.

Another reason your assets may be at risk is if you placed a "personal guarantee" to obtain funding. Many banks and creditors require new limited-liability entities to do this as, if the business fails, they will not have sufficient means to recover debts. In many cases, lenders require borrowers to back their loans, lines of credit, commercial leases, etc., by personal collateral.

You can protect your personal assets by avoiding using them to start or operate your business. If your business does hit a financial rough patch, consider scaling back rather than taking from your personal finances. It is better to retreat than to risk losing your business and your personal property.

The information in this post is designed to educate. You should not construe it as legal advice.

 

 

 

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