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Business bankruptcy and your credit history

Declaring bankruptcy is the sum of all fears for many business owners. If you’ve reached that point and there are no other alternatives, then you need to proceed to filing Chapter 7 and dissolving the business. While you’re aware that the bankruptcy adversely affects credit history, you may not be sure how it will affect you.

Different laws apply to sole proprietorship, general partnership and corporations. The laws governing the structure of your business determines how it affects your credit score. In addition, your credit score hinges on the financing or debt for the business. You are personally responsible for a personally guaranteed business loan, business credit card in your name or any other underwritten debt you signed for.

Sole proprietorship and general partnership

U.S. finance law structures S-corporations and corporations, so directors and executives are not legally responsible for the debt. On the other hand, the business owner is personally responsible for the debt of sole proprietorships and general partnerships.

Sole proprietorship: The finance and credit laws do not distinguish between the business owner and private citizen. You and your business are essentially one and the same, so you are personally responsible for all loans, debts and other financial obligations. All the credit bureaus collect debt information on sole proprietorship business owners.

General partnership: Similar to a sole proprietorship, the laws hold business owners in a general partnership personally liable for the business’ debt. As such, if you default to a creditor, that creditor can report your debts to the credit bureaus. These debts will appear on your personal credit report until you’ve paid the creditor. Often the most expedient way to remedy this debt is to negotiate a settlement with the creditor.

Final analysis

Your credit score will affect mortgage, auto loans, credit card and other lending rates. According to Debt.com, a bankruptcy will remain on your credit history for a minimum of 10 years. While closing a business may be the end of a dream, you can take the necessary steps to protect yourself, so you can effectively transition to your next career. You should figure out the best way to pay off debts as soon as possible to mitigate the impact of the bankruptcy.

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