Debt collectors are calling. but whose debts are they? Are you personally liable?
The extent of your personal liability depends on numerous factors, some of which relate A) the State you live in, B) your current marital status, C) your tax filing status, D) if you own a business, how your business is structured, and E) whether you personally guaranteed any of these obligations.
A) Regarding the State, California is a “Community Property” state. That means that generally (There are exceptions to everything) you and your spouse share all assets and liabilities.
B) Therefore, if you are married and live in California, your assets and liabilities are equally shared. (Again, there are exceptions to this rule).
C) Unless you and your spouse file separate tax returns, a joint tax return tends to support the argument, that you do indeed live in a “community property” estate.
D) If you own a business, your personal liability will depend on how the business is legally organized.
E) If the business is a proprietorship, meaning it is not incorporated, all business debts are considered to be personal debts. If the business is incorporated, but you have signed a personal guarantee for a business obligation, you will be held personally liable for that specific obligation. To the extent you live in a community property estate, your spouse, while not liable, cannot protect community property assets in the event of a lawsuit.
Clearly, discussing all of the above issues with an attorney experienced in these issues, is important, because it will help you determine your options going forward. How can you protect yourself, your spouse, your business? What are the priorities? What comes first? If you have a business, you must first determine where the primary exposure lies.
General Partnerships: Is your business a General Partnership? Each partner is personally liable for the entirety of the business’s debts (and any partner can usually bind the entire partnership to a business deal – a scary combination). This means that if there isn’t enough money in the business to pay the debts, and your partners are broke, creditors can take your personal assets to pay all of the business’s debts, not just your share.
Corporations and Limited Liability Companies: If your business is organized as a corporation or a limited liability company (LLC), your personal assets are usually protected from business creditors as a matter of law. Shareholders and LLC members have a form of asset protection called limited personal liability. Creditors cannot take owners’ personal assets to pay business debts, unless a business owner specifically gives up that limited liability protection, for example, by co-signing as a personal guarantee for the corporation or LLC.
Unfortunately, many small business owners are forced to give up their right to limited personal liability, at least for some of their business debt. Many creditors require personal guarantees and/or personal security from small business owners before they will loan money or extend credit to a business. Landlords generally demand a personal guarantee before they will lease commercial property to a small business.
A personal guarantee is a promise by a business owner to hand over the owner’s personal assets to a creditor if the business can’t pay its debt and its assets are not worth enough to cover the debt. A creditor can also ask a business owner to secure a business debt by pledging specific personal property, such as an owner’s house, boat, or car. When you sign a personal guarantee or pledge personal property, you give up your protection against personal liability, and creditors can come after your personal assets.
The most common form of defense against aggressive creditors is exercising the bankruptcy option. If your business bank account is empty, filing bankruptcy will usually give you some breathing room while you try to work things out, and in almost all cases, a bankruptcy will protect your house, your car, and your furnishings.
Business vs. Personal Bankruptcy. If you are a sole proprietor, you can file for either Chapter 13 or Chapter 7 bankruptcy. Either type of bankruptcy can be used for personal debts or business debts.
If you are a corporate shareholder, LLC owner, or partner in a partnership and you have signed personal guarantees or pledged collateral for business loans, you are personally responsible for the debt. Assuming the business cannot pay, creditors will be looking at you.
Using Bankruptcy as a strategic tool. When you file for bankruptcy, something called an automatic stay immediately stops your creditors from foreclosing on your house or any other personal property that is at risk. In some situations, this can be reason enough to file for bankruptcy, because it will buy you time, if nothing else. Many creditors will think twice before leaning on you too hard if they think you may file for bankruptcy. Some creditors would rather work out a payment plan, or settle for partial repayment, than become a creditor in your bankruptcy case. From a creditor’s perspective, bankruptcy is an expensive and long process that eats into profits. You and your attorney can use that to your advantage in negotiations and perhaps spread payments out far enough to be manageable.
Bankruptcy is not the only option. Debt negotiation, debt buy-downs, and debt work-outs may also work to solve your problems. Creditors are frequently motivated to accept a workout, when they are negotiating with a savvy bankruptcy lawyer. Creditors know that something is always better than nothing!
Don’t wait until you are in imminent danger of losing your family’s home or livelihood. Think strategically, and get the professional help you need early on. Know your options ahead of time.
Call the law offices of Paul M. Allen and take advantage of a free consultation on debt management and business survival. It could save you a lot of money and a lot of heartache.
Two convenient office locations to serve you. No obligation. Get the legal advice you need, from the bankruptcy lawyer that people trust. Call today. Law Offices of Paul M. Allen. 818-552-4500; 562-865-4480.
(This article is for information purposes only, and does not necessary reflect the company’s opinions and views on general issues. We make no warranty, prediction nor representation, nor do we assume any legal liability for the completeness of any information and its effect on any case. Each case is different and results depend on the facts of each case. Consult with and retain counsel of your own choice if you need legal advice.)