Can personal credit suffer due to old business debt?


Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for

Ask Elaine a question or read her prior answers in the 'Your Business Credit' archive.

Question Dear Your Business Credit,
I own a business and am organized as an limited liability company (LLC). A creditor has threatened to take me to court to get a judgment for the past due amount I owe. My lease contained a personal guarantee for the first year of business only. That period of time has long passed. It was seven years ago.

What impact will the judgment have on me personally and on my credit record? Can I be held personally liable for the unpaid bills of my LLC if I can demonstrate that I operated the business responsibly, the insolvency notwithstanding? -- Mable

Answer Dear Mable,
I'm sorry to hear about your financial troubles. In the past few years, it has been easy for business owners to fall behind on bills, and your situation is unfortunately very common.

I consulted three attorneys to try to get you an answer, but I found out that to tell you exactly where you stand, they would need to know details such as the state where the business is located, the type of lease you signed, what charges the debts are for, and the claims being made by the creditor. My best advice is to speak with an attorney who knows the laws of your state and has expertise in debt-related matters to get advice on your specific situation, so you know what to do if you do get sued.

Generally speaking, it is within the realm of possibility that you could be sued and that the judgment will appear on a credit report, according to Leslie Tayne, an attorney in Melville, N.Y., who advises small-business owners on credit and debt.

It is also possible that the creditor could pursue you to enforce the judgment. However, there may be information in the original loan agreement that an attorney could use to make a case against your paying it. "Depending on what is in the personal guarantee, she can try to raise it as a defense," Tayne says, with regard to your situation.

Robert Brennan, an attorney in La Crescenta, Calif., noted that if the personal guarantee has lapsed and the only obligor on the lease is the LLC, then the creditor is limited to pursuing the LLC.

He added that if creditors suspect that someone is using a corporation as a sham to hide from them, they can use complicated methods of "piercing the corporate veil" to go after the individual or people who formed it -- but he says this is unlikely.

"If in fact the personal guarantee has lapsed and the creditor's only recourse is against the LLC, then the creditor has no business and no right to put it onto the person's individual credit report," he says.

For other entrepreneurs who are slipping behind on business debts, I would recommend trying to work out a payment plan as soon as possible with creditors. It's natural to want to stick bills in a drawer and ignore them when you don't have money to pay them, but that will only anger your creditors.

If they know your business has hit hard times and you are doing your best to make payments -- and you keep your promises as to how much you will send them and when -- they will be less likely to move to tough measures like suing you. I discussed options for handling business debts in an earlier column, "Repayment, settlement, bankruptcy: Facing debt from a failed business." Nothing is more frustrating to someone who is owed money than being ignored, so letting creditors know that you are trying to work with them can go a long way toward staying out of court.

See related: Cut personal credit ties to a failing business, Keeping business credit off of your personal record

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Published: March 10, 2014

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