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How does corporate bankruptcy affect personal credit?

22 June 2021

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Key Points

Will corporate bankruptcy affect my personal credit?

If you are worried about whether declaring your business bankrupt will affect your personal credit score, you need to ask yourself if you are personally liable for any debt that the business has racked up.

Corporate bankruptcy can affect personal credit but this depends upon a number of factors:


What is corporate bankruptcy?

Corporate bankruptcy is a legal process where a company cannot pay its debts and declares itself bankrupt.

Over 20,000 companies file for bankruptcy per year according to research. For companies deep in debt, bankruptcy is often the only option and seen as a lifeline to try to manage financial woes.

If you are currently going through corporate bankruptcy, our debt relief specialists can help support you through the process.


What is the difference between corporate bankruptcy and personal bankruptcy?

Individuals and companies both own assets and under the Bankruptcy and Insolvency Act (BIA), this means that they can file for bankruptcy.

However, there are some differences between personal bankruptcy and corporate bankruptcy; the main one being that if you declare personal bankruptcy, you are fully liable for the debt.

In corporate bankruptcy, a company is considered to be a ‘legal person’ and this means that as a company director, although some debts may be written off, you may also be personally liable for some of them, including any loan leases that have been personally guaranteed.

If you are a self-employed sole trader, then you and your company will be seen as the same legal entity and business debt will be viewed as part of your personal finances.

This is why you should think very carefully before making a decision to file for bankruptcy. You can talk to a trusted advisor and they might be able to find an alternative solution.


How can corporate bankruptcy affect my personal credit?

As mentioned earlier, there are certain factors that will determine whether or not corporate bankruptcy affects your personal credit score.

Personal guarantees

It is sometimes the case that upon applying for credit or a loan, the lender may ask business owners to sign a personal guarantee that makes the owner personally responsible for repayment.

If you file for corporate bankruptcy, then this unpaid debt can affect your personal credit score.

Business tax

If you have fallen behind on paying business taxes, including sales tax, this will not usually be covered during the corporate bankruptcy process. This means that business owners will be liable for unpaid tax and this can affect your personal credit score.


How long can corporate bankruptcy affect my personal credit?

Once you have filed for corporate bankruptcy, you can be released from it after 9 months but it will remain on your personal or business credit history for a minimum of six years or until you’ve been discharged.

This can make life difficult if you want to apply for credit as lenders will be unwilling to lend money to someone who has declared bankruptcy.


When am I not personally liable for company debt?

If you are a company director outside of a partnership or sole trader arrangement, then you will not be responsible for company debt. In the case of limited companies, this means that liabilities will hit just the company rather than the directors and not affect personal credit.


Can I avoid corporate bankruptcy?

Filing for corporate bankruptcy is a final resort for business owners who are unable to pay their debts. You should always first seek advice from a licensed trustee and debt relief specialist who can assess your financial situation and offer solutions before going down the bankruptcy route.

It is important to note that if you continue to trade and rack up further debt after the company has gone into insolvency, you then become personally liable for any debt. If a director continues to build up debt knowing that the company cannot recover, then this is considered to be fraudulent trading.

At Harris & Partners, our team of licensed insolvency trustees will help provide effective debt solutions and support you through any financial difficulties. You can find out more information about corporate bankruptcy services here or contact us to speak with a member of our team.