If My Business Gets a Discharge, Am I Personally Cleared of the Debt?

One of the most common bankruptcy misunderstandings we hear at The Law Office of William Waldner, PC  is this: “If my business gets a discharge, I’m personally off the hook, right?”
Wrong.

While filing for bankruptcy can provide powerful relief—especially for small businesses—it doesn’t automatically protect you or anyone else associated with the business unless they’re also named in the case. Let’s break this down using real-world examples involving S-corporations, LLCs, co-signers, personal guarantees, and family members.

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Bankruptcy Basics: Business vs. Personal Liability

When you file for bankruptcy as an individual or a business, the discharge only applies to the person or entity filing the case. That means:

• If your business files bankruptcy → Only the business’s liability is wiped out.

• If you file bankruptcy → Only your personal debts (and eligible guarantees) are discharged.

• If both file → Then both may be cleared of debt, separately.

Let’s get into the nuts and bolts for different business types.

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S-Corporations & LLCs: What Happens in Bankruptcy

🔹 S-Corporations

S-Corps are separate legal entities. If your S-Corp files for Chapter 7, it can discharge business debts—but you personally remain liable for any debts you guaranteed or co-signed.

🔹 LLCs (Limited Liability Companies)

LLCs work similarly. If your LLC files, the court may liquidate its assets to pay creditors. But again, personal guarantees, credit cards, and co-signed loans still stick to you.

💡 Example: If Midtown Marketing LLC takes out a $50K loan and you personally guaranteed it, and the LLC files bankruptcy—you’re still on the hook unless you file, too.

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Why Small Business Owners Usually Need a Personal Guarantee

Let’s get real—most small businesses don’t start with deep pockets or a credit history. If you form a new LLC or S-Corp today, even after paying your state filing fees, that company:

• Has no income

• Owns no assets

• Has zero credit history

Now, if that corporation walks into a bank asking for a $50,000 loan, the lender will absolutely require a personal guarantee from you, the business owner. Why? Because the business itself has no way to repay the loan without your backing.

🔍 Compare This to Big Business

Take American Airlines, for example. It generates billions in revenue, owns aircraft, terminals, and has a track record with lenders. If American Airlines wants to borrow $100 million, the CEO doesn’t sign a personal guarantee—because the company itself has the assets and income to cover the debt.

Same goes for high-profile business figures like Donald Trump. When one of his corporations seeks financing, the lenders base their decision on the value and performance of the business entity—not the person.

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What If I’m a Co-Signer on My Sister’s Business Loan?

Here’s the truth: Co-signing makes you equally responsible for the debt. It doesn’t matter whose name is on the business license. If you signed the dotted line:

• You’re legally obligated to repay the full balance.

• A discharge for her business will NOT protect you.

This is crucial when family members or friends go into business together. Bankruptcy won’t cancel your liability unless you also file.

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Debunking Common Bankruptcy Misconceptions

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Co-Signer & Business Bankruptcy Scenarios

👎 Bad Outcome (No Personal Filing)

• Midtown Builders, LLC files Chapter 7.

• John personally guaranteed $80,000 in tools/equipment loans.

• Result: Business assets are liquidated, but John now owes the $80K personally.

👍 Better Outcome (Both File)

• Midtown Builders, LLC files.

• John also files personal Chapter 7.

• Result: Business is closed, and John may discharge his own liability if eligible.

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FAQs – Business Bankruptcy & Personal Liability

Q1: If my sister’s business goes bankrupt, do I owe the loan we co-signed?
A1: Yes. A business bankruptcy discharge won’t release you from liability as a co-signer.

Q2: Can I file for bankruptcy just to cover my co-signed business debts?
A2: Yes. You can file a personal Chapter 7 or Chapter 13 to address co-signed obligations.

Q3: Will my credit be hurt if the business files?
A3: Only if you co-signed or personally guaranteed debts. Business-only debts don’t impact personal credit unless you’re tied to them.

Q4: What if I’m a silent partner or investor?
A4: You’re typically not liable unless you guaranteed the debts or signed personal agreements.

Q5: Can I still operate a new business after filing personal bankruptcy?
A5: Yes. Many entrepreneurs bounce back stronger. Filing doesn’t prohibit you from starting fresh.

Q6: Do I need a lawyer for this?
A6: Absolutely. Business and personal bankruptcy can get complex fast—especially with co-signed and guaranteed debts.

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The Bottom Line: Bankruptcy Doesn’t Transfer Across Names

Bankruptcy discharges are individual legal shields. They don’t stretch to partners, spouses, friends, or companies unless they’re part of the filing.

So, if:

• Your business gets a discharge → It doesn’t help you or your sister.

• Your sister files → It doesn’t help you if you co-signed.

• You want total protection → You may need to file your own case.

At Midtown Bankruptcy, we help you navigate these tricky lines—so you don’t end up holding someone else’s debt.

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Need Help Sorting Out Business & Personal Debt?

📞 Schedule a Consultation
Don’t let myths or assumptions sink your financial future. Whether you’re the owner, co-signer, or guarantor, let us help you chart the safest path forward.

🌐 Contact or text us at 212-244-2882 or email info@midtownbankruptcy.com.