My clients had owned a small company for 40 years. They had amassed a half-dozen properties, owned a very valuable home, an expensive recreational vehicle, and of course, a big party boat. But when their company began to falter due to the economy, the owners guaranteed a half-million dollar loan to try to get the company through the hard times.
Now they have only a single house they live in, and social security to get them by. The boat and RV had is gone, along with a number of homes they owned.
After helping people file for bankruptcy for some time now, I’ve noticed that people who own struggling businesses often attempt to save their business by personally guaranteeing loans to provide needed cash. Sadly, when the business fails, the business owner needlessly loses assets accumulated over a lifetime that should have been protected by a business failure.
Of course, in the beginning stages of many companies, owners have to provide personal guarantees on loans, but once a company has been alive long enough to be able to borrow its own money, that sort of behavior should cease. One of the major reasons to incorporate a business is to ensure that the failure of a company does not reach down and impact its owners. The corporation acts to buffer bad events from its shareholders, such as a major law suit or simple financial failure. When a personal guarantee is used to obtain funds, that buffer is breached, and failure of a company can turn into a nightmare for its owners.
In that recent case, my clients should have come to me two years before they actually arrived. Sadly, the difference was that they could have closed up their shop and retired, rather than put themselves at risk, and had more than a million dollars of assets and property to enjoy.
Instead, they have their homestead, and no other property. They even had to ask one of their children to give a house back that they had given to the child a year earlier!
So remember why you incorporated your company – for most people, the driving reason to use a corporate entity was to separate themselves from business losses. Be very careful about risking decades of asset accumulation by putting your name on the line of your business debt. In particular, if you are at retirement age, you must ask how much longer you intend to work, and if it is merely a couple years more….consider retiring now, and keeping your properties and funds. Otherwise, there is a good chance you’ll be visiting my office or some other attorney to talk about a bankruptcy, rather than a travel agent about that vacation you always wanted to do.
Warren Norred is an Arlington, TX lawyer who practices in the fields of bankruptcy, intellectual property, and litigation.
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Last modified: May 7, 2014