Small Business Judgment Guide
Judgments against small businesses create unique challenges involving business entity structure, personal liability, operational continuity, and resolution planning. This guide provides educational content for business owners navigating judgment collection or resolution while maintaining business operations.
Education Only: This content is for educational purposes and does not constitute legal or financial advice. Business judgments involve complex legal structures and tax implications. Consult with a licensed attorney and CPA for guidance specific to your situation.
Business Structure & Liability
Understanding Your Exposure
Your personal liability for business judgments depends on your business structure:
🔴 Full Personal Liability
Sole Proprietorship & General Partnership
- • No legal separation between business and owner
- • Personal assets (home, car, savings) at risk
- • Judgment can be enforced against personal property
- • Personal bankruptcy may be necessary to discharge
🟡 Limited Personal Liability (Usually)
LLC, Corporation (S-Corp, C-Corp)
- • Legal separation between business and owner
- • Personal assets generally protected ("corporate veil")
- • Exception: Personal guarantees on business debts
- • Exception: Piercing corporate veil (fraud, commingling funds)
Personal Guarantees
Many small business debts require personal guarantees, making owners personally liable even with LLC/Corp structure:
- •Business loans: Banks typically require owner personal guarantee
- •Commercial leases: Landlords often require personal guarantee
- •Vendor credit: Suppliers may require personal guarantee for credit terms
- •SBA loans: Always require personal guarantee from owners with 20%+ ownership
Key Question: Review your contracts to determine if you personally guaranteed the debt that led to the judgment.
Common Business Judgment Scenarios
💳 Unpaid Vendor/Supplier Debt
Supplier sues for unpaid invoices, obtains judgment against business (and potentially owner if personally guaranteed).
Resolution Options: Payment plan, settlement, or bankruptcy
🏢 Commercial Lease Judgment
Landlord sues for unpaid rent or early lease termination, obtains judgment for remaining lease term.
Resolution Options: Negotiate lease buyout, settlement, or bankruptcy
🏛️ Business Loan Default
Bank or lender sues for unpaid business loan (often personally guaranteed), obtains judgment against business and owner.
Resolution Options: Loan modification, settlement, or bankruptcy
⚖️ Contract Dispute Judgment
Customer or business partner sues for breach of contract, obtains judgment for damages.
Resolution Options: Settlement negotiation, payment plan, or appeal
💼 Employment-Related Judgment
Former employee sues for unpaid wages, discrimination, or wrongful termination, obtains judgment.
Resolution Options: Settlement, payment plan, or insurance claim (if covered)
Impact on Business Operations
How Judgments Affect Your Business
- •Bank account levies: Business bank accounts can be frozen and seized, disrupting payroll and vendor payments
- •Liens on business property: Equipment, inventory, or real estate can have liens attached, preventing sale or refinancing
- •Credit damage: Business credit score drops, making it difficult to obtain new financing or vendor credit
- •Owner wage garnishment: If personally liable, your personal wages (from the business or other employment) can be garnished
- •Vendor relationships: Suppliers may require cash-on-delivery or refuse to extend credit
- •Customer confidence: Public judgment records may affect customer trust and business reputation
Resolution Strategies for Business Owners
Option 1: Negotiate Business Settlement
Approach: Use business cash flow or assets to settle judgment while keeping business operational.
✅ Best For
- • Business is profitable and viable
- • Judgment is manageable relative to revenue
- • Creditor willing to negotiate
- • Want to preserve business operations
💼 Considerations
- • May require lump-sum payment (50-70% of judgment)
- • Payment plan must be realistic for cash flow
- • Get satisfaction of judgment in writing
Option 2: Business Bankruptcy (Chapter 7 or 11)
Approach: File business bankruptcy to discharge debts or reorganize.
Chapter 7 (Liquidation)
- • Business closes and assets are sold to pay creditors
- • Remaining business debts discharged
- • Personal liability: If you personally guaranteed debts, you may still owe (unless you also file personal bankruptcy)
Chapter 11 (Reorganization)
- • Business continues operating while restructuring debts
- • Court-approved repayment plan over 3-5 years
- • Expensive (legal fees $15,000-$50,000+)
- • Best for businesses with viable future but temporary cash flow issues
Option 3: Personal Bankruptcy (If Personally Liable)
Approach: File personal Chapter 7 or Chapter 13 to discharge personal liability for business debts.
- •Chapter 7: Discharge personal liability, but may lose personal assets (home equity, savings) above exemption limits
- •Chapter 13: Repayment plan over 3-5 years, keep assets, discharge remaining debt after plan completion
- •Note: Personal bankruptcy doesn't affect business entity (LLC/Corp), but business may struggle without owner's financial support
Option 4: Close Business & Walk Away
Approach: Shut down business operations and dissolve entity.
✅ Best For
- • Business is no longer viable
- • No personal guarantees on debts
- • LLC/Corp structure protects personal assets
- • Judgment only against business entity
⚠️ Warning
- • If you personally guaranteed debts, you still owe
- • Creditors may pursue personal assets
- • May need personal bankruptcy to discharge
Decision Framework
Key Questions to Answer
- 1.Is the business viable? Can it generate enough profit to pay debts and support operations?
- 2.Am I personally liable? Did I personally guarantee the debt, or is liability limited to business entity?
- 3.What are my personal assets at risk? Home equity, savings, retirement accounts?
- 4.Can I negotiate settlement? Does creditor prefer settlement over enforcement or bankruptcy?
- 5.What's the total debt picture? Is this one judgment or multiple creditors?
- 6.What are the tax implications? Debt forgiveness, asset sales, and bankruptcy have tax consequences
Helpful Resources
Consult Professionals
Business judgments involve complex legal structures, tax implications, and strategic decisions. Consult with a business attorney, CPA, and financial advisor before making major decisions.