Personal Bankruptcy and Multi Member LLC

[knox harrington]

My question involves business law in the state of: Wa. Started a muti (3) member llc a few years back, since the company was new it obviously had no credit and to get a line of credit all the members signed as personal guarantors. With money being tight we paid what we could out to each other when there was profit or hard times. One member was apparently borrowing from various personal lines/credit to make his ends meet, the magnitude of this was something to which we weren't aware of. This member is now looking into filing personal bankruptcy(chapter 7). Since he still wants to be part of the company he'll only be defaulting on the personal credit cards etc.

How will this affect the llc and or my personal credit? As it stands the loans for the llc do not show up on personal credit, so will the bank which holds the loans see his name on a different credit report and come after the business, or will they not know the two names are same?

I've been told (from a bank) that the bank will see his bankruptcy filed and look at it as though he's personally a risk to the business line of credit and they will then shut the business line of credit down. As for the business, we've never missed a payment or been late on anything, so it's in good standing.

My concern obviously is they shut our line of credit down and wrap it into a loan at a higher payment than our current one and write him out off the loan since he's a risk, therefore making the remaining members liable for the business debt.

Worst case scenario is: (1)The company no longer has a line of working capital,
(2) The payment is too high for the company to pay therefore forcing the company out of business,
(3) The remaining balance is then due on the other two owners.
Info is greatly appreciated

[Mr. Knowitall]

If you and the other member who's not in bankruptcy qualify for the line of credit on your own, how about removing #3 as a guarantor before he files?

[knox harrington]

If you and the other member who's not in bankruptcy qualify for the line of credit on your own, how about removing #3 as a guarantor before he files?

Thanks for the reply, that probably wouldn't work for a couple reasons, the first is I don't think banks are all that willing to loan these days especially since when we got the original loan it was three people with good credit and jobs. Since then we've been paying out meager wages to have the company survive, so now the loan would have to be split up amongst two instead of three and those two have a few years of low wages on the W2 to support the loan.

Second, the other owner is only a small percentage owner and doesn't wish to own more of the company, if he and I were to re-apply for the loan that would make him and I responsible for 50% of the debt each. He basically said he won't sign another loan document since he'd prefer to stay a low % owner as he invested a bit of money along with tying his name to the loan.

If the one partner files bankruptcy and the bank doesn't change the loan status then everything will be all right, my main concern is how likely is that to happen. I've also heard the term 'pierce the corporate veil' a few times, does this mean they could come after our personal assets to pay off the debt of the bankrupted partners personal liabilities since we share a company together? That didn't make any sense to me... I could see that happening if the loan with the company defaulted etc, but it's in good standing.