Legal Definitions - personal liability

Personal liability refers to an individual's legal responsibility for their debts, obligations, or actions, meaning that their personal assets can be used to satisfy those liabilities. When someone has personal liability, there is no legal separation between them as an individual and the financial or legal consequences of their conduct or commitments. This means their personal savings, home, car, or other possessions could be at risk to cover what they owe or the damages they are responsible for.

Here are some examples illustrating personal liability:

• Sole Proprietorship Debt: Imagine a freelance graphic designer, operating as a sole proprietor, takes out a business loan to purchase new design software and a high-performance computer. If the design business struggles and cannot repay the loan, the bank can pursue the designer's personal assets, such as their personal savings account or even their car, to recover the outstanding debt. This is because, as a sole proprietor, the individual and their business are legally considered the same entity, making the designer personally responsible for all business debts.

• Personal Guarantee for a Business Loan: A small business owner incorporates their company as a Limited Liability Company (LLC) to protect their personal assets from business debts. However, to secure a significant loan for the business, the bank requires the owner to sign a personal guarantee. If the LLC later defaults on the loan, the bank can enforce the personal guarantee, allowing them to seek repayment directly from the owner's personal assets, such as their home equity or investment portfolio, despite the LLC's limited liability status. The personal guarantee created a specific instance of personal liability for that particular debt.

• Individual Negligence: Consider a homeowner who hosts a party and fails to properly secure a loose railing on their deck, despite knowing it was wobbly. A guest leans on the railing, it gives way, and they fall, sustaining a broken arm and incurring significant medical expenses. The homeowner could be found personally liable for the guest's injuries due to their negligence in maintaining a safe property. In this situation, the homeowner's personal assets, such as their savings or even their home, could be used to pay for the guest's medical bills, lost wages, and pain and suffering.