Personal Guarantees: Are They Nullifed in Bankruptcy?

You may have noticed that the limited liability corporation (also known as the LLC) seems very popular with new business owners today—and seems to offer protection–but you may have questions about how it is affected in bankruptcy, as well as wondering what happens to promises like personal guarantees.

Many Lenders Require the Personal Guarantee

Many lenders today are wary and will require a personal guarantee from those hoping to borrow money for a business. This allows them to circumvent the protective power of the LLC or other corporate clauses in the case of potential default from your business. You may be asked to offer a personal guarantee especially if you are just starting out and don’t have a long business history for the lender to examine.

While a lender may be impressed that you have founded an LLC or other business structure and have a good model to work from, they may only feel comfortable lending money if you are personally tied to the loan too. This makes it a little harder for debtors to walk away during hard times, as you are making a personal promise and indebting yourself—along with the business.

You may also be asked to sign a personal guarantee in acting as a co-signer for a friend or family member too, usually helping them to either get a loan altogether, or allowing them to get a better interest rate due to your guarantee and higher credit score.

The Guarantee is Often Discharged in Personal Bankruptcy

If you are filing for bankruptcy, the personal guarantee may be discharged along with the related debts. This can be complicated, however, due to a variety of different factors. If the lender has a lien on your property, that will not be eliminated. And you are filing Chapter 11, declaring a business bankruptcy, your personal guarantee will not be discharged. That can only be addressed in the personal bankruptcy chapters.

In Chapter 7, your personal guarantee should be discharged along with your other debts. Keep in mind, however, that if you offered a personal guarantee to help someone else get a loan and they file for bankruptcy, the lender will be seeking recourse from you—unless you have filed also. In Chapter 13 bankruptcy you should be able to retain most of your assets, as your debts are consolidated into a repayment plan with monthly payments going to the trustee. You may be able to pay off personal and business debts, as well as keeping your business up and running. And whether you file for Chapter 7 or Chapter 13, you have that initial breathing room offered by the automatic stay, prohibiting debtors from any further collection activity—at least temporarily.

Questions About the Personal Guarantee? Contact Us for Help

If you have questions about personal guarantees, contact Shane Coons now at 949-333-0900 or email us at Shane.Coons@seclawoffices.com. We can review your case, answer your questions, and help you decide how to move forward. We are here to help!

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Personal Guarantees: Are They Nullifed in Bankruptcy?

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