Discharging Personal Guarantees In Bankruptcy
As a general rule, your business debts are owed by the business, not you, personally. The business can sue, be sued, or file bankruptcy, and it should not ever affect your personal income, assets, credit, or other aspects of your life. Except for one situation: When you sign a personal guarantee.
What is a Personal Guarantee?
A personal guarantee obligates you, personally, as well as your personal assets, on debt that belongs to the business. You are telling the business’ creditor that “if the business can’t pay this debt, I will, and you can come after me, personally, and whatever I own, to pay off this debt, as if it was my personal debt.”
To be personally liable for business debt, you have to sign a personal guarantee. Many people needing financing or loans for their business, many people will with many creditors insisting on it.
Of course, when you file for bankruptcy, your personal obligations are generally discharged at the end of your case. But what about a personal guarantee? Is that wiped out at the end of your case as well?
A personal guarantee will be wiped out in your personal bankruptcy, but not in the business’ bankruptcy. In other words, if you were only to file bankruptcy for your business, the personal guarantee would still be in effect, because that is a personal obligation, and you personally are not filing for bankruptcy.
You also could have some problems, because if the business’ obligation is discharged in the business bankruptcy, you personally could end up owing everything remaining on the loan.
The only way you would be discharged from the loan in a business bankruptcy is if the business has assets, they are taken by the trustee, and sold, and the proceeds of the sale satisfy everything that is owed on the loan.
Of course, if you file for personal bankruptcy, the personal guarantee will be wiped out, the way any other debt would be. If you file for Chapter 7, the personal guarantee could actually help you, because it is business debt. This means that you won’t have to qualify for the Chapter 7 means test.
Liens May Survive
Remember that liens survive bankruptcy the same way that your mortgage survives bankruptcy. Often, personal guarantees include liens on homes, or personal property. That means that even if your personal obligation to repay the money is discharged in bankruptcy, you still risk losing property.
If you are concerned about this, Chapter 13 can also be helpful, because in Chapter 13, you can work out a longer-term repayment plan, and at the end of the plan, you are considered current on the loan.
Alternatively, if your business has assets to satisfy the debt when the assets are taken and sold, your lien will be extinguished as well.