Personal Guarantees and Filing for Bankruptcy

A small business often requires a lot of money to get started. However, banks and other lenders are usually unwilling to lend money to small businesses unless the business owner agrees to a personal guarantee. A personal guarantee is an agreement that the owner will pay the debts of the business if the business itself can’t pay.

If everything goes according to plan, the business pays off its own debts and the personal guarantee doesn’t become a problem for the business owner. Unfortunately, things don’t always go according to plan. Twenty percent of small businesses fail within their first year, and half fail within their first five years.

When a small business with personally guaranteed loans doesn’t make enough to pay back the loans, the business owners can find themselves in a difficult position. They can end up losing their homes or other major assets if their businesses fail. Anyone whose business creditors are pursuing him or her based on a personal guarantee should consult a lawyer to figure out the best strategy to protect what they own.

Personal Guarantees Outside of Bankruptcy

Sometimes, a personal guarantee will specify which property the creditor can go after if the business does not pay its debts. When negotiating a personal guarantee, it’s a good idea to see if the lender will agree not to pursue one’s home or other important assets. Anyone who has been asked to sign a personal guarantee should ask a lawyer to review it before signing.

Even if the personal guarantee allows the lender to pursue all of a business owner’s assets, there may be other ways to shield assets from collection attempts by creditors. Some creditors will agree to a partial payment or a repayment plan instead of seizing assets, especially if they’re worried that the business owner will declare bankruptcy. This is because a personal bankruptcy may prevent the creditor from seizing any assets at all.

A lawyer may also be able to help negotiate a debt settlement where both parties agree to a new arrangement for the repayment of the debt.

Personal Guarantees and Bankruptcy

In some situations, filing for bankruptcy can protect one’s assets from a personal guarantee. A business and its owner are usually separate legal entities, meaning both the business and the owner would have to file for bankruptcy. However, in a chapter 11 reorganization bankruptcy, the business bankruptcy might be able to cover the business owner as well.

Often, it’s wise to file a personal bankruptcy along with a business bankruptcy, especially if the business bankruptcy is a chapter 7 liquidation. Filing a personal bankruptcy prevents the lender from going after the business owner on a personal guarantee. Every bankruptcy triggers an automatic stay when filed, which prevents creditors from making collection attempts outside the bankruptcy proceeding.

In a personal chapter 7 bankruptcy, a business owner can often discharge most or all of a personal guarantee. Personal guarantees are usually unsecured claims, meaning they are not tied to specific pieces of property. That means they can be discharged in a chapter 7 bankruptcy and the standard exemptions apply.

A chapter 13 bankruptcy can also discharge the personal guarantee. In chapter 13, a person pays debts with their future income instead of their assets. Chapter 13 is useful for people who would like to keep valuable assets like a home.

Filing a personal bankruptcy may be unnecessary if the business files a chapter 11 reorganization. In a chapter 11 bankruptcy, the owners and creditors of a business negotiate a plan to keep the business running while still paying some or all of its debts. Although chapter 11 usually only protects the business’s assets, in some circumstances it can also protect the business owner.

The entire point of chapter 11 is the reorganization of the business. Courts will sometimes extend the protection of the automatic stay to the business owner’s personal property if that property is required to make a reorganization work. However, this situation usually only arises when the business owner proposes to sell the property to continue funding the business.

A bankruptcy attorney can help a business owner evaluate their options and determine the best way to protect their personal property from business creditors. The best strategy in any case depends on the business owner’s situation and whether they want to keep the business going or liquidate it.

What if You’re on the Hook for a Personal Guarantee?

If your business creditors are trying to collect on a personal guarantee, contact Rosenblum Law for a free consultation today. Our experienced attorneys will evaluate your situation and find the best strategy to keep as much of your property as possible. Call 888-815-3649 or email us today for a free, no-obligation consultation.

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