It’s not uncommon for debtors to sign personal guaranties before their bankruptcy filing. This is particularly common for business owners seeking operating funds or individuals whose family members or friends ask them to guarantee a loan for a car or similar collateral. Before agreeing to any type of personal guarantee, you should consult with an attorney to determine all your available options.
What Is a Personal Guarantee?
A personal guarantee is a promise or agreement to make yourself personally liable for a debt to a lender. For example, if you personally guarantee a business loan and fail to make payments in accordance with the loan’s terms, your lender can levy the assets owned by the business, and can further go after your personal assets. Similarly, if your business fails and doesn’t have enough assets to repay the loan you guaranteed, then the lender can sue you personally to collect the remaining balance.
Likewise, if you guarantee a car loan for a friend, and the friend fails to make payments, it’s likely the lender will try to recover the remaining balance from you. If you refuse to pay, then the creditor can file a lawsuit against you and if a judgment is obtained, the lender can garnish your wages or levy upon your personal property.
Why Would You Sign a Personal Guarantee?
In my experience, the two most common reasons why individuals sign personal guarantees are:
- an individual is starting a new business
- a family relative or friend requires a personal guarantor to purchase something of value.
With regards to new businesses, most lenders will require a personal guarantee if the business doesn’t already own substantial assets. Since the business doesn’t have a positive credit history, the lender will typically want a personal guarantee from the principal. With regards to family members and friends, it’s likely that your friend or family member needs a personal guarantor because they have a low credit score. The loan will likely require a high interest rate, and it’s therefore likely that your family relative or friend will default.
What Happens to Personal Guarantees in Bankruptcy?
In most cases, you can discharge your liability for a personal guarantee by filing for bankruptcy relief. The exception to the general rule is if the Bankruptcy Court determines that the guaranteed debt is non –dischargeable pursuant to 11 U.S.C. 523 of the Bankruptcy Code. However, if you’re filing bankruptcy for a business, then you must also file a personal bankruptcy to discharge the personal guarantee. Likewise, if your family member or friend files for bankruptcy, then you’re still on the hook for the loan unless you also file for bankruptcy.
It’s also important to remember that the bankruptcy does not discharge a lien in your personal assets if the lender included a security interest in your personal assets to the lender. The bankruptcy discharge will resolve your personal guarantee, not the lien (if there is a lien). In other words, the lender could still foreclose on your assets it has lien attached to those assets. Luckily, depending on the circumstance, bankruptcy allows you to file motions to avoid the lien.
If you have any questions concerning your personal guarantees, please contact us to discuss your potential options.