How Personal Guarantees are Treated in Bankruptcy

A personal guarantee is an agreement to make oneself personally liable for a debt to a lender. These are often used by small business owners to secure lines of credit by putting up their personal assets to repay the loan. Personal guarantees play an important role in small business in America. Many banks understand that the financial health of a small business is directly related to the financial health of the owner and thus provides an added layer of protection for the issuers of loans and credit.

Personal Guarantees in Bankruptcy

In the majority of cases, liability for a personal guarantee can be discharged or wiped out in bankruptcy. There are a few exceptions to this, such as if the debt is a type such as tax debt or student loans that aren’t dischargeable in bankruptcy in the first place. It also depends on what type of bankruptcy you are filing. If you chose to file bankruptcy for your business, this will not discharge your personal guarantees, as you must file personal bankruptcy to eliminate the personal guarantee.

Personal Guarantees for Other People

Up until this point, we have talked about personal guarantees and how they pertain to a business setting, but what if you made a personal guarantee for other individuals such as a friend or a family member? If you sign a personal guarantee so another individual could obtain a loan and that individual files for bankruptcy, then you will still be liable for the money unless of course, you file for bankruptcy as well.

Agreeing to be a guarantor is a big decision and the decision should not be made without considering your ability to pay back the loan in full should your guarantee not be able to pay off the loan or file bankruptcy. If you have a personal guarantee that has been accelerated you can risk being subjected to the normal creditor collection activities, including calls, letters, lawsuits, wage garnishments, or property seizure. Contact your Rancho Cordova bankruptcy attorney to find out if bankruptcy protection is the right form of debt relief for your position.