If you signed a personal guarantee on a small business loan, you can be held personally responsible for that debt even if your business is set up as an LLC or corporation. When the business cannot pay, the lender can come after you directly. Filing personal bankruptcy can discharge or restructure your liability on a personal guarantee, stop collection efforts against you, and protect many of your personal assets. Law Offices of Terrence Fantauzzi helps Claremont business owners understand how guarantees work in bankruptcy and which option fits their situation.
What Is a Personal Guarantee?
A personal guarantee is a promise to repay a business debt with your own money if the business fails to pay. Lenders often require one before approving a small business loan, line of credit, commercial lease, or equipment financing, especially for newer or smaller companies.
Forming an LLC or corporation normally separates your personal finances from the business. A personal guarantee removes that protection for the specific debt you guaranteed. If the business defaults, the lender can sue you, obtain a judgment, and pursue your wages, bank accounts, and other property.
Does the Business Filing for Bankruptcy Protect the Owner?
Not usually. If your LLC or corporation files for bankruptcy, the protection applies to the business, not to you personally. Your guarantee remains in place, and the lender may still pursue you while the business case is pending or after it closes.
This catches many owners off guard. Closing the business or filing Chapter 7 on behalf of the company may resolve its debts, but it does not erase the personal guarantee. To address that obligation, the owner generally needs to file a personal bankruptcy case.
Can a Personal Guarantee Be Discharged in Chapter 7?
Yes, in most cases. A personal guarantee is typically treated as an unsecured debt in your personal bankruptcy, similar to a credit card or medical bill. In Chapter 7 bankruptcy, unsecured debts like these can usually be discharged, which ends your personal liability.
There is also an important advantage for business owners. The Chapter 7 means test applies only when your debts are mainly consumer debts. If most of what you owe comes from business obligations, such as guaranteed loans and leases, you may not have to pass the means test at all. That can make Chapter 7 available even if your household income is above the California median.
How Does Chapter 13 Handle a Personal Guarantee?
Chapter 13 can also address personal guarantees. Instead of wiping out the debt right away, you repay what you can afford through a court-approved plan lasting three to five years. The guaranteed debt is usually grouped with your other unsecured debts, and any balance left at the end of the plan is typically discharged.
Chapter 13 may be the better choice if:
- You have property you want to protect that might not be exempt in Chapter 7
- You are behind on your home or car and need time to catch up
- You owe priority debts, such as business-related taxes, that must be paid over time
- Your income allows you to fund a repayment plan
Chapter 13 has debt limits, so owners with very large guaranteed debts may need to consider other options.
What if the Guarantee Is Secured by Your Home or Other Property?
Some lenders, including those making SBA loans, require collateral in addition to a personal guarantee. If you pledged your home or other property, the lender may have a lien that survives bankruptcy even after your personal liability is discharged.
In that situation, bankruptcy can still help. The automatic stay stops collection and foreclosure efforts once you file, and Chapter 13 may give you time to deal with the lien while keeping your home. Reviewing your loan documents with an attorney is the best way to understand what the lender can and cannot do.
Does the Automatic Stay Stop the Lender From Coming After You?
Once you file personal bankruptcy, the automatic stay requires creditors, including lenders holding your guarantee, to stop most collection activity against you. This includes lawsuits, wage garnishments, bank levies, and collection calls.
Keep in mind that the stay protects the person or entity that filed. If you have business partners who also signed guarantees, they are not protected by your filing and may still be pursued.
Steps to Take if You Are Facing a Personal Guarantee Claim
If your business is struggling and you signed a guarantee, these steps can help protect you:
- Gather copies of every loan, lease, and guarantee you signed
- Make a list of business debts and which ones you personally guaranteed
- Note whether any guarantee is tied to your home or other collateral
- Avoid transferring personal assets to family or friends
- Keep any lawsuit papers or demand letters from lenders
Our small business bankruptcy team can review these documents and explain how each debt would be treated.
Talk to a Bankruptcy Attorney Serving Claremont
A personal guarantee can turn a business setback into a personal financial crisis. Bankruptcy may give you a way to resolve that liability, protect your assets, and move forward.
To discuss your options, contact Law Offices of Terrence Fantauzzi at (909) 552-1238 today.
