A personal guarantee is a contract that requires a person to make payments in exchange for funds or goods. It is common practice in certain business transactions, including SBA loans and commercial landlords’ requests for tenant improvements. Many people also sign personal guarantees for friends’ small businesses, student loans, and more. Unfortunately, personal guarantees can have unexpected consequences if the primary borrower defaults. Bankruptcy is a common way for personal guarantees to be voided.
Although bankruptcy is generally not a good idea for a guarantor, in certain cases a guarantor can get an injunction to prevent the lender from pursuing collection efforts on the guaranty. For example, in a recent bankruptcy case involving a 24-hotel chain in Daytona Beach, Florida, debtors who were owed $350 million on a personal guarantee filed for relief under Chapter 7 and argued that bankruptcy was doomed to fail without such an injunction and would distract the guarantor from collecting on the guaranty.
If you’re wondering how bankruptcy affects a personal guarantee, you should first determine the business structure. Sole proprietorships and partnerships are personal entities, and the personal guarantee includes all of the business’ obligations. If you’re the sole owner of a business, you’re personally responsible for all debts, even those made to others. In contrast, corporations and limited liability companies are separate legal entities. So if you’re a sole proprietor, you’ll likely find that a personal guarantee would be included in bankruptcy.
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