A common question we receive from those considering bankruptcy is how it impacts personal guarantees. Some situations in which someone may sign a personal guarantee before filing bankruptcy include assisting a friend or family member in receiving a loan, and a business owner may sign a personal guarantee in order to secure funds for their company.
If you’re considering filing for bankruptcy, you need to consult with a bankruptcy attorney before signing a personal guarantee. You also need to know critical details regarding the relationship between personal guarantees and bankruptcy.
What Is a Personal Guarantee?
A personal guarantee loan is a signed agreement stating that you’re liable for a debt. For example, you may sign a personal guarantee to secure a loan for your business, and if you fail to make payments, the lender can go after both the business and your personal funds because you’re liable through the written agreement. Those starting new businesses often sign personal guarantees because the business will not yet have positive credit or substantial funds.
People also frequently make personal guarantees on behalf of another person’s debts, and these written agreements are common when a borrower has a bad credit score. A friend or family member may step in to assist the borrower in obtaining a loan for a car, home, or student loan. Unfortunately, if a friend or family member needs someone to personally guarantee their loan, that likely means they’ll have a high-interest rate and have a higher chance of defaulting on payments. For example, you may assist your family member to obtain a car lease by signing a personal guarantee. If the borrower fails to keep up with their payments, the lender can seek the rest of the funds from you because the agreement made you liable.
If you refuse to pay a lender after the borrower defaults, they can sue you in order to recover the loaned funds.
Does a Personal Guarantee Survive Bankruptcy?
Whether or not a personal guarantee will be discharged in bankruptcy will depend on who signed the personal guarantee and who filed for bankruptcy:
- You signed a personal guarantee and are filing bankruptcy: If you signed a personal guarantee in order to assist a business or person with securing a loan, you’ll no longer be legally liable for most types of loans after filing bankruptcy. Some loans that you cannot discharge include tax debts and federal student loans. If you discharge your liability, the borrower will still owe on their debts.
- You are filing bankruptcy, and someone signed your personal guarantee: If someone signed a personal guarantee to assist you in obtaining a loan, that person will still be liable after you file for bankruptcy, but you can discharge your own debts. For example, if someone signed a personal guarantee to help you secure a business loan, they’ll remain liable even if you file for bankruptcy. You will discharge your own debts, but the person who signed the personal guarantee will still be liable for the money you owed to lenders.
- Someone signed a personal guarantee for you, and they are now filing for bankruptcy: If someone signs a personal guarantee for you and then files for bankruptcy, they will no longer be liable for your debt. You will still owe money to your lender, but the person who signed the personal guarantee discharges their liability.
- You signed a personal guarantee for someone who is now declaring bankruptcy: If you signed a personal guarantee and the borrower declares bankruptcy, you are still financially liable for their debts. The borrower may discharge most types of loans, but you are still financially responsible because you signed the personal guarantee.
Will I Face Financial Repercussions After Discharging a Guarantee?
The majority of personal guarantees cover unsecured obligations, meaning there isn’t a backing asset the lender can recover in the event that the borrower defaults. Some of these obligations include personal loans, credit card debt, and medical bills. These debts are typically dischargeable, but that doesn’t mean they’re completely eliminated per se. For example, there are situations in which a person can discharge student loans, but the person may not be able to obtain important transcripts as a result of the remaining debt. The discharge eliminates a person’s legal obligation to pay a debt, but it doesn’t entirely erase it.
If you have a secured guarantee on a loan, a lender can seize your backing collateral, and this is even the case if you discharge your personal guarantee in bankruptcy. For example, if you used your house in order to personally guarantee a loan and you discharged your personal guarantee, the lender can still go after your house. Although the lender can foreclose on your home, they must first abide by the Automatic Stay period.
Contact an Indianapolis Bankruptcy Attorney
If you’re considering filing for bankruptcy, you need a skilled lawyer at your side to help you through the process. For legal support in filing Chapter 7 bankruptcy and Chapter 13 bankruptcy in Indianapolis, contact the bankruptcy lawyers at Sawin & Shea, LLC. Our attorneys have helped thousands of clients get their finances back on track through bankruptcy legal guidance. Call us today at 317-759-1483.