What Happens to a Personal Guarantee in Bankruptcy?by Mark Harley

24 April 2014

What Is a Personal Guarantee?

A personal guarantee is a promise or agreement to make yourself personally liable for a debt. For example, if you personally guarantee the debts of your business, your lender can pursue the assets owned by the business as well as your personal assets if your business defaults on the loan. If your business cannot afford to pay the loan and it does not have enough assets to pay back the loan you guaranteed, the creditor can sue you to collect the balance.

Why You Might Sign a Personal Guarantee

Most lenders will require a personal guarantee if you are starting a new business. Because the business does not have a positive credit history yet, the lender will typically want you to personally guarantee the loan. This way, if the business fails, it can go after both business and personal assets to satisfy the loan. If your business cannot obtain a loan on its own, you may have no choice but to provide a personal guarantee to secure the necessary funding.

Discharging Your Personal Guarantee in Bankruptcy

In most cases, you can easily discharge your liability for a personal guarantee by filing for bankruptcy relief. But keep in mind that you must file a personal bankruptcy to eliminate your personal guarantee. If the business files for bankruptcy, it does not eliminate your personal obligation to pay back the guaranteed loan.

Similarly, if you signed a personal guarantee for a friend or family member