Many business owners approach us with questions regarding how to get out of personal guaranty liability, asking, “can I get rid of my personal guaranty liability through bankruptcy?”
Bankruptcy may help in several ways.
1. The business owner can file a personal bankruptcy case. Depending on the guarantor’s personal financial situation, assets, and other liabilities, the business owner could file an individual chapter 7 case, chapter 13 case, or even a chapter 11 or subchapter V case to deal with the personal guaranty. Whether the business owner has to repay anything on the guaranty depends on what chapter s/he files.
2. The business can file a reorganization proceeding under chapter 11 or subchapter v and satisfy the debt underlying the guaranty through the business’ plan. However, this approach may not stop the lender from attempting to collect directly from the guarantor on the guaranty while receiving payments under the business case.
Let’s explore these options in more detail.
Chapter 7 is what most people think of when they think of personal bankruptcy. Chapter 7 is a liquidation proceeding in which the court appoints a trustee to marshal and liquidate all non-exempt assets to be distributed to the debtor’s creditors. Once the assets have been liquidated and creditors have received their distributions, the chapter 7 debtor receives an order of discharge from the bankruptcy court, wiping clean all dischargeable debt. Personal guarantees are typically dischargeable absent fraud.
What stops most business owners from filing a chapter 7 case is that s/he either makes too much income to qualify for chapter 7 or has too much non—exempt property that could be taken and liquidated by the chapter 7 trustee. What qualifies as exempt property varies by state. For this reason, the guarantor’s bankruptcy case must be either a chapter 13 or a subchapter V (of chapter 11) case. Both chapter 13 and subchapter v cases involve repayment plans. The size of the debt, the type of debt, and the amount of control the debtor wishes to exercise over his/her property during the case are some of the factors to consider when determining whether chapter 13 or subchapter v would be the better option for the guarantor’s personal bankruptcy case. (This is a decision to be made with the help of an attorney.)
The business can also attempt to address the debt underlying the personal guaranty by filing a chapter 11 or subchapter v case. Although the company can address the underlying debt through its bankruptcy case, the bankruptcy stay that applies in the business case to stop creditors from collecting would not necessarily stop the creditor from seeking to enforce the personal guaranty against the guarantor or the guarantor’s personal property.
Although the business debtor can attempt to negotiate with the creditor to stop collection efforts against the guarantor during the pendency of the business bankruptcy case, perhaps even through the life of the business debtor’s plan, outside of those circumstances, there is nothing in the bankruptcy code that requires the creditor to stop collection efforts against the personal guarantor. However, in certain cases, the business debtor may be able to confirm a plan that contemplates a release of the guarantor from personal liability in extremely limited circumstances. (There is a circuit split as to whether this is permissible without the creditor’s consent.)
If you want to learn more about your options as a personal guarantor of business debt, click the button below to schedule a free phone/video consultation with Melissa Youngman Law. We will discuss all options available to you, including non-bankruptcy options.
Melissa Youngman Law helps businesses and business owners throughout Central Florida. With over 20 years of experience, attorney Melissa Youngman provides legal services to Florida businesses at every stage, including formation, succession, and reorganization.