Rarely. When you agree to sign a personal guarantee, you become personally responsible for a company debt and must pay it if the company isn’t able to. Because it’s your obligation—not that of the organization—a business bankruptcy will not get rid of the personal guarantee (at least not in most cases—read about how it works with sole proprietors below).
In a similar vein, a business bankruptcy stops litigation against the company only. So while a bankruptcy will stay (halt) an ongoing lawsuit against the enterprise, the case can continue against the guarantor.
However, an exception exists for an owner who holds a business as a sole proprietor. Such owners are personally responsible for both individual and business debts, and therefore, a bankruptcy filing will include all obligations (and all nonexempt assets, as well). As a result, a Chapter 7 bankruptcy will wipe out both the underlying business debt and the individual liability under a personal guarantee.
It’s notable to add that if the company files a reorganization bankruptcy, the possibility to negotiate the debt emerges. The liability of the guarantor in such cases can be complicated, and you should seek counsel.
(Learn more about bankruptcy options in What Kind of Bankruptcy Can a Business File?)
In what situation does a personal guarantee arise? It’s a mechanism used by creditors to ensure the payment of debt—especially when dealing with small businesses because they tend to suffer from cash flow problems.
Here’s how it works.
When a company uses a credit account to buy product or supplies—or enters into a contract, such as a lease or a real estate purchase—the vendor or lender might condition the transaction on an agreement that the transacting individual will personally pay the debt if the company cannot satisfy it. The contract memorializing the agreement is called a “personal guarantee.”
When a business fails to pay (or shuts its doors), the lender will pursue the personal guarantee, often leaving the signer of the guarantee with one of two options: pay the company debt out of individual assets, or, if the signer doesn’t have the funds to do so, file a personal bankruptcy.
If you’ve agreed to a personal guarantee that you can’t live up to, it’s advisable to have a bankruptcy attorney review your situation and help you plan the best course of action for you.
(Not sure what to do to maximize your initial consultation? Read Bankruptcy: Preparing to Meet with a Lawyer.)
Go to the main business bankruptcy FAQ page.