What Happens To Personally Guaranteed Debt In A Business Bankruptcy?

When a business files for bankruptcy and closes its doors, it is filing a chapter 7 bankruptcy. This means that the company or corporation will no longer operate under that name and will no longer transact any business whatsoever under that name. Provided the corporation has no assets, creditors are unable to collect on their outstanding debts against the corporation. However, what about a situation where the corporation debt was personally guaranteed by members of the corporation? In this scenario, the personal guarantees are still responsible or liable for the underlying debt.

If you personally guarantee a business debt and the business files for bankruptcy, you may have to file for personal bankruptcy as well if the creditors pursue you. Just last week, I handled two cases for individuals who also had corporate debt. Since the corporate debt was personally guaranteed, not only did the corporations file for bankruptcy but the two individuals had to file for bankruptcy as well. Luckily, the two individuals did not have non-exempt assets that were subject to a taking by a chapter 7 trustee. If they did have assets, we would more likely have filed a chapter 13 bankruptcy or be forced to liquidate knowing that some of the property would be lost.

The take away from this article is to be very careful when you are personally guaranteeing any type of corporate debt. If the corporation does not have the financing or the ability to acquire the product or service without a guarantor, then maybe the corporation should wait until a later date when they do have such ability. It is one thing to subject a corporation to bankruptcy and it is quite another to have to file a personal bankruptcy based on the failure of the corporation.

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