Key Takeaways

• A business bankruptcy does not discharge the owner’s personal guarantee. The creditor can still collect from the guarantor.
• The automatic stay in the company’s case generally protects the company, not the owner.
• Whether your spouse also signed is one of the most important facts. It can decide whether your home is exposed.
• Owners have options: a negotiated settlement, a Subchapter V plan that pays the guaranteed debt through the business, or a personal filing under Chapter 7, Chapter 13 or Chapter 11.

What a Personal Guarantee Does

A guarantee is your personal promise to pay the company’s debt. Most are unconditional, which means the creditor does not have to pursue the business or its collateral first. Many are joint and several, so each guarantor can be made to pay the whole debt. Guarantees are easy to overlook because they are often a paragraph inside a longer loan, lease, credit application or merchant cash advance agreement. Before deciding anything, collect every document you signed and find out which debts you guaranteed and which you did not.

SBA Loans

SBA loans almost always carry guarantees. Under the standard 7(a) program, each owner of 20% or more of the business generally must guarantee the loan, and the lender often takes a lien on the owner’s home. For COVID-era Economic Injury Disaster Loans, loans above $25,000 are secured by a lien on the business’s assets, and loans above $200,000 required a personal guarantee.

A defaulted SBA loan does not go away when the business closes. The debt can be referred to the United States Treasury, which adds substantial collection fees and can take federal tax refunds and part of other federal payments, and can garnish up to 15% of disposable pay without first going to court. The SBA will consider an offer in compromise in some cases, usually after the business has closed and its assets have been liquidated. A sole proprietor is personally liable for an SBA loan whether or not a separate guarantee was signed.

What Creditors Can Reach

A creditor holding your guarantee can sue you, obtain a judgment and collect from your non-exempt assets: bank accounts, investment accounts, real estate equity, vehicles and, in some states, wages. Two points matter most:

• Liens on your home. If you gave a mortgage on your residence to secure the business loan, the lender has rights in the house itself, not just a claim against you.
• Your spouse’s signature. In Pennsylvania and Maryland, a home owned by a married couple as tenants by the entireties is generally protected from a creditor of only one spouse. That protection is lost for any debt both spouses signed. One joint guarantee or one joint credit card can change the whole analysis.

Do not transfer property to a spouse, child or anyone else to keep it from a creditor. Transfers made while you are insolvent can be undone, and they can cost you a bankruptcy discharge.

If the Business Files Bankruptcy

A corporation or LLC that liquidates in Chapter 7 does not receive a discharge, and its filing does nothing for the owner’s guarantee. A reorganization can help indirectly. If the business confirms a Subchapter V plan that pays the guaranteed creditors, those creditors are being paid and have less reason to pursue the owner, though the guarantee itself remains. In limited circumstances a court will extend the stay to an owner whose time and money are essential to the reorganization. See our pages on Subchapter V and merchant cash advance debt.

The Owner’s Own Options

• Negotiated settlement. Guarantee creditors often accept less than the full amount from an owner who can show limited assets, particularly after the collateral has been sold.
• Chapter 7. Discharges personal liability on guarantees. An owner whose debts are mainly business debts is not subject to the means test that applies to consumer cases. Non-exempt assets are at risk.
• Chapter 13. Lets an owner with regular income keep assets and pay creditors over three to five years, subject to debt limits.
• Individual Chapter 11 or Subchapter V. For owners whose debts exceed the Chapter 13 limits or who need more flexibility. See our page on individual Chapter 11.

The order in which things are done matters. Whether the business files first, the owner files first, or both file together affects what is protected and what is paid. We plan the sequence before anything is filed.

What Our Firm Does

• Identify every debt you personally guaranteed and whether your spouse is liable.
• Determine what each creditor can and cannot reach under state exemption law.
• Negotiate with lenders, landlords and the SBA.
• Coordinate the business’s restructuring with the owner’s personal exposure.
• File and handle the owner’s personal case where that is the right answer.

Frequently Asked Questions

If I close my LLC, do the debts I guaranteed go away?

No. Closing or dissolving the company ends the company. It does not release you from debts you personally guaranteed.

Can the SBA take my house over an EIDL loan?

Most EIDL loans are secured by business assets, not by the owner’s home. On loans above $500,000 the SBA could also take a lien on real estate the business owned. If you signed a personal guarantee, the government can pursue a judgment and collect from your assets as any creditor can, and it has collection tools private creditors do not. Whether your home is at risk depends on how it is owned, your equity and whether your spouse also signed.

My spouse did not sign anything. Is my spouse liable?

Generally not for a debt only you guaranteed. Jointly owned property may still be affected depending on the state and the form of ownership. Check every document, because spouses are frequently asked to sign and do not remember doing so.

Will a personal bankruptcy wipe out a guarantee?

Yes, in most cases. A personal guarantee is an unsecured debt and is dischargeable unless the creditor proves fraud or another exception. A lien you gave on your home or other property survives unless it is dealt with separately.

Should I keep paying the business loan personally to avoid default?

Not without advice. Paying one guaranteed creditor from personal savings while others go unpaid can use up assets you would have been entitled to keep and can create problems if a bankruptcy follows.

Find Out What You Are Personally Liable For

Email msiddons@siddonslaw.com with the debts you guaranteed, whether your spouse signed any of them and whether the business is still operating. We will reply with the list of documents we need. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.