Many business owners are faced with the difficult decision to sign a personal guarantee. Most banks, suppliers and landlords are unwilling to extend credit or make loans to a business with few assets. Often the only way to secure the necessary financing is with a personal guarantee. In a struggling economy many small business owners now risk losing their businesses as well as their personal assets.
A personal guarantee is a promise by a business owner to use personal assets to repay a loan or debt if the company cannot meet its financial obligation.
Collecting Personal Property
To collect a business owner's personal property, the creditor must take the owner to court and prove that the business can't pay the debt. The property or assets available for the creditor to seize depends on the type of personal guarantee signed.
Types of Personal Guarantees
A general personal guarantee doesn't list specific assets that the business owner will pledge to guarantee the debt, so all of the business owner's personal assets (excluding those protected by law) may be used to repay the debt. For personal guarantees pledging a specific piece of property, the creditor must satisfy the debt with the specified property before seizing other assets.
Business vs. Personal Bankruptcy
Declaring business bankruptcy will not protect a business owner's private assets from creditors collecting on a personal guarantee. When a business owner signs a personal guarantee, personal bankruptcy may be the only option to protect his personal assets.
How Bankruptcy Can Help
When an individual files for bankruptcy an automatic stay goes into effect preventing creditors from foreclosing on the debtor's home or seizing other personal assets. The benefits of filing bankruptcy ultimately depend on the type of debt owed. Some debts, including payroll taxes owed to the IRS, cannot be discharged in bankruptcy. Often the threat of bankruptcy will cause creditors to negotiate with a debtor to reduce the principal or change payment terms.
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