Personal Guarantees and Bankruptcy
When a person guarantees a loan for their business, friend, or family member, they become liable for it. A personal guarantee is a type of agreement that allows lenders to pursue assets if the family member, friend, or company defaults on a loan. At the Bankruptcy Center of Illinois we help you understand the types of debts you may remain liable for, including personal guarantees. In addition to personal guarantees and bankruptcy, our attorneys are skilled in assisting small businesses. Our bankruptcy attorneys provide guidance and representation that has helped people and businesses throughout DuPage County and surrounding areas.Personal Guarantees and Bankruptcy
When a borrower does not pay a loan, the creditor may pursue collection efforts. A guarantor is the person that agrees to pay the borrower’s debt, if they fail to pay. In a personal guarantee situation, a collection agency or creditor may pursue the guarantor. However, the original borrower may remain responsible for the loan as well. In other words, if a guarantor pays off the creditor, they may then pursue reimbursement from the borrower.
Outstanding debt on the loan may be discharged if the original borrower files for bankruptcy. The original borrower may be able to discharge obligations to their guarantor. By filing for bankruptcy, they will not be forced to repay the guarantor for payments made on their own debt.Types of Personal Guarantors
Typically, personal guarantors for loans are people close to the borrower, such as family or friends. The government may serve as a guarantor in some situations, and the result is that the government controls the loan if payments are not made.
Small business owners may be required to secure personal guarantors. Lenders understand not all small businesses are successful. If the business fails, they may not be paid back. A lender may verify that the guarantor is capable of repaying the loan. In these circumstances, the guarantor is often the owner or manager of the business.Potential Consequences of Providing a Personal Guarantee
The original borrower in a loan is helped by a personal guarantee because it compensates for potential credit problems. They may also receive a reduced interest rate on their loan, and ultimately be able to borrow more. Those that serve as a personal guarantor may want to consider whether the borrower is able to pay. Often, lenders that request a guarantee do so because the borrower is not financially secure.
If there is a problem with the loan, it may appear on a credit report and ultimately affect your credit score. For this reason, agreeing to guarantee a loan is a wise decision when you are confident that you have the resources to pay the entire amount if the borrower defaults. A skilled bankruptcy lawyer can help you understand the potential consequences of serving as a personal guarantor.Eliminating a Personal Guarantee with Bankruptcy
As a business owner, you may consider filing individual bankruptcy in order to get rid of a personal guarantee. In many situations, personal guarantees will qualify for discharge, meaning you will not be required to pay. If the debt is nondischargeable, bankruptcy will not help. For example, in Chapter 7 bankruptcy, nondischargeable debt may include taxes and domestic support.
If you have signed on as a personal guarantor for a family member or a friend, you may be responsible for their loan if they file for bankruptcy. To get rid of the obligation, you have to file individual bankruptcy yourself. An exception to this is when repayment of the loan occurs during the repayment plan of Chapter 13 bankruptcy.Consult a Dedicated Bankruptcy Attorney in DuPage County
Eliminating a personal guarantee in bankruptcy is possible. Contact our experienced personal guarantees and bankruptcy attorneys to better understand your options. We proudly assist clients throughout DuPage County, as well as Lake County and nearby areas. To speak to a skilled debt relief attorney, contact our office by calling (773)993-0024 or online.