Personal Guarantees of Business Debt in Bankruptcy

How does a personal guarantee actually work when the business fails?

A personal guarantee is a second promise. The business signs the loan, and you sign again, agreeing that if the company does not pay, the lender can collect from you individually. Closing the doors, letting the entity lapse, or formally dissolving it does not undo that second signature.

That is why the debt follows you. In an individual bankruptcy case, the guaranteed amount is listed as your own debt, alongside credit cards and medical bills, because the promise you made is your liability rather than the company's. The court grants an individual debtor a discharge unless one of the grounds listed in 11 U.S.C. § 727(a) applies. A discharge voids any judgment determining your personal liability for a discharged debt and operates as an injunction against collecting that debt from you (11 U.S.C. § 524(a)).

What a personal filing does not do is give the business itself relief, and it does not remove a valid lien on collateral.

What changes the answer in your situation?

Four things move this the most.

First, how the credit was obtained. A debt for money, property, services or credit obtained by use of a written statement that is materially false, respecting your financial condition, on which the lender reasonably relied, and that you caused to be made with intent to deceive, is excepted from discharge under 11 U.S.C. § 523(a)(2)(B). Business loan files often contain exactly that kind of personal financial statement.

Second, collateral. A discharge addresses personal liability, not liens. A pro se debtors' guide published by the Middle District of Alabama states plainly that the discharge does not prevent secured creditors from seizing collateral if payments are not kept up, and that an uneliminated lien such as a mortgage may still be enforced against property afterward.

Third, who else signed. A spouse, partner or co-guarantor who does not file remains exposed on the same paper.

Fourth, whether the debt is listed. A debt neither listed nor scheduled in time for the creditor to act may be excepted from discharge under 11 U.S.C. § 523(a)(3).

What does federal law say about guaranteed business debt?

Federal law separates the person from the entity, and that separation drives most of the outcome. A discharge under 11 U.S.C. § 727 is granted to an individual debtor; § 727(a)(1) withholds it where the debtor is not an individual. Court guidance from the District of Arizona puts the same point in plain words: corporations, partnerships and LLCs do not get discharges and are not eligible for Chapter 13. Filing a case for the company therefore does not clear what you signed personally.

Chapter 13 is available to an individual with regular income whose noncontingent, liquidated debts fall within the limits set by 11 U.S.C. § 109(e). Those limits have been amended and adjusted over time, and we do not publish a verified current figure for them on this page. A self-employed debtor who incurs trade credit in producing income is treated as engaged in business under 11 U.S.C. § 1304.

Where do state or local rules differ?

Whether a guaranteed debt can be discharged is a federal question, and the answer generally does not shift from state to state. What state law shapes is everything around it. The guarantee contract itself, how a lender obtains and enforces a judgment, and how wages or accounts can be reached before any filing are state matters.

Exemptions matter too. Under 11 U.S.C. § 522, a debtor may claim exemptions available under other federal law and under the law of the state of domicile, and states may pass a law determining whether the federal exemption set is available as an alternative. Those amounts differ by state and decide how much home or vehicle equity a guarantee creditor can reach.

Local bankruptcy courts also publish their own rules, plan forms and filing procedures. We keep state figures on the state pages and district details on the court pages rather than restating them here.

What does this look like in practice?

Say the business was an LLC that closed last year. The lender is not writing to the LLC. It is writing to you, because you signed the guarantee, and any lawsuit that follows aims at your wages, your bank account and your property rather than the company's.

An SBA-backed loan behaves the same way at this level: what binds you is the guarantee document you signed. We do not publish verified SBA program rules here, so ask a lawyer how that specific loan, its collateral and any federal collection procedures are treated.

Two practical consequences follow. Your ownership interest in the business is an interest in property, and once the estate is created the debtor's interests in property of the estate pass to it (11 U.S.C. § 541). And if the company still holds assets, or you moved money out of it before filing, expect the trustee to ask about both. Section 727(a) lists transfers made to hinder, delay or defraud creditors among the grounds for denying a discharge.

What documents and information are involved?

Start with paper. Find the guarantee itself, the underlying note or credit agreement, and any personal financial statement you gave the lender. That written statement matters because 11 U.S.C. § 523(a)(2)(B) turns on a materially false written statement respecting the debtor's financial condition.

Then gather anything showing enforcement: demand letters, complaints, judgments, recorded liens, garnishment notices and payoff figures.

The case itself runs on official forms. The bankruptcy courts' published instructions for individual filers describe Schedule D for creditors holding claims secured by property, Schedule E/F for unsecured claims, and Schedule G for executory contracts and unexpired leases. The Statement of Financial Affairs asks about business activity and about property you hold or control for someone else. In a Chapter 7 case, Official Form 108, the Statement of Intention, addresses secured claims and unexpired personal property leases, and the form states its own filing deadline.

• The signed guarantee and the underlying loan or lease agreement
• Any personal financial statement or application submitted to the lender
• Judgments, liens, garnishment notices and current payoff amounts
• Entity records: formation documents, tax returns, and any transfers out of the business
• A list of every co-guarantor and their contact details

What should you ask a lawyer?

This is one of the areas where a consultation earns its cost, because the facts that decide the outcome sit in documents a lender already has. Bring the guarantee and the loan file with you. Court guidance repeatedly notes that neither the bankruptcy court nor the clerk's office can give legal advice, and that pro se filers are expected to know their own duties.

Useful questions are specific ones about your paper and your timing, not general ones about bankruptcy. Ask about the financial statement you signed, about collateral you pledged, about anyone else who signed with you, and about anything the business paid out before it closed.

• Is this guaranteed debt likely to face an objection under 11 U.S.C. § 523(a)(2)(B), given what I told the lender?
• Did I pledge collateral, and what happens to that lien after a discharge?
• Which chapter fits my income, my debts and the 11 U.S.C. § 109(e) limits?
• What happens to my co-guarantor, and does the 11 U.S.C. § 1301 codebtor stay reach them?
• Do transfers out of the business before it closed create a problem under 11 U.S.C. § 727(a)?
• Does my ownership interest in the entity have value the trustee will pursue under 11 U.S.C. § 541?

Frequently asked questions

Does closing or dissolving my LLC get rid of the personal guarantee?

No. A guarantee is a separate contract between you and the lender. Dissolving the entity ends the company, not your promise, and the lender can pursue you individually for the balance. Whether that personal liability can be discharged is decided in your own bankruptcy case, under 11 U.S.C. § 727 and the exceptions listed in 11 U.S.C. § 523.

Can the business file bankruptcy to clear what I guaranteed?

No. Under 11 U.S.C. § 727(a)(1) a discharge is not granted where the debtor is not an individual, and District of Arizona court guidance states that corporations, partnerships and LLCs do not get discharges. A business case may liquidate or reorganize company assets, but it leaves your separate promise intact. The guarantee is addressed, if at all, in your own individual case.

Will my business partner or spouse be protected if I file?

Not usually. Chapter 13 includes a codebtor stay under 11 U.S.C. § 1301 that bars collection of a consumer debt from an individual liable with the debtor, but it does not apply where that individual became liable in the ordinary course of that individual's business. A partner who guaranteed a business loan commonly falls outside it, and Chapter 7 has no equivalent codebtor stay.

Can a lender challenge the discharge of a guaranteed loan?

Yes. A creditor can object to the discharge of a particular debt. 11 U.S.C. § 523(a)(2)(B) excepts a debt for money, property, services or credit obtained by use of a materially false written statement respecting the debtor's financial condition, on which the creditor reasonably relied and which the debtor caused to be made with intent to deceive. Loan applications and personal financial statements are where that argument usually starts.

Does filing cost more because business debt is involved?

No. Court fees do not change because a debt is a personal guarantee. A Chapter 7 case carries a $245 filing fee (28 U.S.C. § 1930(a)(1)(A), (f)(1)), a $78 administrative fee (Bankruptcy Court Miscellaneous Fee Schedule, Item 8), and a $15 trustee surcharge (Bankruptcy Court Miscellaneous Fee Schedule, Item 9). A Chapter 13 case carries a $235 filing fee (28 U.S.C. § 1930(a)(1)(B)) plus a $78 administrative fee. Attorney fees are separate.

What is a reaffirmation agreement, and does it come up with guarantees?

A reaffirmation agreement is a contract with a creditor by which a debtor becomes legally obligated to pay all or part of an otherwise dischargeable debt, and it must be filed before the discharge is entered. Middle District of Alabama guidance notes that it takes away some of the effectiveness of a discharge and strongly advises consulting counsel first. It most often arises where collateral is involved.

Sources

• 11 U.S.C. § 727 — Discharge · official source
• 11 U.S.C. § 524 — Effect of discharge · official source
• 11 U.S.C. § 523 — Exceptions to discharge · official source
• 11 U.S.C. § 1301 — Stay of action against codebtor · official source
• 11 U.S.C. § 1304 — Debtor engaged in business · official source
• 11 U.S.C. § 109 — Who may be a debtor · official source
• 11 U.S.C. § 522 — Exemptions · official source
• 11 U.S.C. § 541 — Property of the estate · official source
• U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter: What can Bankruptcy do for you? What will it do to you?
• U.S. Bankr. Ct. M.D. Ala., Consumer Pro Se Debtors Guide
• Bankr. S.D. Iowa official guidance — Instructions - Bankruptcy Forms for Individuals
• Bankr. E.D. Mich. official guidance — A Guide for Pro Se Filers
• Bankr. N.D. Ill. official guidance — Chapter 13 - Additional Documents
• U.S. Bankr. Ct. S.D. Ala., SBRA guide (Judge Paul Bonapfel, 338 pp.) (updated June 2022)
• 28 U.S.C. § 1930(a)(1)(A), (f)(1)
• 28 U.S.C. § 1930(a)(1)(B)
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8
• Bankruptcy Court Miscellaneous Fee Schedule, Item 9

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