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Bankruptcy and Personal Guarantees

Bankruptcy and Personal Guarantees

Personal guarantees are the promises made by individuals to repay the finances of a business or an individual if they fail to pay.  In simpler words, if that business or individual fails to repay the money, you will be held liable.

When you personally sign a guarantee for your family member, friend, or business, you make yourself liable for it. However, this personal liability can be wiped out through bankruptcy.

bankruptcy personal guarantee legal papers

What are Personal Guarantees in Bankruptcy

The most basic requirement of all credit applications, terms of lease and trade agreements signed by individuals or companies is that the director of the company or another individual should sign a personal guarantee. The person who signs the personal guarantee is known as the guarantor.

The main aim of this personal guarantee is to limit the lender’s exposure in case the individual or business defaults. The lender can use the guarantee signed by the guarantor and demand them to pay the outstanding amount.

In case the guarantor fails to repay the amount, they can be held legally liable. The lender has the right to file a lawsuit against the guarantor for repayment of the full amount, with interest, legal cost, and or any other associated costs.

If the guarantor still fails to make the payment, the lender can seek to enforce the judgement or might force bankruptcy proceedings if the debt is more than $5,000. This results in the guarantor potentially ending up in bankruptcy for a debt that another person or company owes.

This is a type of creditor-initiated bankruptcy.

While in some cases the lender is the one who enforces the bankruptcy on the guarantor, there are also cases in which the guarantor seeks legal assistance when the lender starts making demands for the payment the guarantor signed for a personal guarantee.

How Enforceable Are Personal Guarantees?

Personal guarantees are typically enforceable as it is a signed agreement. The lender can force the guarantor to court and demand for a judgement to be made. When the lender starts taking legal actions, the personal guarantee can be quickly enforced.

However, it is essential to note that there are certain documents that are known as guarantees, but legally they are not, which can make it difficult for the lender to enforce them. The court examines the guarantees thoroughly to determine if they are enforceable. The following factors are taken into account:

  • Consideration: There has to be evidence of an offer made and accepted, capacity, intention, and consideration for the personal guarantee to be enforced.
  • Secondary Liability: The document has to establish the fact that the guarantor had secondary liability.
  • Signed: It is crucial that the document has the signature of the guarantor or the signature of their authorised agent. Their name can be mentioned on the guarantee as printed or handwritten.
  • In writing: the document has to be in writing in order to be enforced.
  • Substance over Form: Merely because of the usage of the word ‘guarantee’ doesn’t mean the document can be enforced.
  • Proper Interpretation: The document must have used proper words in relevant clauses, which are the right clauses that can be counted in the court to be enforced, not simply because it is called a guarantee.

A guarantee can’t be enforced if it doesn’t meet these factors or if it hasn’t been in writing.

How Do You Get Out of a Personal Guarantee?

When the guarantee is enforceable, there isn’t really a way out of it. However, there are certain ways that the guarantor can protect themselves from damage. Here are a few of them:

1.   Apply for Personal Guarantee Insurance

Personal guarantee insurance offers a cover for guarantors whose personal assets might become a risk in case the individual or business isn’t able to repay the lender. This insurance covers existing or new agreements and can cover up to 70% of liability.

The drawback is that this insurance can be expensive because if you take out the insurance, it means you are unsure about the company or individual’s ability to repay the loan.

2.   Try Renegotiating

If the individual or company has started doing well and can make repayments without any problems, the guarantor should renegotiate the deal with the lender without the personal guarantee requirement. For instance, the lender might agree to put a limit on the personal guarantee period or a certain percentage of the loan being repaid. It might be difficult but certainly worth trying.

Can Personal Guarantees Be Claimed in Bankruptcy

In some cases, the guarantor can discharge their personal guarantee liability by applying for bankruptcy. It is crucial to get professional assistance in this case. A bankruptcy expert would be able to walk you through the process and identify the next best steps for you.

If you would like assistance or have more questions regarding bankruptcy and personal guarantees, get in touch with the experts at Bankruptcy Advisory Centre.


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