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Bankruptcy and Personal Guarantees

Bankruptcy Personal Guarantees

What is a personal guarantee in Bankruptcy?

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, you will be liable if that business or individual fails to repay the money.

Signing a guarantee for your family member, friend, or business makes you liable for it. However, the Australian Financial Security Authority (AFSA) can eliminate this personal liability through bankruptcy.

Details of a Signed a Personal Guarantee

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.

The Guarantor can be Personally Liable for Business Debt

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

If the guarantor fails to make the payment, the lender can seek to enforce the judgement or might force bankruptcy proceedings if the debt exceeds $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. The personal guarantee can be quickly enforced when the lender starts taking legal actions.

However, it is essential to note that certain documents are known as guarantees, but legally they are not, making it difficult for the lender to enforce them. The court examines the contracts 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 that the guarantor had secondary liability.
  • Signed: The document must have 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 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 appropriate words in relevant clauses, which are the suitable 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 hasn’t been in writing.

How to get out of a personal guarantee?

When the guarantee is enforceable, there isn’t a way out of the responsibility to pay it. However, there are certain ways of protecting assets from personal guarantees, and guarantors can protect themselves from financial damage. Here are a few of them:

  • 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 taking out the insurance means you are unsure about the company or individual’s ability to repay the loan.
  • Try Renegotiating: If the individual or company has started doing well and can repay without problems, the guarantor should renegotiate the deal with the lender without the personal guarantee requirement. For instance, the lender might agree to limit the personal guarantee period, or a certain percentage of the loan is repaid. It might be difficult but certainly worth trying.

Can Personal Guarantees Be Claimed in Bankruptcy

Sometimes, the guarantor can discharge their personal guarantee liability by applying for bankruptcy and applying for a personal guarantee discharge.

Need more information about Bankruptcy?  Contact Us.

“Acting as a personal guarantee can be a liability, especially if things go wrong. So, it is crucial to get professional assistance from a bankruptcy expert who would be able to walk you through the process, answer questions such as “do personal guarantees survive bankruptcy” and identify the next best steps for you to protect yourself and your assets.”

If you are seeking Bankruptcy advice in Sydney, Melbourne, Brisbane, Perth or anywhere around Australia. We can help you make informed choices before selecting your best options. Get a complimentary first consultation by calling 1300 887 210.  We can help you navigate Bankruptcy in Australia.

          

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