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. Simply put, 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. However, the Australian Financial Security Authority (AFSA) can eliminate this personal liability through bankruptcy.

Details of a Signed 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 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 that they pay the outstanding amount.

The guarantor can be Personally Liable for Business Debt.

They can be legally liable if the guarantor fails to repay the amount. The lender has the right to file a lawsuit against the guarantor to repay the total amount, with interest, legal costs, and other associated costs.

If the guarantor fails to pay, the lender can seek to enforce the judgment or 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 judgment to be made. The personal guarantee can be quickly enforced when the lender takes legal action.

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 guarantor’s or their authorised agent’s signature. 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 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 specific 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 coverage for guarantors whose personal assets might become risky if the individual or business can’t 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 not be easy, but it is 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.

“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 can walk you through the process, answer questions such as “Do personal guarantees survive bankruptcy?” and identify the next best steps to protect yourself and your assets.”