Personal Guarantees And Business Bankruptcy: What To Consider
If you own a business and your business is considering the possibility of bankruptcy, it is important to consider whether you have made any personal guarantees for business loans or lines of credit and how any personal guarantees could impact the bankruptcy case or your personal finances. You may have provided a personal guarantee in order to obtain a traditional business loan or line of credit, or you might have provided a personal guarantee for a COVID-19 Economic Injury Disaster Loan (EIDL) through the U.S. Small Business Administration (SBA). As you likely know, personal guarantees involve guaranteeing the loan with personal assets. If your business files for bankruptcy, how will the bankruptcy affect the personal guarantee and your personal assets? Consider the following information from our experienced West Palm Beach bankruptcy lawyers.
Your Personal Guarantee Could Be Discharged in the Bankruptcy Case If You Are a Sole Proprietor
If you are a sole proprietor, and if your business is structured as a sole proprietorship, then filing for business bankruptcy will also mean that you are filing for individual bankruptcy. As you may already know, sole proprietorships are not business entities that are distinct from the individual owners. Rather, the individual owner of a sole proprietorship and the business entity are, in effect, the same entity for purposes of taxation and bankruptcy. Accordingly, any personal assets through which you may have guaranteed a business loan will become part of the bankruptcy estate in your bankruptcy case.
Personal Guarantee Can Come Due for Other Types of Businesses Filing for Bankruptcy
If your business is not a sole proprietorship and you personally guaranteed a business loan, filing for business bankruptcy could result in responsibility for the business loan. In other words, since you personally guaranteed the loan, you can still be responsible for it after the business bankruptcy case is closed. In these circumstances, and depending upon the amount of the business loan, it may be necessary to file for personal bankruptcy.
Chapter 11 and Other Reorganization Cases May Not Impact Your Personal Assets
Depending upon the circumstances of your case, including the amount of the business loan and the personal assets you used to guarantee the loan, filing for Chapter 11 bankruptcy or another type of reorganization bankruptcy may not result in you personally owing the amount on the loan. Instead, since Chapter 11 (as well as Subchapter V under Chapter 11 and Chapter 12) are types of reorganization bankruptcies, your business’s repayment plan could involve paying off the business loan over the course of the case such that your personal assets will not be at risk.
Contact a Bankruptcy Attorney in West Palm Beach
If you have any questions about business bankruptcy and a personal guarantee on a business loan, you should seek advice from a lawyer who can assist you. One of the experienced West Palm Beach bankruptcy attorneys at Kelley Kaplan & Eller can assess your situation today and can provide you with more information about the next steps and what to expect in your bankruptcy case.
Sources:
sba.gov/funding-programs/loans/covid-19-relief-options/covid-19-economic-injury-disaster-loan/about-covid-19-eidl
law.cornell.edu/uscode/text/11
