Updated October 2, 2023
Personal guarantees are common for business loans. Lenders routinely ask for personal guarantees from the owners of the business. Commercial landlords can ask for personal guarantees from new businesses or where there are significant tenant improvements as part of a commercial lease. Individuals are often asked to guarantee business debts for friends and family who may be starting a business or acquiring student loans. These personal guarantees can have unanticipated consequences down the road when the primary borrower defaults and the lender starts looking to the guarantor for payment. The good news is that personal guarantees are usually able to be discharged in bankruptcy.
Common Considerations on Guarantees
Commercial lenders realize that it can be difficult to collect on business debts when a business falls into distress. For this reason, lenders, trade creditors, landlords and others require business owners to personally guarantee business debts. This makes the personal guarantor liable if the business is unable to pay.
First, guarantees should be distinguished from co-signing on a loan. Co-signing on a loan makes a person liable for the payment regardless of whether the other signor stays current. Debts incurred by co-signing usually appear on a person’s credit whereas liability as a personal guarantor rarely does.
Second, personal guarantees in Arizona must be signed by both spouses in order to collect against community assets. A.R.S. § 25-214(C)(2). If not signed by both spouses, the guarantee can have little weight in attempting to collect against a married guarantor and is uncollectable since the marital community cannot be liable for the debt.
When Can Guarantees be Discharged in Arizona
Unless a business is a sole proprietorship, personal guarantees can only be discharged in Arizona by filing an individual bankruptcy. A business bankruptcy will not eliminate a personal guarantee. Likewise, the Chapter 13 co-debtor stay only applies to consumer debts and personal guarantees are usually considered business debts. Therefore, a business or related bankruptcy will not stop or prevent collection efforts against the guarantor. A personal guarantor must file their own bankruptcy to eliminate the debt on the guarantee.
Chapter 11 for a business allows the debtor to extend the automatic stay to co-debtors unlike other chapters of the bankruptcy code. This is based on the assertion that preserving the guarantor’s credit can assist with the reorganization process. But the Ninth Circuit generally does not allow broad releases for third parties. The U.S. Supreme Court is considering this issue in December 2023 related to the Purdue Pharmaceutical bankruptcy.
Personal guarantees can generally be discharged in all circumstances unless the underlying debt is non-dischargeable such as taxes or student loans. However, liens giving a security interest in property as part of the guarantee cannot be avoided in most instances.
A good practice tip for any individual filing bankruptcy with a personal guarantee is to name any co-guarantors on the bankruptcy petition to avoid post-petition indemnity claims.
If you have a personal guarantee that you cannot satisfy, you should consult a bankruptcy attorney to consider your options. Likewise, in many circumstances, individuals can file for personal bankruptcy protection and still keep their businesses active. Barski Law Firm has decades of experience discharging personal guaranties in bankrputcy. Contact us today to discuss your options.
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