Business bankruptcy and personally guaranteed loans
The U.S. Small Business Administration states that there are two types of personal guarantees for company debt. One type is referred to as a guarantee of collection and this gives business owners protection until a judgment has been issued in the creditor’s favor. However, to obtain the judgment, the creditor must initiate legal action. If the owner is not financially able to pay the debt, the creditor will probably not take such steps since it would not be worth the cost or time.
The other type is a guarantee of payment and this is the most commonly used by lenders and business owners. However, the downside of using this type is that lenders can pursue the owners for the balance owed without having to go through the courts. It can also really impact their personal credit line, especially if they used their own credit rating to get a credit card for the business. However, if businesses could get the lender to renegotiate the guarantee of payment to one of a collection, they might be able to eliminate their liability.
Entrepreneur recommends avoiding using a personal guarantee if possible because it is really hard for people to get out of the responsibility of paying the business’ debt. If there is a personal guarantee in place, then the lenders could go after the owner’s personal assets, even in a bankruptcy.