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What happens to a personal guarantee in bankruptcy?

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Published: 17th February 2020

Personal guarantees encourage banks and other lenders to agree business loans, as their risk of losing money is reduced. If default occurs by the company concerned, the lender has one or more directors who can be pursued for payment.

A secondary liability is created when a personal guarantee is provided, and as a result directors may face legal action by the lender to recover the debt, which in some instances could lead to bankruptcy if they’re unable to pay.

How can a lender enforce a personal guarantee?

Lenders are able to enforce personal guarantees, as they’re legal documents that make the provider personally liable for some or the entire outstanding loan amounts. If more than one director has provided a personal guarantee, the lender is more likely to target the director they believe is most financially able to repay.

This means that if you have significant personal savings or own high value assets such as property, you may be more of a target for lenders and could face the prospect of having to enter bankruptcy.

This is why it’s essential to seek professional guidance prior to signing a personal guarantee for business lending.

Could you be forced into bankruptcy for a personal guarantee?

You need to owe £5,000 or more before a creditor can make you bankrupt, but the debt also has to be proven to the court. The lender can achieve this by obtaining a County Court Judgment (CCJ) against you, or sending a 21-day statutory demand for payment.

In this case, if the money isn’t paid in 21 days the debt is proven to exist and the lender can petition for your bankruptcy.

What happens to the personal guarantee in bankruptcy?

Entering bankruptcy means control of your personal assets is transferred to the appointed Trustee. In making you bankrupt, the lender is hoping to recover at least some of their money from the sale of these assets, which will include your home if the amount of equity makes a sale worthwhile.

Essentially, bankruptcy is a last resort for all parties but it does rid you of your debts, including those arising from personal guarantees, and once the bankruptcy has ended creditors have no right to pursue you for their money.

Discharge from bankruptcy typically takes 12 months, but if you’re able to contribute more to creditor returns from your monthly income, an Income Payments Agreement (IPA) could be set up, which will last for a further two years.

If you inherit money or property during the course of a bankruptcy, this also passes to the Trustee and becomes available to add to creditor returns.

Protecting yourself from bankruptcy if you’ve provided a personal guarantee

Providing personal guarantees enables a company to access vital funding, but the associated drawbacks for directors are ever-present. There are ways you can reduce the potential ramifications of providing personal guarantees, however, and mitigate the risk of bankruptcy.

These include:

  • Understanding how personal guarantees work before you sign, and how yours in particular could affect your personal finances
  • Seeking guidance from a professional adviser on the value of signing a personal guarantee before you sign it, to ensure you fully understand the risks, including how and when you could become personally liable if your company cannot pay
  • Taking out personal guarantee insurance

For more information on what happens to personal guarantees in bankruptcy, and how you can protect yourself, please contact our experts at Real Business Rescue. We can offer you a free same-day consultation at any of our network of offices nationwide.

Jonathan Munnery

Partner

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