What Is A Personal Guarantee In Bankruptcy?

Typically, a personal guarantee is first party collateral for a lease or loan, or the guarantor is a third party co-signer. For example, Ramon might personally guarantee a property lease in which Ramon LLC is the lessee. If Ramon LLC fails to pay, Ramon must pay personally. Or. Ramon could co-sign (guarantee) his daughter’s new car loan. Once again, if she fails to pay, Ramon is on the hook. Generally, such personal guarantees are unsecured obligations in bankruptcy.

As outlined below, there are several different types of loan guarantees. There are also several different types of bankruptcy. So, an experienced Chicago bankruptcy lawyer is an invaluable partner during this process. Lawyers offer advice on subjects unavailable elsewhere, like what kind of bankruptcy to file and how to classify debts and assets. Furthermore, only an attorney can unlock some advanced bankruptcy options which can save your family thousands of dollars a year.

Unsecured Guarantees

As mentioned, most loan guarantees are unsecured obligations. The guarantor, or co-signer, simply promises to pay if the responsible party doesn’t pay. Unsecured obligations are usually dischargeable in bankruptcy.

Briefly, “discharge” does not mean “complete elimination.” Instead, discharge means “partial elimination.” The judge erases the legal obligation to repay a debt. However, the debt itself remains. Assume John owes tuition to State U. The tuition is dischargeable. However, State U may continue to withhold John’s transcript until he makes arrangements with the school.

For this reason, unsecured guarantees are rather complex. Since the debt remains, the creditor could pursue a guarantor for payment. Bankruptcy’s Automatic Stay protections usually only apply to the filer, and not to guarantor and other third parties.

Priority Unsecured Debts

Student loans are the most common example of unsecured priority debts. These unsecured obligations are only dischargeable if the debtor shows an undue hardship. Illinois and Indiana bankruptcy courts use the Brunner Rule to define “undue hardship.” Under this rule, student loans are dischargeable only if:

• Debtor cannot repay the loans and live above the poverty line,
• A disability will prevent repayment for all or most of the loan term, and
• Debtor has made a good-faith effort to repay the debt.

Since student loans are usually not dischargeable, the personal guarantee, if any, usually does not come into play. If the judge reduces the student loan amount due, as is often the case, this reduction lowers the risk of a personal guarantee.

On a related note, PLUS loans, or Parent Loans for Undergraduate Students, usually follow the same discharge rules as other student loans.

Secured Guarantees

A secured guarantee is essentially a security agreement. If Tony uses his ranch to guarantee a loan, if the payments aren’t made, the creditor can foreclose on the ranch.

Technically, secured loans are dischargeable in bankruptcy. However, as mentioned, the debt itself remains despite the discharge. So, if the loan involves any secured collateral, the bank can still foreclose on it. However, in most cases, the bank must wait until the Automatic Stay ends.

Chapter 13 is usually a very good option for individuals with delinquent secured debts or at-risk personal guarantees. The Automatic Stay stops foreclosure and other adverse actions. Additionally, Chapter 13 gives debtors up to five years to catch up on these obligations.

Reach Out to Diligent Cook County Lawyers

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Resource:

uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics