Rated PG & Bankruptcy

Personal Guarantees & Bankruptcy…

When we were kids, our parents were leery of sending us to a theater alone because movies, Rated PG (or above), probably had content that would not be suitable for children. While a movie’s rating of PG would definitely grant us a ticket and admission into a movie by ourselves, a PG rating implied that parental guidance was strongly advised. Essentially, a parental guidance rating warranted that our parent(s) see the movie prior to us being granted their blessing. In turn, their preview allowed us to enter the theater and enjoy a movie we’d been dying to see on our own.

Conversely, while we had the benefit of a parent to help us make decisions about movie choices as kids, most small business owners don’t pause to seek out the same of professionals, when it comes to taking on debt to fund their business goals. Oftentimes, a fledgling, small business owner goes it alone, without acknowledging the extent of his or her own personal liability before absorbing debt. Had the small business owner simply taken the time to ask for advice of a professional, he or she would have discovered whether or not the debt obligation they’d undertaken had a personal guarantee.

While a teen movie’s PG rating wasn’t too detrimental to us as kids, a PG rating, with regard to debt, can be extremely hazardous to a small business owner’s financial health.

What is a Personal Guarantee (PG)?

A personal guarantee obligates a person to repay a loan, as it is a contractual promise to fulfill a debt. A person’s promise to repay his or her obligation is either backed by property, which is debt secured by collateral, or his or her personal creditworthiness, which is unsecured debt.

Most personal guarantees are dischargeable with bankruptcy. However, some PG’s are not dischargeable, because the underlying debts are not dischargeable. Debts that fall into this category are student loans, tax debts that are less than 3 years old and/or are attributable to fraud or willful evasion, and some hold harmless, domestic agreements (i.e. found in divorce cases).

Who’s on the Hook for Personal Guarantees?

Individual/Sole Proprietor: If you personally take on debt, then you are personally liable to repay said debt. Likewise, if you are an unincorporated business owner, all liability belongs to you as owner, along with debts you’ve incurred, since no business exists to absorb debt.

Co-Signor: If you personally guarantee someone else’s loan (co-sign) and they default, followed by subsequently filing bankruptcy, then you, as their co-signor, are left holding the bag to fully absorb the debt.

Company: Most small business debts are personally guaranteed. While incorporated small business owners may have protections that sole proprietors do not, it comes as a surprise to some, if not most, small business owners that they are on the hook to repay their company’s debts (as personal guarantors), should their company pursue bankruptcy protection. In the minority of cases, if debt is not personally guaranteed, then the creditor must pursue business assets to collect.

If you are concerned that you may have personally guaranteed a loan and are contemplating bankruptcy, contact REFUGE Law to see if your debt is Rated PG. Make an appointment to speak with one of our experienced bankruptcy attorneys. Bankruptcy can help give you relief from your financial worries. Call us today at (404) 618-2733 in Georgia, (713) 570-6377 in Texas, to discuss.