Are You Personally Liable for Your Business Debts? – Ray J. Buloan, Debt and Tax Relief Attorney

When a business closes, the legal and financial consequences can be significant, particularly if the business owner has personally guaranteed the debts of the company. In many cases, the owner may assume that shutting down the business will relieve them of their financial obligations, but a personal guarantee can make this assumption problematic.
A personal guarantee is a legal commitment that an individual (usually the owner or an officer of a company) makes to be personally responsible for the debt of their business. This type of agreement is often required by lenders when a business applies for loans, leases, or other credit. The guarantee essentially bypasses the limited liability protection typically afforded to owners of corporations or limited liability companies (LLCs).
For instance, in a corporation or LLC, the owner’s liability for debts is generally limited to the amount of their investment. However, when an owner personally guarantees the debt, they effectively step out from behind the protection of their business entity and expose their personal assets to the risk of creditor claims.
When a business is forced to close due to financial trouble, it may not have enough assets to satisfy all its debts. In such a scenario, creditors will seek to recover what they are owed. If the owner personally guaranteed certain debts, creditors can pursue the owner’s personal assets to satisfy these obligations, even if the business itself is insolvent or has been dissolved.
The exact scope of liability depends on the terms of the personal guarantee. Some guarantees may be “limited” to a specific amount, while others are “unlimited” and make the owner liable for the full amount of the debt. For example, if a business owes $500,000 and the owner has provided an unlimited personal guarantee, the creditor can demand the full $500,000 from the owner, regardless of whether the business has any remaining assets.
If the owner becomes personally liable for the business’s debts, creditors can potentially pursue the owner’s personal assets. This may include bank accounts, real and personal property, investment accounts and future income (wage garnishment).
Even when a personal guarantee is in place, there are defenses and strategies that may help reduce the financial burden on the owner. These could include negotiating with creditors for a reduced amount or a payment plan or a last resort, filing a personal bankruptcy to discharge your liability.
When a business shuts down, the personal guarantee of its debts can have far-reaching consequences for the owner. Even though the business may be dissolved, the owner’s personal liability remains intact, and creditors can aggressively pursue repayment. Business owners should be aware of the risks associated with personal guarantees and take steps to protect their personal assets whenever possible. By understanding the implications of a personal guarantee, seeking proper legal counsel, and taking steps to mitigate liability, owners can better navigate the challenges that arise when a business faces financial trouble. Ray J. Bulaon is a bankruptcy and debt relief attorney in Valencia who has helped more than 6,000 clients get out of debt. Call his office at 866-477-7772 or 661-775-4880 for additional information.