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Eliminating Personal Guarantees on Business Debt

Guy Harvey Holman, Esq. • December 7, 2021

How Chapter 7 Bankruptcy Can Help Small Business Owners

When a business owner files for Chapter 7 bankruptcy, they may be able to discharge or eliminate their personal liability for certain business debts. This can be particularly beneficial for small business owners who have personally guaranteed business loans or other debts.


A personal guarantee is a legal agreement in which an individual agrees to be personally responsible for repaying a debt if the business is unable to do so. This means that if the business defaults on the loan or other debt, the creditor can come after the individual's personal assets to collect the debt.


However, when a business owner files for Chapter 7 bankruptcy, they may be able to eliminate their personal liability for certain debts, including those that were personally guaranteed. This means that the creditor can no longer pursue the individual for repayment of the debt.


In order to eliminate personal guarantees on business debt in Chapter 7 bankruptcy, the business owner must meet certain criteria. First, they must qualify for Chapter 7 bankruptcy, which involves passing a means test to determine if their income is low enough to qualify for this type of bankruptcy.


Second, the debt in question must be dischargeable under bankruptcy law. Certain types of debts, such as taxes and student loans, ordinarily cannot be discharged in bankruptcy, unless additional criteria are met. However, many types of business debts, including loans and credit card balances, can be discharged.


Finally, the business owner must provide evidence that the debt was incurred for business purposes and not for personal expenses. If the debt was incurred for personal expenses, it may not be dischargeable even if it was guaranteed by the business owner.


Eliminating personal guarantees on business debt in Chapter 7 bankruptcy can be a complex process, and it is important to consult with an experienced bankruptcy attorney to ensure that all legal requirements are met. However, for small business owners struggling with debt, this option can provide much-needed relief from personal liability for business debts.

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Debunking the Myths

By Guy Harvey Holman, Esq. • April 14, 2023
Understanding the Truth about Bankruptcy
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Understanding Chapter 7 Basics

By Guy Harvey Holman, Esq. • April 13, 2023
Chapter 7 bankruptcy is a legal process designed to help individuals and businesses that are struggling with overwhelming debt. It is the most common type of bankruptcy in the United States and can provide significant relief to those who qualify. The purpose of Chapter 7 bankruptcy is to discharge or eliminate most of your unsecured debts, such as credit card bills, medical bills, and personal loans. This means that you will no longer be responsible for paying off these debts, and creditors will no longer be able to pursue you for payment. In addition, certain assets may be exempt from liquidation, allowing you to keep most of your property. To file for Chapter 7 bankruptcy, you must first pass the means test. This test compares your income to the median income in your state, and if your income is below the median, you may be eligible for Chapter 7. If your income is above the median, you may still be eligible if you can show that you do not have enough disposable income to pay off your debts, or if you qualify for an exception to the means test. The common exceptions include being a disable veteran or currently serving as a reservist or nation guard member. You may also qualify for an exception to the means test if the majority of your debt is business related. Once you have passed the means test and filed for Chapter 7 bankruptcy, an automatic stay will go into effect. This means that creditors must stop all collection efforts, including phone calls, letters, and lawsuits. The bankruptcy court will appoint a trustee to manage your case and liquidate any non-exempt assets to pay off your creditors. While Chapter 7 bankruptcy can provide significant relief, it is important to understand that it may have short-term consequences. Your credit score may be negatively affected, and the bankruptcy will remain on your credit report for up to ten years. In addition, certain debts, such as student loans and tax debts may not be discharged in Chapter 7, unless certain additional factors are met. If you are considering filing for Chapter 7 bankruptcy, it is important to consult with a qualified bankruptcy attorney. We can help you understand your options, navigate the complex legal process, and ensure that your rights are protected. In conclusion, Chapter 7 bankruptcy can be a powerful tool for those struggling with overwhelming debt. While it may have short-term consequences, it can provide significant relief and a fresh start. If you are considering bankruptcy, it is important to understand your options and seek the advice of a qualified attorney.
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Understanding the Power of the Automatic Stay

By Guy Harvey Holman, Esq. • December 7, 2021
Bankruptcy can be a complex and overwhelming process, full of legal jargon and procedures that can be confusing for those who are not familiar with the system. One of the most important concepts to understand in bankruptcy is the automatic stay. In this blog post, we will provide an overview of what the automatic stay is, how it works, and why it is important.  What is the Automatic Stay in Bankruptcy? The automatic stay is a powerful tool that is triggered as soon as a person or business files for bankruptcy. Essentially, the automatic stay is a legal injunction that immediately stops most collection activities against the debtor, including lawsuits, wage garnishments, and foreclosure proceedings. The purpose of the automatic stay is to give the debtor a breathing room and protect them from further financial harm while they work through the bankruptcy process. How Does the Automatic Stay Work? The automatic stay is a mandatory injunction that goes into effect immediately upon the filing of a bankruptcy petition. Once the stay is in place, creditors are prohibited from taking any action to collect on debts owed by the debtor, including contacting the debtor directly, filing or continuing legal action, or even sending collection letters. There are some exceptions to the automatic stay, however. For example, the stay does not apply to criminal proceedings, tax audits, or domestic relations such as actions to collect child support payments. The stay may not also apply to repeat bankruptcy filings within one year. Additionally, creditors can file a motion with the court to lift the stay in certain circumstances, such as if the debtor has no equity in the property being foreclosed upon, or if the debtor is using the bankruptcy process in bad faith. Why is the Automatic Stay Important? The automatic stay is a critical component of the bankruptcy process, as it provides debtors with much ­needed relief from collection activities while they work to reorganize or discharge their debts. Without the stay, creditors would be free to continue their collection efforts, which could exacerbate the debtor's financial problems and make it more difficult for them to achieve a successful outcome from the bankruptcy process. By providing debtors with a temporary reprieve from collection activities, the automatic stay allows them to focus on developing a plan to address their financial situation. Whether that plan involves reorganizing their debts through a Chapter 13 bankruptcy, or discharging their debts through a Chapter 7 bankruptcy, the automatic stay provides a much-needed breathing room that can make all the difference in the success of their bankruptcy case.
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