Personal Guaranties and Chapter 11's

As a small law firm, we represent a number of small businesses that need to file Chapter 11 for the simple reason of affordability. One unique problem facing most small business owners face when closing a business is the dreaded personal guaranty. At the time you signed the contract or loan the idea of being on the hook personally was likely an afterthought. That being said, any personal guaranty obligations can loom large in deciding how best to proceed.

Even though our representation is technically with the business, it would be silly to disregard those personal guaranties namely for the reason that the person calling all the shots for the small business is also that person guarantor. That often poses some conflict because in some instances, the best direction for the small business may not be the best direction for the owner/personal guarantor. 

An all too scary concept in bankruptcy is that the small business’ Chapter 11 WILL NOT protect a personal guarantor from those same debts of the small business. In other words, the automatic stay that goes into effect upon filing bankruptcy won’t extend to the owner/personal guarantor.  

Then how do we fix this problem? The short answer is two-fold:  

(1) either the creditors have to simply agree not to pursue the owner/personal guarantor in order to give the small business in Chapter 11 a chance to reorganize.
                             OR 
(2) the small business in Chapter 11 must agree to pay back 100% of the debt and thus, leaving zero debt for the owner/personal guarantor.  

The beauty of Chapter 11 is its flexibility in that we often craft payment plans for business that can stretch many years, even a decade. Chapter 11 offers the small business (and its owner/personal guarantor) a 
chance to breathe and get out from under its creditors’ attacks.

Recently, one of our small business Chapter 11 clients faced the same obstacle. In that case, the creditors not only agreed to not pursue the owner/personal guarantor, but agreed to be paid back their debts over a ten (10) year period. By agreeing to do this, the small business AND its owner can focus on churning profits without worrying about its past debts, so long as they abide by the terms agreed upon. Thus, the bottom line is that personal guaranties are a distinctive problem for small businesses and their owners and sometimes, reorganizing through a Chapter 11 may be one of the few ways to protect the owner and pay off the debts.