A personally guaranteed business line of credit is an extension of credit to your business for which you are personally liable. If your business falters and is unable to pay off its debts, your lender can go after your assets to recoup any debt associated with a personally guaranteed line of credit. For this reason, you should exercise great caution when considering any extension of business credit that requires a personal guarantee.
Personally Guaranteed Credit
When a bank or other lender requires you to personally guarantee a business debt, it effectively removes any liability protection your business may afford you. This means even if your business is a limited liability company or corporation, you are still responsible for paying a personally guaranteed business line of credit. If your business is forced to declare bankruptcy, any lines of credit you have personally guaranteed survive the bankruptcy process since these debts are tied to your credit.
Chapter 7 Bankruptcy
Personal bankruptcy is your only option to discharge a personally guaranteed business line of credit. Chapter 7 bankruptcy can completely expunge this debt, though at the cost of your assets. The liquidation process associated with Chapter 7 bankruptcy could result in you losing valuable assets such as a home. Your business may also be liquidated to pay off your debts if it was created as a sole proprietorship or partnership. Limited liability companies and corporations cannot be liquidated when you file for personal bankruptcy since they are considered separate legal entities.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is another form of personal bankruptcy that can assist you in expunging a personally guaranteed line of credit. In Chapter 13 bankruptcy, your debts are not immediately discharged. Instead, you make payments on your debts based on a court-approved repayment plan designed to pay down your debts over a three- to five-year period. At the successful conclusion of this repayment time frame, remaining debts are expunged. Chapter 13 bankruptcy also allows you to retain possession of your assets including a business.
Why Personally Guarantee Credit?
It's never a good idea to personally guarantee a business line of credit and remove your liability protection. But you may have no other choice in order to obtain the funds your business requires to operate. A bank or other lender may require a personal guarantee on a line of credit because your business is newly founded or does not have a substantial credit history. The bank is seeking to mitigate its risk in lending your business money by tying the loan to your personal assets.
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