Are personal guarantees enforceable if you have been declared bankrupt?

Personal guarantee motivates banks and other lenders to approve business loans, as it lessens their risk of losing money. If the company defaults, the lender can pursue one or more directors for payment.

When offering a personal guarantee, it establishes a secondary responsibility, potentially exposing directors to legal action by the lender for debt recovery. In certain cases, this could result in bankruptcy if payment cannot be made.


How might a lender uphold a personal guarantee?

Lenders can enforce personal guarantees, as these are legal documents that hold the provider personally accountable for some or all of the outstanding loan amounts. When multiple directors have given personal guarantees, the lender is inclined to pursue the director deemed most financially capable of repayment.

This indicates that if you possess substantial personal savings or own high-value assets like property, you might be a prime target for lenders, potentially leading to the possibility of entering bankruptcy.

That’s why it’s crucial to seek professional advice before signing a personal guarantee for business loans.


Can you be compelled into bankruptcy due to a personal guarantee?

A debt of £5,000 or more is required before a creditor can initiate bankruptcy proceedings, but the debt must also be substantiated in court. The lender can accomplish this by securing a County Court Judgment (CCJ) or issuing a 21-day statutory demand for payment.

In such a scenario, if the payment isn’t made within 21 days, confirming the existence of the debt, the lender can file for bankruptcy.


What happens to the personal guarantee in bankruptcy?

Declaring bankruptcy entails the transfer of control over your personal assets to the appointed Trustee. By initiating bankruptcy, the lender aims to recoup some of their funds through the sale of these assets, including your home if the equity makes it a worthwhile sale.

Essentially, bankruptcy is a final option for all involved, but it does relieve you of your debts, including those arising from personal guarantees. Once bankruptcy concludes, creditors no longer have the right to pursue you for their money.

Release from bankruptcy usually occurs within 12 months, but if you can contribute more to creditor returns from your monthly income, an Income Payments Agreement (IPA) may be arranged, extending for an additional two years.

In the event of inheriting money or property while undergoing bankruptcy, it similarly transfers to the Trustee, becoming accessible to supplement creditor returns.

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How do you protect yourself from bankruptcy if you’ve provided a personal guarantee?

Offering personal guarantees allows a company to secure essential funding, yet the accompanying downsides for directors are constant. 

Nevertheless, there are ways to diminish the potential consequences of providing personal guarantees and alleviate the risk of bankruptcy.

These include:

  • Consult a professional adviser to assess the implications of signing a personal guarantee, ensuring a comprehensive understanding of the risks, including when personal liability may arise if your company cannot meet its obligation. 
  • Grasping the mechanics of personal guarantees before signing, especially how yours could impact your personal finances.
  • Considering personal guarantee insurance.

For additional details on the implications of personal guarantees in bankruptcy and ways to safeguard yourself, kindly get in touch with our specialists at Vanguard Insolvency. We are available for a complimentary same-day consultation at any of our offices across the country.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.