Is a Personal Guarantee Discharged in Bankruptcy?

man asking question

As a Minnesota bankruptcy lawyer, I was recently asked whether a personal guarantee could be discharged in bankruptcy. The answer is fairly simple, depending on who is asking.

There are two simple rules to keep in mind:

  1. The person who files for bankruptcy has his or her debts discharged.
  2. The person who does not file for bankruptcy still owes all of his or her debts, even if those debts include a personal guarantee for someone who filed for bankruptcy.

Here are four examples with the rules illustrated and explained.

Example 1: You signed a personal guarantee; Now you are filing for bankruptcy

If you signed a personal guarantee and are now filing for bankruptcy, your liability for the debt will be discharged in bankruptcy. There is one exception, your liability will not be discharged if the debt itself is of the few types that cannot be discharged, including federal students loans, tax debt, etc.

But keep in mind that even if your debt (under the personal guarantee) is discharged in bankruptcy, the other person who got the loan (or credit) is still liable for the debt. In other words, your bankruptcy only takes care of your debts—other people still owe for their debts, even when you share the debt with someone else.

Example 2: You signed a personal guarantee; Now the other person is filing for bankruptcy

If you signed a personal guarantee so someone else could get a loan, and that person files for bankruptcy, you still remain liable for the money. In other words, the person who files for bankruptcy is no longer liable because they obtained bankruptcy protection, but you still are liable to repay the loan because you signed a personal guarantee, making you contractually liable for the money. Of course, if you file for bankruptcy, your liability for that debt would be discharged (assuming the debt was not one of the few types of debts that is not dischargeable).

Example 3: Someone else signed a personal guarantee for you; Now you are filing for bankruptcy

This is the same situation as Example 1 with the roles reversed. You obtained a loan, someone else signed a personal guarantee for your loan, and you are filing for bankruptcy. In short, if you file for bankruptcy, you can discharge the debt, but the person who signed the personal guarantee for you cannot discharge the debt (unless they will file for bankruptcy).

Example 4: Someone else signed a personal guarantee for you; Now that person is filing for bankruptcy

This is the same situation as Example 2 with the roles reversed. You obtained a loan, someone else signed a personal guarantee for your loan, and now that person is filing for bankruptcy. In short, if the person who signed a personal guarantee for your loan later files for bankruptcy, that person’s liability (obligation to repay the money if you default) is discharged, but you are still liable to repay your loan.

Conclusion

As you can see, all of these examples involved the two simple rules:

  1. The person who files for bankruptcy has his or her debts discharged.
  2. The person who does not file for bankruptcy still owes all of his or her debts, even if one of those debts is a personal guarantee for someone who filed for bankruptcy.

The exception to the first rule is debts that are not dischargeable in bankruptcy. That is, no one can discharge a federal student loan, most tax debts (IRS, Minnesota Department of Revenue, etc.), and family support obligations (child support, alimony, etc.).

Of course, before relying on any of this information, you should consult with a Minnesota bankruptcy lawyer to analyze your particular situation.