Bankruptcy 101: The Personal Guarantee

It’s not unusual for first-time borrowers, those with poor credit histories, or newly-created businesses to obtain loans. In difficult economic times, it can be next to impossible for these applicants to receive credit unless they are helped by a guarantor or, in the case of a business application, they guarantee the loan with personal assets like their home or vehicle.

Guarantors are usually people with better credit, a higher income, or higher-value assets. You may be asked to provide a guarantor if:

 

  • You have little or no credit history
  • Your credit is poor
  • You are a first-time renter
  • You filed for bankruptcy in the past and the filing is still on your credit report
  • You want to borrow more than your income suggests you can repay

They are different from cosigners in that they are generally only liable for the loan if the primary borrower defaults. If your mother cosigns on a personal loan and you miss a payment, the lender can pursue her at any time. If she guaranteed the loan, the creditor must typically try to collect from you first before compelling your mother to pay off the loan.

How Does Bankruptcy Affect Guarantors?

If you file for bankruptcy and receive a discharge, you are no longer obligated to pay those debts, but if you used a guarantor for any of them, their liability doesn’t change. The effect on them, however, will depend on whether you filed for Chapter 7 or Chapter 13.

With a Chapter 7 filing, there is no protection for guarantors. The automatic stay prevents creditors from coming after you, but they can still pursue any friend, relative, or entity that guaranteed the debt for you unless you do one of the following:

  • Reaffirm the debt. This means that you voluntarily make yourself liable for the debt even after your discharge.
  • Pay the debt. You can willingly pay off any discharged debts after your bankruptcy to protect your guarantors. Unless you negotiate a payment plan with the creditor, however, you may have to pay the entire outstanding balance to prevent them from trying to collect from the guarantor.

In contrast, Chapter 13 offers more protection to guarantors, as they are included in the automatic stay unless you aren’t proposing to pay the guaranteed debt in full or a creditor convinces the bankruptcy court that they will suffer irreparable financial harm if the stay remains in place.

Contact an Oklahoma Bankruptcy Attorney

When you file for bankruptcy in Oklahoma, you’re probably going to be worried about how your decision will affect those who guaranteed any of your debts.  At the Law Offices of B. David Sisson, we understand your concerns and will recommend strategies that reduce the impact of your filing on the friends and family members who gave you access to credit when you needed it. Attorney Sisson and his team are here to listen and help, so to schedule a consultation, please contact us.

 

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