Personal Bankruptcy and an MCA Guaranty: 5 Questions When the Business Stays Open

If you signed a personal guaranty, and then it is discharged in a bankruptcy you file, can the lender still collect against your business? Personal bankruptcy wipes out individual debts, so any guaranty by your personal name could be discharged; but if the business itself signed an agreement to pay, that debt doesn’t go away: the lender can still collect against the business. But the courts are split over what happens if you keep using credit from the same lender. A court may find that your discharge does not block collection against your guaranty for money borrowed after you filed bankruptcy.

Many guarantors go to bankruptcy after a business fails, unable to pay the debts they guaranteed. But at the time of a bankruptcy other big debts may weigh on your mind, and you may forget about the guaranties. For example you may sign them long before when you open credit for the business.

Once you file, the automatic stay stops collection activity against the guarantor. Filing does stop the suit at your end, but generally not at your company’s. The MCA advance is a debt from the business, and your company stays in trouble.

Bankruptcy wipes out your own debt, but no one else’s. If your partner also guaranteed the loan, then the partner can still be collected from. A Chapter 13 co-debtor stay might protect a guarantor partner of yours, but it only covers consumer debts, for personal or household reasons, so it might not reach a business guaranty. Your partner is probably still vulnerable.

Guaranty Can Last into New Deals

A restaurant owner in Wisconsin bought food and supplies from a big wholesaler, and personally guaranteed the purchases. Then he filed bankruptcy and got a discharge, wiping out his debts. But he did not list the wholesaler’s claim in his schedules. So the wholesaler never knew that the business owner was bankrupt. Four years of bill-by-bill credit continued as before. When the restaurant finally failed, the wholesaler sued on the guaranty.

In 2022 a federal district court held that the guaranty was signed before bankruptcy, but liability arose only when the later purchases were made. That post-filing debt would not be blocked by the guarantor’s discharge. The owner has appealed. The wholesaler said, if it had known about bankruptcy, the company would have demanded a guaranty reaffirmation.

A Virginia federal court has a similar fact pattern. Two owners each guaranteed purchases by their company. Both individually filed Chapter 7 and properly listed the same trade supplier. After that the purchases kept coming. Later the company failed. The court sided with the supplier. The owners never turned the credit tap off, and they never gave notice that orders beyond an announced date should stop. You might think that filing bankruptcy and listing the trade creditor as an unsecured creditor would be enough to cancel out the guaranty. However, the court seemed to give greater weight to the course of dealing. Their behavior seemed like an affirmation of the guaranty, overriding any inference otherwise from the filing alone.

Not every court agrees. On the same issue as the above restaurant case, a federal bankruptcy court in Michigan decided in 2017 that all obligations under a guaranty, even for new transactions after a bankruptcy case is filed, can be wiped out. A bankruptcy is meant to give a fresh start. But it could be risky to assume that you are off the hook. So be cautious.

You can get a discharge without going out of business, but there are rules. You generally need credit counseling from an approved agency, within 180 days before you file. If you are an individual, you can file Chapter 13. In calculating disposable income, your current business expenses (what you need for daily operations) do not count. Unsecured debts must be less than $526,700.

Not every Chapter 7 requires passing the means test. If your debts are mostly from business dealings, no, it is irrelevant. And a trustee will not run your firm for long, if at all, unless it’s going to make more to creditors by having him do it than just shutting it down. The Chapter 7 case filing fee is $245, plus an administrative fee of $78 and a trustee surcharge of $15.

A deliberate, major false statement on your financial picture may give a creditor a way to stop your bankruptcy from wiping out your debt. You must write something you knew to be untruthful, and mislead the lender on something that could matter, before you got the cash. To sue, the funder has to make its move within 60 days after the first date set for the creditors’ meeting, unless the court extends it. If not, they probably have to roll over.

Account for Every Guaranty in Your Bankruptcy

Do make sure you account for every guaranty in your bankruptcy, including MCA guaranties. Next, send the funder a notice in writing that you will not be responsible for any new deals. The response may be a cut-off. If the funding entity then says, “We will not fund your future orders without a reaffirmed guaranty,” then you and your business will need to decide which matters more.

If you don’t do that, then you may have to argue that you effectively did end the guaranty. Don’t leave anything to chance. Let the funder know that you want the guaranty off, and make sure they get it.