Can You Discharge Personal Guarantees in Bankruptcy?

Yes. In most cases, a personal guarantee can be discharged if the person who signed the guarantee files for bankruptcy. A personal guarantee is treated as an unsecured debt under federal bankruptcy law, which means it is generally eligible for discharge in both Chapter 7 and Chapter 13 cases. The outcome of a personal guarantee bankruptcy case depends on how the guarantee was created, what type of debt it covers, and whether any exceptions to discharge apply.

What Is a Personal Guarantee and Why Does It Matter in Bankruptcy?

A personal guarantee is a legal commitment in which an individual agrees to repay a debt if the primary borrower defaults. Business owners most commonly sign personal guarantees for:

• Commercial leases
• Business loans
• Lines of credit
• Equipment financing

The guarantee makes the individual personally liable for the debt, even if the business itself is a separate legal entity like an LLC or corporation. This distinction matters in bankruptcy because a business bankruptcy does not automatically discharge the personal guarantor’s obligation.

Under 11 U.S.C. § 524(e), a discharge only eliminates the debtor’s personal liability. When a business is a separate legal entity, its debts and the owner’s personal debts are treated independently under bankruptcy law. A discharge in the business case clears the business’s obligations only. A discharge does not affect the liability of anyone else who is also on the hook for that same debt.

If the business files for bankruptcy and receives a discharge, the lender can still pursue the personal guarantor for the full amount owed. That means if you signed a personal guarantee for a business loan and the business goes under, you may need to file your own personal bankruptcy to eliminate that liability.

How Do Chapter 7 and Chapter 13 Handle Personal Guarantees?

Both Chapter 7 and Chapter 13 can discharge personal guarantees, but they work differently. In a Chapter 7 bankruptcy, the court liquidates non-exempt assets and discharges most unsecured debts, including personal guarantees, within three to six months. If the guarantee is for a straightforward business loan or lease and no fraud is involved, it is typically dischargeable.

In a Chapter 13 bankruptcy, the debtor enters a three-to-five-year repayment plan. Personal guarantees are included as unsecured claims in the plan. One advantage of Chapter 13 is the co-debtor stay under 11 U.S.C. § 1301, which temporarily prevents creditors from pursuing co-signers or guarantors while the plan is active. This protection applies only to consumer debts and does not extend to commercial or business obligations such as business loans or commercial leases. At the end of a successful plan, remaining balances on personal guarantees may be discharged.

The right chapter depends on your situation:

• Your income and whether you qualify for Chapter 7 under the means test
• Your assets and how much is protected under Texas exemptions
• The total amount of guaranteed debt and whether any exceptions to discharge apply

An attorney can help you determine which path offers the best outcome for your situation.

When Can a Personal Guarantee Not Be Discharged?

Not every personal guarantee is dischargeable. Under 11 U.S.C. § 523, certain debts survive bankruptcy regardless of the chapter filed. The most common exceptions that affect personal guarantees can include:

• Fraud-based guarantees: If the lender can show that you obtained the loan through false pretenses, false representation, or actual fraud, the guarantee may be ruled nondischargeable under § 523(a)(2). This includes situations where the borrower misrepresented financial information on a loan application.
• Student loan guarantees: Personal guarantees on educational loans are generally nondischargeable unless the debtor can prove that repayment would cause undue hardship, which is a difficult standard to meet.
• Tax-related debt: If the guarantee covers certain tax obligations, those debts may fall outside the scope of discharge under § 523(a)(1).
• Debts from willful and malicious conduct: Guarantees tied to judgments for intentional harm to another person or property are nondischargeable under § 523(a)(6).

If a creditor believes the guarantee should not be discharged, they can file an adversary proceeding (a formal lawsuit filed within the bankruptcy case) in bankruptcy court to challenge it.

Can You Get a Personal Loan After a Bankruptcy Discharge?

Yes, but lenders will treat you differently in the years immediately following a discharge. Most traditional lenders require a waiting period of one to two years after a Chapter 7 discharge before approving a personal loan, and some require longer. Chapter 13 filers may be able to borrow sooner since the repayment plan demonstrates an ongoing commitment to resolving debt.

Interest rates will likely be higher initially, and loan amounts may be limited. Credit recovery typically begins within the first year after discharge as the eliminated debts no longer appear as active delinquencies, which gradually improves borrowing options over time.

Talk to Our Bankruptcy Attorney About Your Personal Guarantee

A personal guarantee does not have to follow you forever. Whether you signed a guarantee for a business loan, a commercial lease, or a line of credit, bankruptcy may offer a path to eliminate that debt and move forward. Our bankruptcy attorneys at Pelley Law Office have been helping individuals and business owners resolve debt since 1974. Our founding attorney served as a U.S. Bankruptcy Trustee, which means we understand how trustees evaluate cases from the inside. Call us at (214) 560-1919 or contact us online to schedule a free consultation.