Lots of small business owners personally guarantee some of their company’s debts. When the business fails, creditors then go after the owner on his guarantee. If the owner can’t pay the guaranty, he may file for personal bankruptcy, and discharging that guaranty debt becomes the whole point of the bankruptcy.
Other business owners personally guarantee some of the debts but decide to file for personal bankruptcy, for reasons completely unrelated to the guaranty. At filing, there may not even be a balance due on that guaranty, or the owner may not even know he guaranteed those debts. Guaranties sometimes live in the fine print of a vendor’s credit application.
What about debts the business runs up after the owner’s discharged? Is the owner on the hook for debts the business runs up in the future?
Future Liability Under the Guaranty
In Reinhart Foodservice v. Schlundt, 646 B.R. 478 (2022), a federal district court in eastern Wisconsin reversed the bankruptcy court and held the owner’s bankruptcy did not discharge his future liability under the guaranty. In Reinhart, a restaurant owner personally guaranteed debts their business owed to its food supplier. He later filed for personal bankruptcy, but never listed the supplier on the bankruptcy schedules, so the supplier had no notice. The restaurant kept ordering on credit anyway, and it closed four years later. When the restaurant failed, the supplier looked to the owner for payment of those later debts. The bankruptcy court ruled the owner’s bankruptcy discharged his guaranty, and he was not on the hook for that debt. The supplier appealed.
The district court reasoned that the owner signed the guaranty before the bankruptcy but his liability only arose when the restaurant bought food afterwards, so the bankruptcy could not discharge it. The district court also avoided the question of whether the lack of notice to the supplier affected the outcome. The owner is currently appealing the district court’s decision to the Seventh Circuit Court of Appeals, so at this writing, nothing about that case is final.
Hindsight’s 20/20. The supplier said that, if they had known about the bankruptcy, they would have refused to continue supplying on credit. They would have required a reaffirmed guaranty. It turns out, it would not have mattered had they known about the bankruptcy anyway.
Notice wasn’t a factor in another case, either. The bankruptcy court in the Western District of Virginia in 2018 faced a similar fact pattern in In re Schaffer, 585 B.R. 224. There, two owners personally guaranteed their company’s debts to a supplier. Both owners filed for Chapter 7 bankruptcy. Both listed the supplier as a creditor in their bankruptcy, and both got their discharges. The company kept buying on credit from the supplier. When the company failed, the supplier looked to both for payment. The bankruptcy judge held that the guarantee survived both bankruptcies, and the owners were on the hook for the debt. To the untrained eye, filing bankruptcy and listing the supplier seems like it should end the guaranty. The question here was, did the guaranty debt arise before or after the bankruptcy filing? In both cases, the bankruptcy filing preceded the guarantor’s liability to pay. The Schaffer owners also did not take any additional steps in the bankruptcy to disclaim their guarantees. Apparently the owners knew the company kept ordering, and they benefited from those orders.
Contingent Claim
Courts differ though. A bankruptcy court in southeastern Michigan had the opposite view in In re Lipa, 433 B.R. 668. Judge Rhodes held that any future liability under the guaranty was a contingent claim, and all such claims were discharged in bankruptcy. Judge Rhodes pointed out that the bankruptcy discharge gives honest debtors a fresh start.
Pay Close Attention to That Guaranty
If you personally guaranteed your business debts and then filed for personal bankruptcy, pay close attention to that guaranty.
Do not leave your guaranties off your bankruptcy schedule.
Write your creditors a short letter, notifying them that you will not pay debts guaranteed by you and incurred by the business after your filing for bankruptcy. That disclaimer would be notice to the creditor to stop taking on more debt relying on your liability. The catch is that creditors may ask the guarantors to reaffirm the guaranty after they file personal bankruptcy, if they want to maintain that line of credit. If you did not write the letter, your guaranty may be in doubt.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
