What Happens to a Personal Guarantee When My Business Goes Bankrupt in 2026?

Businesses can go through really rough times. You are the owner of a business that is struggling. At some point, you signed a personal guarantee for a loan or a line of credit. The business may be on the verge of filing for bankruptcy, and you are concerned that with the bankruptcy of the business comes the termination of the personal guarantee. In general, that is not the case. The bankruptcy of the business does not affect the personal guarantee. A personal bankruptcy is a different matter, which is discussed below.

What Is a Guarantee

What is a guarantee? It is a promise by you personally to pay if the business does not pay. Well-written ones are irrevocable, meaning the promise cannot be revoked. They will cover future extensions of credit, not just the first loan. They often include broad waivers of defenses. Lenders draft them so they are enforceable even in a bankruptcy. That’s one reason the lender requested a guarantee.

Even when the business is bankrupt, your guaranty remains good for the full amount of the debt. Because the lender’s recovery against you does not have to be reduced by the amount of its recovery against collateral or the company until the lender is paid in full, it may proceed against you for the entire amount of your guaranty regardless of the current balance owed. The only restriction is the lender can only collect what it is owed in the end. That has been the settled rule, as the U.S. Supreme Court put it in 1946. In short, a personal guarantee is an obligation that remains standing even if the line of credit was part of the bankruptcy filing.

Your Own Bankruptcy

Then there’s your own bankruptcy. A claim against you as personal guarantor is just a claim against a guarantor. Unsecured. And like most unsecured debts, the guaranty obligation can be discharged in your bankruptcy. Whether that extends to new credit the lender extends the business after your discharge is another question.

A 2021 decision by Judge Beth E. Hanan of the U.S. Bankruptcy Court for the Eastern District of Wisconsin took up exactly that question. In that case, Mr. Schlundt signed a guaranty for supplier Reinhart Food Service in 2003, and then he and his wife filed chapter 7 bankruptcy in 2014, receiving a discharge. When Reinhart subsequently extended new credit to the business in 2018, it attempted to argue that Schlundt remained bound by the guaranty from 2003, and that he had to pay for the debt. The judge, however, explained that the guaranty was discharged in 2014 and it did not apply to the 2018 credit extension.

How did the judge decide that? When does a claim arise? The “conduct test” says that the date of the claim is the date of the conduct that gave rise to it. For a contract, the conduct is usually the signing. So the debt is usually created the day you sign. That’s true even if the liability is “contingent” or “unmatured” at the time you sign. That’s different from the older ”accrual theory,” which looked to state law to determine when a liability existed. The Bankruptcy Code says a “claim” is any right to payment, no matter whether it’s contingent, unmatured, disputed, etc. Congress intended to discharge as many claims as possible to give the debtor a fresh start.

The court acknowledged the policy objection that the conduct test may be too broad and may discharge a claim before a creditor is aware it exists. But Judge Hanan found that concern was alleviated in this case because Reinhart and Schlundt already had a contract in place before the bankruptcy. The guaranty also specifically contemplated future debts. Schlundt assumed a contingent liability when he signed it. As a result, the judge said, the guaranty discharged in 2014 and did not extend to the 2018 credit.

Why does this matter to you as an owner? Because, under that line of thought, your liability on the guarantee began when you signed the guarantee, even if the business did not owe the lender anything then and the debt was then contingent. That is why a personal bankruptcy discharge could wipe out the guarantee, including the credit that the guarantee anticipated. It is a double-edged sword: good news for the owner who has been through bankruptcy, bad news for the lender who assumed that the old guarantee was still alive and well.

Lesson for a Lender

So what’s the lesson for a lender? Never assume that a personal guaranty will “ride through” a bankruptcy, even as to new credit extended post bankruptcy. The obvious answer is to get a new guaranty. But beware. Some courts have determined that new guaranties entered into after a bankruptcy discharge, if arguably related to the discharged debt, are unlawful reaffirmations under section 524(c) of the Bankruptcy Code, and unenforceable. Some courts have even held that lenders violate the discharge injunction and are liable for obtaining guaranties tied to the discharged debt. Creditors are warned to consult with counsel.

If the business files for bankruptcy, the lender can still come after you on the guarantee. Depending on the details, you may be liable for the entire amount. The business filing does not automatically mean you are off the hook as the owner. If you have already been through bankruptcy and have received a discharge, an old guarantee may not extend to credit that was extended after your discharge. Be careful if the lender asks you to sign a new guarantee on a discharged debt. Obtain legal advice before you sign any documents. And before you sign a guarantee, you need to do your homework and read it carefully.