Personal Guarantees: What Business Owners Must Know

You formed an LLC or corporation to protect your personal assets from business liability. But then you signed a personal guarantee on a business loan, and that protection vanished.

This is the harsh reality for millions of business owners: If your business defaults on debt you personally guaranteed, creditors can come after your house, your car, your personal bank accounts, and your retirement savings.

Here's what you need to know about personal guarantees and how to protect yourself.

What Is a Personal Guarantee?

A personal guarantee is a promise that you personally will pay back a business debt if your business can't or doesn't.

Key Terms:

• Guarantor: You (the person signing)
• Principal Debtor: Your business
• Creditor/Lender: Bank, SBA, equipment financing company, etc.

When you sign a personal guarantee, you're waiving the liability protection of your LLC or corporation. The legal separation between you and your business disappears for that specific debt.

Types of Personal Guarantees

1. Unlimited Personal Guarantee

Most common. Most dangerous.

You're liable for 100% of the debt, plus interest, fees, attorney fees, and court costs.

Example: Business owes $200,000. Business defaults. You personally owe the full $200,000 + accumulated interest + collection costs.

2. Limited Personal Guarantee

Your liability is capped at a specific amount or percentage.

Example: You guarantee up to $50,000 of a $200,000 loan. If business defaults, your personal liability maxes out at $50,000.

Rare. Only strong borrowers can negotiate limited guarantees.

3. Joint and Several Guarantee (Multiple Owners)

If you have business partners, each of you is 100% liable for the full debt.

Example: Three partners each sign. Business owes $300,000. Lender can collect the full $300,000 from any one partner.

Danger: Your partner's bankruptcy or disappearance leaves you holding 100% of the debt.

4. Continuing Guarantee

Covers all current and future debts with that lender.

Example: You sign a continuing guarantee for a $100K line of credit. Business later takes an additional $50K loan from same bank. You're personally liable for both—$150K total.

Very dangerous. Common with revolving lines of credit.

What Debts Require Personal Guarantees?

What Did You Actually Sign?

Most business owners don't read or understand what they signed. Here's what's typically buried in that guarantee:

Standard Personal Guarantee Clauses

• "Absolute and unconditional": You can't claim business had defenses to payment
• "Joint and several": If multiple guarantors, each is liable for 100%
• "Waiver of defenses": You can't argue lender did something wrong
• "Waiver of notice": Lender doesn't have to notify you before suing
• "Continuing guarantee": Covers all current and future debt
• "Attorney fees and costs": You pay lender's legal bills if they sue
• "Confession of judgment" (some states): You pre-authorized a judgment against you (no trial needed)
• "Waiver of jury trial": Disputes decided by judge, not jury

Translation: The lender wrote these guarantees to make it as easy as possible to collect from you personally, with as few obstacles as possible.

When Can Creditors Come After You?

Trigger Events

Personal guarantee is triggered when:

• Business defaults on payment (misses payment, usually 30-90 days)
• Business files bankruptcy
• Business closes/dissolves
• Covenant violation (breach of loan terms, like falling below minimum revenue)
• Material misrepresentation (lied on loan application)

What They Can Take

Once triggered, creditor can pursue:

• Bank account garnishment: Freeze and seize your personal checking/savings
• Wage garnishment: Take portion of salary (if you're employed elsewhere)
• Lien on your home: File lien, force sale or wait until you sell/refinance
• Seizure of personal assets: Cars, boats, investment accounts
• Retirement accounts: Some states allow, others protect 401k/IRA

Exemptions vary by state. Some states (FL, TX) have unlimited homestead exemptions protecting your home. Others protect very little.

Timeline: What Happens After Default

Key Point: If you're sued, DO NOT IGNORE IT. Respond or hire attorney. Default judgments are nearly impossible to reverse.

Can You Get Out of a Personal Guarantee?

Option 1: Negotiate Removal (Rare)

When It Works: Business has significantly improved since loan originated.

How to Ask:

"When we took this loan 3 years ago, we were a startup. Now we have $2M in annual revenue, strong cash flow, and perfect payment history. I'd like to request removal of the personal guarantee based on the business's improved financial position."

Success Rate: Low (10-20%). Banks almost never release guarantees voluntarily.

Option 2: Refinance Without Guarantee

When It Works: Strong business financials + good credit.

Find a new lender willing to lend without personal guarantee (rare but exists). Use new loan to pay off old guaranteed loan.

Candidates: Businesses with $1M+ revenue, 2+ years profitability, strong assets.

Option 3: Pay Off the Debt

Most straightforward: Pay the loan in full, guarantee is released.

Option 4: Bankruptcy (Discharge the Guarantee)

Personal Chapter 7 Bankruptcy: Discharges your personal liability for the guaranteed debt.

• Business can continue operating (if separate entity)
• You're personally discharged from the guarantee
• Lender can still pursue the business entity
• Protects your personal assets from collection

See our Chapter 7 guide for details.

Defending Against Personal Guarantee Claims

Possible Defenses (Consult Attorney)

• Lender fraud/misrepresentation: Lender lied to induce guarantee
• Duress: You were forced to sign under threat
• Lack of consideration: You didn't receive anything in exchange for guarantee
• Statute of limitations: Lawsuit filed too late (3-6 years in most states)
• Release: Lender agreed to release guarantee (get it in writing!)
• Material alteration: Lender modified loan terms without your consent
• Lender bad faith: Lender sabotaged business to trigger default

Reality Check: These defenses rarely succeed. Personal guarantees are "absolute and unconditional" for a reason. Don't count on defenses—assume you're liable.

Negotiating After Default

Even after default, you can negotiate:

Settlement

Offer lump sum (40-70% of balance) to settle in full.

"The business is closed and has no assets. I'm personally liable under the guarantee. I can offer $[AMOUNT] as a lump-sum settlement. Otherwise, I'll file personal bankruptcy and you'll get nothing."

Payment Plan

Spread payments over time.

"I acknowledge the guarantee. I can pay $[AMOUNT] per month for [X] months to satisfy this. Will you accept that and not pursue garnishment or liens?"

See our Negotiation guide for scripts and strategies.

Protecting Yourself From Personal Guarantees

Before You Sign

• Read the entire guarantee: Know what you're signing
• Negotiate: Ask for limited guarantee, specific dollar cap, or sunset clause (expires after X years of on-time payments)
• Joint guarantee with spouse?: Try to keep it in your name only (protects spouse's separate assets)
• Get your own attorney to review: Don't rely on lender's assurances
• Consider alternatives: Can you get loan without guarantee? Pledge more business collateral instead?

After You Sign

• Protect personal assets: Don't commingle business and personal funds, keep assets in exempt categories (retirement, homestead)
• Pay on time: Never default. Protect that guarantee from triggering.
• Monitor business health: If business is struggling, act early (negotiate, restructure) before default
• Build cash reserves: Have emergency fund to keep business payments current
• Get disability/life insurance: Protects family if you die or become disabled (debt doesn't disappear)

Asset Protection Strategies

IMPORTANT: Asset protection BEFORE debt is incurred is legal. AFTER you owe money, it's fraudulent transfer.

Legal Strategies (Do Before Taking on Debt):

• Maximize homestead exemption: If your state protects home equity, live in modest home
• Max out retirement contributions: 401k, IRA protected in bankruptcy in most states
• Tenancy by entirety: If married, own home jointly (creditors of one spouse can't touch it in some states)
• Irrevocable trusts: Transfer assets to trust (complex, requires attorney, must be done years before debt)
• Spouse doesn't sign: Keep assets in non-guarantor spouse's name

ILLEGAL Strategies (Fraudulent Transfer):

• Transferring assets after default: Courts can reverse transfers made 2-4 years before bankruptcy
• Hiding assets: Criminal fraud
• Gifting to family: After incurring debt = fraudulent transfer
• Sham divorce: Divorcing to transfer assets to spouse = fraud

Bottom Line: Protect assets BEFORE you sign guarantees, not after you default.

SBA Personal Guarantees: Special Rules

SBA loans have unique guarantee requirements:

• Mandatory for 20%+ owners: If you own 20% or more of business, SBA requires unlimited personal guarantee
• Spouses may be required: SBA can require spouse to sign if spouse has ownership or community property state
• Cannot be released: SBA almost never releases guarantees, even after years of on-time payments
• SBA Offer in Compromise: If business fails, you can settle guaranteed SBA debt for 10-50% of balance through OIC program

See our SBA Loan Debt guide for SBA-specific strategies.

State Differences in Guarantee Enforcement

Community Property States

States: AZ, CA, ID, LA, NV, NM, TX, WA, WI

Impact: Debts incurred during marriage are community debts. Your personal guarantee may create liability for your spouse even if spouse didn't sign.

Homestead Exemption States

Unlimited homestead: FL, TX, OK (home equity fully protected in bankruptcy)

High exemptions: CA ($600K+), MA ($500K), NV ($550K)

Low exemptions: Many states protect only $20K-50K in home equity

Wage Garnishment Limits

• Federal limit: 25% of disposable earnings
• TX, PA, NC, SC: No wage garnishment for ordinary debts (only child support, taxes, student loans)
• Most states: 25% of wages can be garnished

Real-World Scenarios

Scenario 1: SBA Loan Default After Business Closure

Facts:

• Owner guaranteed $200K SBA loan
• Business closed due to COVID
• Owner has $100K equity in home, $50K in retirement accounts
• Lives in state with $50K homestead exemption

Outcome:

• SBA demands full $200K from owner personally
• Owner offers SBA Offer in Compromise: $30K lump sum (15% of balance)
• SBA accepts (business is dead, owner has limited assets)
• Owner saves $170K vs. full balance
• Home and retirement accounts protected

Scenario 2: Multiple Partners, One Files Bankruptcy

Facts:

• 3 partners each guaranteed $300K loan (joint and several)
• Business defaults
• Partner A files personal bankruptcy (discharged)
• Partner B disappears
• Partner C is solvent

Outcome:

• Lender sues Partner C for full $300K (joint and several liability)
• Partner C has to pay 100% despite only owning 33%
• Partner C can theoretically sue Partners A/B for contribution, but Partner A is bankrupt and Partner B is gone
• Partner C gets stuck with entire debt

Lesson: Joint and several guarantees are extremely dangerous with multiple partners.

Scenario 3: MCA with Confession of Judgment

Facts:

• Owner signed MCA with personal guarantee + confession of judgment (NY)
• Business defaults on $75K MCA

Outcome:

• MCA company files confession of judgment in NY court
• Judgment entered WITHOUT trial or notice
• MCA garnishes owner's bank account: $30K seized overnight
• Owner hires attorney, gets judgment vacated (confession of judgment unenforceable in many states)
• Negotiates settlement: $40K lump sum (53% of balance)

Lesson: Confessions of judgment allow creditors to skip due process. Extremely dangerous.

Frequently Asked Questions