Guarantors

The bankruptcy of a guarantor is often associated with his business. If so, then the interest of the guarantor in the business will fall into the bankruptcy estate. This means that the bankruptcy of a guarantor could result in the loss of his interest in the business or have other repercussions. Quite often, however, when the guarantor faces a potential insolvency, his business already owes more that it would bring if it were sold. Businesses that are corporations or partnerships with more debt than assets often pass through the bankruptcy estate and return in ownership to the owners after the bankruptcy is over. And the business may continue to operate even though the guarantor filed a bankruptcy.

It is in this way that a Chapter 7 can be a means to reorganize a business - partially in and partially out of bankruptcy.

Issues

Guarantors should be especially careful of the manner in which their corporation pays debts that have been guaranteed by the guarantors. Likewise, creation of liens to secure debts guaranteed by principal/guarantors can be problematic. All such transfers should be done only with legal advice.

Principals and guarantors should be vigilant in how they cause their corporation or partnership to pay them back for loans made to the corporation.

Actions of the principals prior to a bankruptcy proceeding are important for other reasons also. How they run the business can affect whether the officers can remain in control of the corporation if the corporation opts to reorganize in a Chapter 11.

A future Chapter 7 discharge of debt for a guarantor is often the most valuable "asset" that the guarantor owns.

And the actions that a principal/guarantor takes before filing his own bankruptcy can expose him to losing his own discharge. So, what the principal/guarantor does with his business before he files, what transfers of funds he makes and how he deals with his creditors are extremely important because his own discharge is on the line ... and he may not know it.

For the principal/guarantor, the goal is sometimes an effective Chapter 11 reorganization or payments by the corporation against employment taxes.

Where there are outstanding employment taxes for which the guarantor may be liable, he should contact bankruptcy counsel immediately because the personal obligation for the trust-fund portion of employment taxes is a forever non-dischargeable debt. The assets of the business can be used to pay it; and, at the same time, the discharge of the principal can be preserved.

Sometimes it is prudent to devise a plan that will pay IRS through the individual principal instead of paying IRS through the corporation because when the individual pays, the obligation is limited to the (lesser) trust fund portion, rather than the entire employment tax bill.

Immediate action by the guarantor / owner is often essential.