All is not lost if you, a friend or relative signed personal guarantees on business equipment purchases, unsecured lines of credit or leases. First, the court can, and typically will, issue an order under section 105 of the code barring the creditor from pursuing the personal guarantor of the debt while the reorganization plan is being put together and then while it is being implemented. The court’s reasoning is that the purposes of the SBRA would be frustrated, rendered effectively useless, if the creditor could immediately pursue the guarantor because doing that would deny the business owner of the opportunity to take advantage of a reorganization to which the business owner is entitled under the law.
Creditors are also willing in many cases to withhold execution on the personal guarantees in exchange for certain concessions in the reorganization plan, itself. Having the right to pursue a guarantor is not the same thing as getting paid. The guarantor may not have non-exempt assets to pursue. To even find out if the guarantor is liquid, the creditor has to sue—and getting that judgment could take years. Plus, contrary to popular belief, many creditors want to see the business succeed and are willing to negotiate—especially if they think, or are led to think, that the guarantor will, him or herself, file bankruptcy to wipe out the guarantees. A California resident can exempt a significant amount of assets and still wipe out the guarantees. Effective 1/1/2021, a California homeowner can exempt county median home value up to $600,000 or $300,000 in home equity, whichever is greater. With some advanced planning, a personal guarantor with significant assets could save their restaurant or other business through the SBRA, wipe out the personal guarantees and still keep $500,000 or more in equity and other assets. Agreed, filing a personal bankruptcy to save the business is not the “ideal” result—emotionally. But you wouldn’t be in business if you were faint hearted so sometimes what needs to be done has to be done. What would you rather see: 1. Lose a business you genuinely enjoy and then have to file for personal bankruptcy when the creditors come after you on the personal guarantees; or, 2. Save the business by permanently eliminating, reducing or restructuring debt and wiping out the personal guarantees with a personal bankruptcy and likely keep everything that you own? If you sense that there is an exit strategy, you’re right. The threat of a personal bankruptcy to wipe out the personal guarantees gives the business owner leverage, considerable leverage in many cases, to bring the creditor to the bargaining table. Foreseeable end result: neither side gets their “best case scenario”. The creditor gets paid more through the restructuring plan than they would without the personal guarantees. The business owner doesn’t get all the debt reduction they could without the personal guarantees but the owner does reduce debt to the level where post-COVID income is enough to become profitable again.