By Mr Bankruptcy
27th February 2019
One of the first things I get asked by clients who find themselves with unmanageable debt and facing statutory debt solution such as an IVA or filing for bankruptcy is whether they will lose their house.
As I explained in a previous blog post, during bankruptcy proceedings secured loans such as a mortgage, are usually left alone, but the Trustee in Bankruptcy will be closely examining the “beneficial interest” (their share of the equity) in any property owned or co-owned by the bankrupt.
Business owners who took the step of forming a limited liability company directors believe their family home is protected from creditors. However, if they have signed a personal guarantee for a business loan that their company is no longer able to honour, then the lender can go after their personal assets as well as the company’s. This includes private property, even if it wasn’t specifically named as security in a personal guarantee agreement.
What is a personal guarantee?
It’s standard practice for lenders to want some more security when they make a loan to a business (limited company), so unless the business has enough assets that a Debenture will suffice, they ask directors to give a personal guarantee for the loan. A personal guarantee is a binding legal agreement guaranteeing payment on a loan using personal assets should the business find itself unable to pay it back.
A personal guarantee may make it more likely for a company, especially a new or small one, to get the loan it needs for crucial investment. Ideally, your business will pay off the debt, and your personal guarantee just acts as a safety net. However, the guarantee does allow the lender to go your personal assets to get their money back.A personal guarantee may make it more likely for a company, especially a new or small one, to get the loan it needs for crucial investment. Ideally, your business will pay off the debt, and your personal guarantee just acts as a safety net. However, the guarantee does allow the lender to go your personal assets to get their money back.
It is becoming increasingly common when businesses enter into a CVA (Company Voluntary Arrangement) for lenders to immediately crystalise the personal guarantee and go after the guarantor for the full debt rather than rely on payments in the CVA.
If your business hits difficulties, the lender can take you to court to force you to sell assets in order to pay back your debt – including your house (either through bankruptcy or a Charging Order following the issue of a County/High Court Judgement). On the upside, if you do have to sell your house the creditor can only take the amount needed to cover the debt. The rest goes to the guarantor, less court costs and legal fees etc of course.
Limiting your liability
If you feel you have no choice but to give a personal guarantee, here are some ways you can reduce your liability:
● Limit the guarantee, in writing, to reduce the risk to your property. Most lenders have historically favoured this route, but the use of “all monies” (or unlimited) guarantees is becoming far more common.
● You can decrease the guarantee over time or as your business becomes established and its performance improves, which means the risk to your lender is reduced. This however is entirely at the discretion of the lender and once lenders have security, they are usually unwilling to let it go or reduce it.
● Remove spousal guarantee to protect property assets that are part owned by your other half (but that will only protect their share).
● You can purchase personal guarantee insurance. This will cover a percentage of the total liability, but this percentage will increase year-on-year.
In my view, the best option is to learn to say no when a lender asks you for a personal guarantee in the first place. It may take longer to get the investment you need, but is it worth putting your family home at risk? It will stay on the top of the guarantee form to take independent legal advice before signing, so TAKE INDEPENDENT LEGAL ADVICE BEFORE SIGNING!
Professional advice from James Rosa Associates
Please be advised that this is a very general overview and should not be taken as formal advice. Every case is different and a licensed/authorised professional advisor would need to analyse the financials etc in order to make a proper determination/recommendation. If in doubt, my advice is to seek advice to explore your options.
James Rosa associates is a firm of debt advisors and debt adjustors. With a supportive and friendly approach, we offer a full range of advice and professional services to individuals and business owners/directors facing unmanageable debt or involved in civil or commercial disputes.
Our services include:
● Insolvency support
● Negotiated settlements
● Personal assisted bankruptcy
We are authorised and regulated by the Financial Conduct Authority (FRN665061) to work with clients to produce bespoke solutions to fit their specific circumstances.
Contact James Rosa Associates for a consultation
If you want to deal with an unmanageable debt, or bring a dispute to a swift and cost-effective resolution, contact James Rosa Associates, ring 0845 6807217 or email firstname.lastname@example.org to explore whether you qualify for a consultation.
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.