Downside Scenario

March 30, 2023

by a searcher from University of Pennsylvania - The Wharton School in Tampa, FL, USA

Taking on a personal guarantee is a scary thing, yet not many talk about what actually happens if a bankruptcy is required. Does anybody have any insight to what happens personally, financially, and in the future to someone that has to default on a PG loan?

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Reply by a professional
from Villanova University in West Chester, PA, USA

A lot of great answers here. There are a few nuances to it not previously mentioned. First, it depends on the terms of the loan and terms of your other contracts. The lender has all remedies at law and in equity unless agreed otherwise in the contracts. In addition, they may have specific remedies set forth in the loan documents. There may be a notice period, a cure period, the personal guaranty may be limited to a certain amount if its joint and several with other investors, etc. The terms of the personal guaranty drive the available remedies. For example, if permitted by the terms of the loan documents and personal guaranty, the lender may not have to begin liquidating the borrower's assets before seeking payment under the personal guarantee. In which case, the personal guarantor would be liable for that payment even if the borrower has assets that could be liquidated. If you don't make that payment, there would be an event of default which would trigger the event of default provisions in the personal guarantee. If you're pledging all personal assets, this would allow the lender to potentially put a lien on those assets, freeze bank accounts, force liquidation, reclaim those assets, etc. In addition, with respect to your other contracts, a default in a loan may trigger cross defaults in other loans or agreements, that all amounts outstanding become immediately due in full, etc. In addition, in certain states, the loan documents may include a confession of judgement clause whereby the lender can have the court enter a judgment against the borrow and/or guarantor without a lawsuit to freeze assets, garnish wages, seize property, etc. So, essentially, it all depends on the terms of the agreements, but there's a lot they can do if the loan documents permit it, which they usually do. I'd be happy to chat about this further. I highly recommend negotiating loan documents. It's standard and expected for loans above $1-2 million.

Reply by a professional
from University of Wisconsin in Madison, WI, USA

Defaulting on a loan you placed a personal guarantee means the bank will go after all who signed on to guarantee the dept. You, and any partners you may have who also signed, would be responsible for the remaining debt. Banks would liquidate any assets tied to the loan and look to you for the balance. The bank would have to seek judgement against you for the balance which may then force you to liquidate personal property to pay off the balance. This may even include wage garnishment.

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