Personally Guaranteed An Insolvent Business?

Personally Guaranteed An Insolvent Business?

A personal guarantee is a legal commitment made by an individual to assume responsibility for the debts or obligations of another person or entity. Small business owners often personally guarantee debts of their business, as this may be the only way to obtain approval for financing. This is just one of many ways small business owners financially back their businesses.

Charla Smith & Company often assists business owners with understanding their financial obligations after their business has become insolvent. We find that when business owners reach out to us after their business has become insolvent, many are unable to recall whether they signed a personal guarantee or what the implications of such guarantee may be.

In this blog post, we will take you through how we assist in these situations.

  • The first step is to obtain a copy of all of the company’s loan or lease agreements and review the terms to see if they include a personal guarantee. Even if there is no personal guarantee, sometimes the business owner has signed as a co-borrower, so it’s important to look for that, too.

If there is a personal guarantee, the terms will need to be reviewed closely. It’s possible that the guarantee has been limited to a certain portion of the debt or split between multiple individual backers, but most commonly each guarantor has provided a joint and several guarantee, meaning each guarantor is fully responsible for the entire debt.

It is often worth having a lawyer review the documentation to confirm whether the guarantee is legally binding, as sometimes there are errors in the documentation that invalidate the guarantee. For example, in Alberta, personal guarantors must obtain legal advice prior to making this commitment and sign an acknowledgement certificate with the lawyer, which should be attached to the loan document.

  • Next, it’s important to determine what exposure the business owner has as a result of the guarantee. This involves confirming the balance owing and reviewing the financial situation of the primary borrower (the company) to determine whether it has defaulted on the loan agreement and the extent to which it could satisfy the debt on its own.

This may include a full review of the company’s financial position and discussion of options like re-financing, restructuring, or liquidation. However, in many cases, the business owner will have already undertaken this analysis and decided to close the business. Or, the lender may have already forced the company into receivership. In that case, the analysis will likely focus on determining how much of the debt can be satisfied by a liquidation of company assets in order to estimate the potential shortfall that the guarantor may be responsible for.

It's important to keep in mind that even if the company can pay some portion (or even all) of the debt over time as a going concern or in a liquidation event, the lender does not necessarily have to wait for this to occur. Once the company defaults on the loan agreement, the lender may be legally able to pursue the guarantor for payment instead or at the same time. It is often worth retaining a lawyer in this case, as it may be possible to negotiate a standstill agreement while the company’s ability to pay is determined. However, for the purpose of the remaining analysis, it is often prudent to assume that the guarantor may be responsible to satisfy the entire debt.

  • Next, we analyze the individual guarantor’s personal financial situation to determine what options they have for satisfying the personal guarantee. This involves a full review of the individual’s assets, debts (including other personal debt), income and expenses, and family situation. This review may find that the individual is insolvent, in which case a discussion of various options will occur. Those options may include settlement negotiations with the company’s lender, a proposal to all creditors, or a bankruptcy.

The above discussion will also include a conversation about what may happen if the individual doesn’t pay off the debt or pursue any of the options reviewed. While a lawyer’s advice should be sought in this case, typically we would be able to give some general information about what the individual might expect the lender to do to try to collect on the debt. Depending on the individual’s financial situation, this may include garnishing the individual’s wages, seizing assets, or registering a writ against their home.

It's important that an individual guarantor understands the legal ramifications of providing a guarantee before they do so. However, that doesn’t always happen. Regardless, if the business becomes insolvent (possibly many years later), it needs revisiting. Getting proper advice from a qualified professional is critical.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help business owners review their options for dealing with personal liability stemming from business debt. If you'd like some advice, please reach out to us.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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Frequently Asked Questions

At Charla Smith & Company, we focus on the needs of individuals who are struggling with debt, so you've come to the right place. Check out our solutions page for information on insolvency options, our blog for a discussion of various bits of information surrounding those options, or better yet give us a call at 1-403-899-3890 or send us a message and we will work with you to figure out how the various options for dealing debt might look for you.

Licensed Insolvency Trustees (or LITs) are the only people who can provide bankruptcy or Consumer Proposals as an option for dealing with your debt. They are uniquely qualified to provide these services and give you advice about your debt. For more information, see our blog post: What is a Licensed Insolvency Trustee?

Reach out to us. You can make an inquiry directly from our website by clicking here, or you can call or text us at 1-403-899-3890. We will respond quickly, and work with you to find a good time for the meeting.

Nothing. We offer free consultations to anyone looking to review their options for dealing with their debt. If we decide together that one of the services we provide is the right option for you, there will be payments you need to make in connection with that, but that will occur only after you have made a decision and signed the formal documents.

There's a common misconception that if someone becomes bankrupt, everything they have gets sold to pay creditors and they're left with nothing. 

The truth is, people often don't lose their assets in bankruptcy for one or more of the reasons we've discussed in What I Wish People Understood About Bankruptcy: Will I Lose All Of My Assets? :

There are many factors unique to your situation which must be considered to determine what you could keep in a bankruptcy. To be sure, the best way to find out is to contact a Licensed Insolvency Trustee for a free no-committment assessment.

There are several factors which must be considered to determine which options are feasible for you and to select the best one, including:

  • What assets do you own?
  • Who do you owe money to and how much?
  • What sort of income are you bringing in and how predictable is it?
  • What is your family situation?
  • Your personal goals and priorities

Check out our Consumer Proposal and Bankruptcy pages for information about each of these options and their pros and cons. For more indepth information about these and other options, we've provided a plethora of information on our blog

For a fulsome review of your situation and advice about which option is best for your specific circumstances, contact a Licensed Insolvency Trustee for a free no-committment assessment.

Sometimes it helps to know how much your creditors would get in a bankruptcy, as this can help you figure out what a fair settlement with your creditors looks like. The amount your creditors could expect to receive if you made a bankruptcy filing is very much dependent on your situation.

A Licensed Insolvency Trustee will review your assets, debts, income, and family situation, while considering the applicable provincial laws about exempt assets, in order to determine what impact bankruptcy would have on your creditors. Be careful taking advice from anyone else about bankruptcy – only a Licensed Insolvency Trustee can provide bankruptcy filing services, so they have the training and experience to provide information you can rely on. 

For more details on the features and benefits of Bankruptcy, visit this page or contact us.

In some cases, particularly where the debt is large, you may benefit from consulting a lawyer for assistance with negtiating a deal with your creditors. If you need help finding a good lawyer, a Licensed Insolvency Trustee can typically make a referral to a lawyer experienced in debt issues. If you can’t afford a lawyer, you may be able to find free legal resources in your community.

A credit counsellor may be willing to assist you, for a fee. However, make sure you do your homework before you sign anything or pay a credit counsellor. Some credit counsellors are essentially debt settlement companies, with the same potential pitfalls discussed in Everything You Need to Know About Debt Settlement. And like debt settlement companies, they are not well regulated so you need to do your own research to make sure they are legitimate and have ethical practices.

Another option is to contact a Licensed Insolvency Trustee for a free consultation. Licensed Insolvency Trustees will educate you about your options and may be able to give you some guidance on negotiating with your creditors.


With our experience and our caring approach, we will help you find the best option for debt relief based on your unique situation - from advice on talking to your creditors to a consumer proposal or bankruptcy, and everything in between. We are here to lift the burden caused by overwhelming debt. 

Contact us today at 1-403-899-3890‌ for a FREE, no-commitment meeting, and let us guide you to regaining your financial footing.

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