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I was recently asked as a Minnesota bankruptcy lawyer if bankruptcy can discharge a personal guarantee. Depending on who is asking about a personal guarantee, the answer is quite simple. There are two simple rules to keep in mind: 1. Debts are discharged for those that file for bankruptcy. 2. Debts including a personal guarantee are not discharged for those that have not filed for bankruptcy. Here are four examples with the rules as they relate to personal guarantees illustrated and explained. Example 1: You signed a personal guarantee; Now you are filing for bankruptcy When you file for bankruptcy your personal guarantee debt will be discharged. However, there is an exception. Personal guarantee debts cannot be discharged in they fall into exempt form discharge categories such as federal student loans and tax debts. While in this example you will no longer be responsible for the personal guarantee debt, the other person that signed for the loan or credit will still be liable for the debt owed. In short, the bankruptcy relieves you of the debt, but not anyone else that shares the debt with you. Example 2: You signed a personal guarantee; Now the other person is filing for bankruptcy If you sign a personal guarantee for someone else to obtain a loan, you remain responsible for the loan when that person files for bankruptcy. Bottom line is that only the person who filed for bankruptcy is released from the responsibility to pay the loan and you are still liable for the loan and must repay it because you signed a personal guarantee. Your liability can be discharged if you end up also filing for bankruptcy, although not if the debt is in one of the categories that cannot be discharged. Example 3: Someone else signed a personal guarantee for you; Now you are filing for bankruptcy This scenario is similar to Example 1, but the roles are reversed. In this case you got a loan in which someone else signed a personal guarantee for it and you are now filing for bankruptcy. In this case you file for bankruptcy and your debt is discharged unless it is a type of debt that cannot be discharged. The person who signed the personal guarantee will still be responsible for the loan. Example 4: Someone else signed a personal guarantee for you; Now that person is filing for bankruptcy This is the opposite of the roles in the Example 2 situation. In this example you were the one that got the loan and someone else signed a personal guarantee for the loan. That person is now filing for bankruptcy. If at any time after signing the personal guarantee for you that person files for bankruptcy, they become no longer liable for the debt and you are still required to repay the loan. Conclusion As seen from the above examples discharges of personal guarantees follow two basic rules: 1. Debts are discharged for those that file for bankruptcy. 2. Debts including a personal guarantee are not discharged for those that have not filed for bankruptcy. There is still an exception to the first rule, as some types of debts cannot be discharged in bankruptcy. These exceptions include a federal student loan, most tax debts owed to the IRS, Minnesota Department of Revenue and other tax agencies, and family support obligations such as child support and alimony.
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Of course, do not just rely on the above information. It is recommended that you consult with a Minnesota bankruptcy lawyer, as they can better analyze your specific circumstances.
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