What Is a Personal Guarantee on Business Debt—And Why It Matters

Many small business owners form LLCs or corporations to protect their personal assets from business liabilities. But all that protection can vanish the moment you sign a personal guarantee.

These common but often overlooked clauses make you personally responsible for business debt—even if the company fails, closes or files bankruptcy. If you have any buisness debt, it is critical to understand:

• What a personal guarantee is (and isn’t)

• The different types of guarantees

• How to spot one in a contract

• What happens if your business can’t pay

• Virginia-specific issues with spouses and TBE ownership

• How bankruptcy can help

• What to do if you’ve already signed one

What Is a Personal Guarantee?

A personal guarantee is a legally binding promise that you (or another individual) will repay a business debt if the business cannot. If the business defaults, the creditor can come after your personal finances—bank accounts, real estate, wages, and more. Many people believe that since their company signed for the debt (i.e., their corporation or LLC), it means they have no individual liability since their company provides legal protections. Those legal protections do not matter, if you individually sign for any debt.

A personal guarantee is like co-signing your business’s debt.

Examples of where you might see one:

• Business credit cards

• Merchant Cash Advances

• Equipment financing

• SBA or EIDL loans

• Commercial leases

• Vendor agreements

• Consolidation loans from companies like OnDeck or OneMain

Types of Personal Guarantees

Not all guarantees are the same. Here’s what to look for:

🔹 Unlimited Personal Guarantee

You’re personally responsible for 100% of the debt, no matter what happens.

🔹 Limited Guarantee

Your liability is capped at a specific dollar amount, time period, or percentage of the debt. These are safer—but still risky.

🔹 Joint and Several Guarantee

If multiple owners sign, each person can be held responsible for the full amount (also called joint and several liability_. Creditors don’t have to divide the liability evenly—they can go after whoever has the most money or is the easiest to collect upon.

Personal Guarantee vs. Co-Signing

There’s often confusion between a guarantor and a co-signer. In practice, they’re similar:

• A guarantor agrees to step in only if the business doesn’t pay

• A co-signer is immediately liable—no default required

But legally, both can be sued and held personally responsible.

Why Creditors Require Personal Guarantees

Most small businesses don’t have extensive assets or long credit histories. Lenders and landlords want a safety net—so they ask for a personal guarantee from an owner with income, equity, or savings.

Landlords are especially aggressive, especially in Virginia and Maryland, where married couples often hold real estate or joint accounts as Tenants by the Entirety (TBE). TBE property is protected from creditors unless both spouses owe the debt.

➡️ To get around this, landlords will often require both spouses to sign the lease or personal guarantee—even if one spouse has no involvement in the business.

How to Spot a Personal Guarantee in a Contract

Personal guarantees are often buried in loan agreements or lease documents. Here’s how to identify one:

🔎 Look for:

• Signature lines labeled “Guarantor” or “Individual”

• Language like:

  “The undersigned hereby personally guarantees all obligations of [Business Name]…”

• Addenda or separate pages labeled “Unconditional Guarantee” or “Guaranty Agreement”

• Boilerplate at the end of contracts that includes personal liability language

Just because the contract is between the business and the creditor doesn’t mean you’re off the hook. Always read the entire agreement, including attachments.

How to Negotiate a Personal Guarantee Before Signing

You can’t always avoid a personal guarantee—but you can try to make it safer:

✅ Ask for a cap—limit your liability to a certain dollar amount
✅ Request a time limit—e.g., guarantee expires after 24 months of on-time payments
✅ Offer collateral instead of a guarantee
✅ Improve business credit to negotiate from a stronger position
✅ Ask to remove the spouse unless required by law

What Happens If the Business Defaults?

If your business can’t pay and you’ve signed a personal guarantee, the creditor can:

• Sue you personally

• Report the default on your personal credit

• Garnish your wages or bank accounts

• Put a lien on your personal property

• Pursue collections for years—judgments in Virginia can last at least 10 years, and be renewed for up to 40 years

⚠️ Real Example:

A Northern Virginia business owner signed a personal guarantee for a 5-year lease. When the business shut down in year 2, she walked away—only to be sued personally for over $100,000 in unpaid rent and CAM fees.

Can Bankruptcy Eliminate a Personal Guarantee?

Yes—personal bankruptcy can often wipe out your liability under a personal guarantee.

In Chapter 7, you may:

• Eliminate most personal guarantees

• Protect your home using Virginia exemptions, like Tenants by the Entirety or the $50,000 homestead

• Be free of the debt in about 4–6 months

In Chapter 13, you may:

• Pay only a portion of the guaranteed debt over 3–5 years

• Catch up on missed mortgage or car payments

• Avoid asset liquidation while stopping lawsuits and garnishments

Important: A business can file Chapter 7, but does not get a discharge. To wipe out the guarantee, the individual must file.

Already Signed a Personal Guarantee? Here’s What to Do

✅ Don’t ignore the debt—especially if the business is struggling
✅ Review the contract with an attorney
✅ Plan ahead if you may need to walk away from the business
✅ Consider bankruptcy before using retirement savings or selling your home
✅ Protect your assets (but don’t transfer anything without legal advice—it may be considered a fraudulent transfer)

Virginia-Specific Risks and Protections

Virginia has strong protections for married couples’ jointly owned property through Tenants by the Entirety (TBE). But those protections don’t apply if both spouses sign the guarantee.

Landlords often require both spouses to sign to avoid this loophole. Be cautious before signing joint leases or guarantees—even if one spouse isn’t involved in the business.

Real Client Example

A couple came to us after signing a business lease with both spouses listed as guarantors. The business failed, and the landlord sued them jointly—even though the spouse had never worked for the business. We were able to help them file Chapter 7 bankruptcy, protect their home (held TBE), and discharge the $90,000 debt.

FAQ: Personal Guarantees and Business Debt

❓ Can a creditor sue me if the business defaults?

Yes—if you signed a personal guarantee, they can sue you personally for the entire amount.

❓ Can I remove a personal guarantee after signing?

Only if the creditor agrees. You may be able to refinance or negotiate a release, but there’s no automatic way out.

❓ What happens if my business partner also signed?

If it’s a joint and several guarantee, the creditor can go after either of you for the full amount.

❓ Can bankruptcy remove my liability?

Often yes. A properly timed personal bankruptcy (Chapter 7 or 13) can discharge your guarantee—though secured debts and fraud-related debts may need special review.

How to Protect Yourself Before Signing

Use this quick checklist:

✅ Read the entire contract, including fine print and attachments
✅ Ask: “Is there a personal guarantee clause?”
✅ Negotiate terms, especially if your business is strong
✅ Don’t sign on behalf of a spouse or have them co-sign unless absolutely necessary
✅ Get a legal review before signing any significant loan, lease, or contract

 

Final Thoughts: Personal Guarantees Are Common—But Risky

Whether you’re a startup founder, a franchise owner, or an independent contractor, personal guarantees are everywhere. The key is to understand what you’re signing and plan ahead—before your business runs into trouble.

If you’ve already signed a personal guarantee, or if your business is struggling with debt, we can help.

📞 Contact Ashley F. Morgan Law, PC for a free consultation to review your options. We help business owners across Virginia manage debt, protect assets, and get a fresh start.