A personal guarantee is a legal promise by an individual to cover a debt if the company cannot pay. While risky, they are often a necessary tool to secure business loans.
Strictly speaking, you cannot simply cancel a guarantee. However, there are ways to challenge or reduce the liability:
Check for Enforceability: A guarantee may be void if it wasn’t witnessed correctly, if you were pressured to sign, or if you didn’t receive independent legal advice.
Negotiated Settlements: Lenders are often willing to accept a percentage of the debt as a “Full and Final” settlement rather than pursuing you for the full amount.
Personal Guarantee Insurance (PGI): If you have a policy, it can cover up to 70% of your liability during liquidation.
If you are currently negotiating a guarantee, you can limit your exposure by:
Setting a Cap: Requesting a maximum limit on the amount guaranteed.
Time Limits: Asking for a “sunset clause” so the guarantee expires after a set period.
Asset Exclusion: Specifying certain items (like your family home) that cannot be seized.
If the lender demands payment, you have several formal options to consider:
Individual Voluntary Arrangement (IVA): This spreads the cost over 3-5 years and can write off a portion of the debt. It protects your assets but will impact your credit score.
Bankruptcy: This is the final option. While it discharges the debt, it has a significant impact on your professional life and personal assets.
Note for Sole Traders: If you aren’t a limited company, you are already personally responsible for all debts. Moving to a Limited Company structure is the best way to protect your personal assets for the future.
Written ByRobert Moore
Marketing Manager
Rob has over two decades of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.
Rob is now working with the Board at RMT to develop strategic marketing programmes to support the business plan and drive more company rescues.
