Bankruptcy/personal Guarantee

[Ingram]

I am a one third owner of California S corp that is going through some major financial problems at the moment. The corporation has bank credit cards and a credit line that have personal guarantees with all three principals. We are behind in our payments on the credit card portion and today, they withdraw the limited funds we had in our corporate bank account and a large sum of money from one of the partners but not the other two. I have three questions. If we can't get our finances in order and decide to file for bankruptcy protection, can the bank continue to take money from the individuals? If one of the partners is about to file for personal bankruptcy, does the personal guarantee still apply or is there some protection interim or otherwise?

Final question, when the bank collects form an individual under the terms of the personal guarantee, can it also collect from a spouse's individual, private account? The spouse has no connection to the corporation.

Thank you in advance for advise.

[Orell]

Leon Bayer  

Dear Edward,

I am sorry that you are facing this hardship. You have asked a bankruptcy question of considerable complexity. A true legal consultation would involve going into a review of documents and information that was not included with your question.   

I'll keep the answer short to hit the basic issues because this is only intended to give you some general understanding. This does not take the place of obtaining legal advice from your own attorney. To obtain proper legal advice, you must get that from your own attorney.   

You didn't say where you are located. I'll assume that you are in California, which is where I am licensed to practice law. I'll also assume that California law governs as to all events and persons involved.

If only the corporation files bankruptcy, the bank is still entitled to collect from each and every guarantor.

If one guarantor receives a bankruptcy discharge, the bank is still entitled to collect from each of the other guarantors. However, if the party who receives a bankruptcy discharge is married, that party's spouse may enjoy some limited bankruptcy protection.

The bank is entitled to collect from any person who owes the money. That may include a guarantor's spouse if the guarantor's interest in the corporation is community property. If so, that would probably make the guarantor's obligation a community debt. Community debts can be enforced against a spouse's interest in community property. Money saved by the spouse in her own individual bank account may be reached by the bank if the money was derived from the couple's community property. Money derived from community property and then placed into a person's individual bank account does not  cause the money to cease being community propery.

You don't need me to tell you that you are in a world of trouble. Please go see an experienced bankruptcy specialist immediately for legal advice.

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