Can business debts I personally guaranteed be discharged in bankruptcy?

In order to obtain funds for your business, you may have personally guaranteed a loan that could not be secured by assets in the business. If the business fails, chances are, you won’t be able to repay the loan and the bank will come after you personally to repay the loan if the business has not enough assets. You have the option to discharge the amount owed in bankruptcy unless you have non-exempt (unprotected from creditors) property that could be used to pay the debt.

If you continue to operate the business, its assets and income will still be subject to creditors’ claims, and if you continue to derive sufficient income from it, you may be forced into a Chapter 13 re-organization plan in order to repay part of the loan.

For example, if you borrowed $50,000 to open a hair salon with a personal guarantee, and the salon failed, and you had $20,000 in the bank, $11,200 would be protected under federal exemption rules. The rest would be available to creditors. If you had less than $11,200 then the debt would be completely discharged. IfMassachusetts exemption rules are used instead, your home can be protected (for up to $500,000 in equity) but not your bank accounts. Massachusetts is generous with its home exemption amount but not for personal property whereas the Federal Bankruptcy rules are almost the opposite.