Bankruptcy of Guarantors
The bankruptcy of a guarantor is often associated with his or her business. If so, then the interest of the debtor will fall into the bankruptcy estate. This presents a significant issue because the bankrutpcy of a guarantor could result in the loss of his interest in the business or have other repercussions. All of these issues must be reviewed prior to filing, so the debtor and counsel will be fully award of what will occur after the bankruptcy petition is filed.
Quite often, when the guarantor faces a potential insolvency, his business already owes more that it would bring if it was sold, either piece by piece or as a whole. Business of this nature often pass throught the bankruptcy estate and can be utilized by the debtor after the bankruptcy has been closed.
This presents the classic scenario of the resurrection of a new business after the discaharge of the old.
Issues
Guarantors should be especially careful of the manner in which the corporation pays debts that have been guaranteed by principals who control where the money goes. Payments of guaranteed debts with corporate funds from an insolvent corporation can be voided if a bankruptcy is filed within 90 days of the payment - if the payment was due or past due.
On the other hand, transfers of liens to secure debts guaranteed by principals can be voided to the extent of the principal's obligation within one year prior to filing a bankruptcy.
This is but one example of how one payment method results in guarantor liability while the other payment method results in guarantor exculpation, even though the same value may have been transferred in both instances.
Equally true is that principals and guarantors should be vigilant in the manner in which they receive funds from the potentially insolvent corporation to pay themselves back for loans made to the corporation.
Actions of the principals prior to a voluntary or involuntary bankruptcy proceeding are important for other reasons also. Acts that they do can effect whether the officers can remain in control of the corporation after the commencement of a Chapter 11 or whether they have conflicts of interest that will follow them or whether their history leaves them vulnerable to an action to place others in charge, such as a Trustee, which results in the end of the bankruptcy reorganization process.
For the principal/guarantor, the goal is often either effective Chapter 11 reorganization or payments against guaranteed obligations and employment taxes.
Where there are outstanding employment taxes for which the guarantor may be liable, he should contact bankrkuptcy counsel immediately because the personal obligation for employment taxes is a forever non-dischargeable debt. And sometimes, it is primarily the assets of the business that case pay it. In such a scenario, it is prudent to derive a plan that will, for instance, pay IRS through the individual instead of paying IRS through the corporation, or end up paying IRS instead of American Express.
Immediate action by the guarantor / owner is often essential.