A large number of lenders will ask for a personal guarantee when you accept their offer of finance. What does a personal guarantee actually mean? It means that if a company cannot pay the debt (i.e. it goes into Voluntary Liquidation), you will honour it. This isn’t the same as the debt being secured; once your company has been liquidated it will just become another personal creditor.
Dealing with personal guarantees once you have liquidated your company.
Much like any other creditors you may have, a creditor with a personal guarantee just wants their money back. It is quite probable that they will take a payment plan or a full and final settlement figure (you have just been made unemployed after all). If you are going to handle the negotiations yourself then always suggest bankruptcy is a very real prospect, creditors like to threaten it without thinking about the financial consequences to themselves.
Financial consequences of bankruptcy.
Bankruptcy has a financial consequence to everyone involved, both you and the creditors. Through bankruptcy the only realistic way of getting money in for creditors is through the sale of assets. Assets are sold at auction where they will typically sell for between 60-80% of market value.
Once your assets have been sold, the secured debts (such as mortgages) have to be paid. Anything left is then distributed between your creditors pro rata. When you crunch through the numbers you generally find this isn’t a great deal of money, and so the lender is much better accepting your initial offer.
In summary
- Be sensible about what you can afford to repay on your debts
- Remember that you have a strong position with regard to negotiations
- Compare any offer to what they will get under bankruptcy