Identify each obligation
The borrower may be a corporation or limited liability company, while a separate person or entity guarantees payment. A security agreement or mortgage can add another layer by granting rights in particular property. The names and capacities shown on the signature pages matter.
For a lender, these distinctions affect the available sources of repayment. For an owner, they affect the extent to which a business problem may also become a personal financial issue.
Read the guarantee with the other documents
The guarantee should be considered alongside the loan agreement, modifications, payment history and relevant communications. Its scope, conditions, limitations and governing law can affect the analysis. A short description of the debt is not a substitute for reviewing the signed documents.
A company filing does not resolve every personal obligation
A bankruptcy filed by a company does not, by itself, release a guarantor from a separate promise to pay. Questions about collection activity, bankruptcy protections and the effect of court orders require their own review. A lender, business and individual guarantor can have different interests.
Gather the materials needed for review
- The signed loan documents, guarantee and security documents.
- Amendments, renewals, releases and forbearance agreements.
- The payment history and any demand or default notices.
- Information identifying the borrower, guarantors and collateral owners.
- Any lawsuit or bankruptcy notices, including the dates shown on them.
Choose the next step after reviewing the complete picture
A negotiated resolution, enforcement action and bankruptcy can affect the same parties in different ways. Counsel should assess the documents, current financial circumstances and potential conflicts before recommending a course of action.
MJB Law advises lenders through its banking and creditors’ rights practice. Karl Johnson advises on business bankruptcy and related disputes. Each proposed representation is subject to conflict review.
For general background on reorganization, see the U.S. Courts Chapter 11 overview.