What happens if I can’t afford to pay a personal guarantee?
July 24, 2019
A personal guarantee is a formal written assurance that makes the guarantor personally liable for a debt if a default occurs. Being unable to pay a personal guarantee is a serious situation as lenders can pursue you through the courts for repayment.
Lenders often require these types of guarantee if a borrower has a poor credit history, for example, as it reduces their risk of financial loss. When students commence university the role of guarantor for rental payments is typically fulfilled by a parent, and in business, personal guarantees are commonplace.
Personal guarantees are legal promises to pay the outstanding debt in these circumstances, and are enforceable in law, so what happens if you can’t afford to pay and what are the potential consequences?
I can’t afford my personal guarantee – what happens now?
If you’re unable to pay the personal guarantee you’ve provided, you need to let them know as soon as possible – the lender may be willing to negotiate a repayment amount that’s affordable to you rather than demanding the outstanding debt in full.
It’s a good idea to seek professional advice to make sure it’s a bona fide contract, and that the personal guarantee is in fact legally enforceable. If so, and they’re unwilling to consider repayment in affordable instalments, the lender can ultimately take action through the courts to make you bankrupt.
It’s not always the case that bankruptcy follows, however, as the lender won’t necessarily recover a significant amount of their debt in this way if you also owe money to other creditors. So is there anything you can do when you can’t afford to pay your personal guarantee?
What can I do if my personal guarantee is unaffordable?
You may be able to enter a formal insolvency procedure that would protect you from creditor action, and allow you to repay your outstanding debt(s) in instalments. It’s crucial to seek assistance from a licensed insolvency practitioner (IP) under these circumstances, however, as they will clearly explain all your options.
These options may include an Individual Voluntary Arrangement (IVA), which halts any existing legal action and is designed to help you repay all or a proportion of your debts, typically over a five-year term.
Personal bankruptcy, although a drastic measure, can remove the severe financial pressure you’re bound to be under when you can’t afford to pay your personal guarantee and the lender is relentlessly pursuing you for the money.
A bankruptcy order usually lasts for 12 months, after which time you may be discharged and free to rebuild your financial situation and credit file. If you would like more information about personal guarantees and what happens if you can’t afford to pay, call our team of experts at UK Debt.
We offer free same-day meetings to quickly establish your best options, and work from a wide network of offices throughout the UK.
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