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Director’s Personal Guarantee Debt and Bankruptcy

Published: 13 September 2024

Director considering a business debt personal guarantee

Company directors often have to give a personal guarantee before their business can borrow money. Going bankrupt will write off liability for such personal guarantees.   

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Will personal guarantee debt be written off if you go bankrupt?

If your company stops trading, you are personally liable for any business debt for which you have given a personal guarantee (PG). These debts could be just a few thousand or total many hundreds of thousands of pounds.

If you don’t have sufficient personal funds to settle your guarantees, the associated lenders can take legal enforcement action against you.

Personal guarantee debts are generally unsecured. This means, going bankrupt will write them off in the same way as any other personal debt. This is regardless of how large they are.

Bankruptcy gives you immediate legal protection from all of your unsecured creditors including all personal guarantees. This means they are no longer able to take action against you.

Once you are bankrupt, you no longer have to repay any debt for which you have given a personal guarantee.


How much will you have to pay back towards your personal guarantee debt?

After you go bankrupt, you no longer have to make direct repayments to your personal guarantee debts. If any of your creditors continue to chase you for money you simply refer them to the Official Receiver.

However, the fact you are bankrupt does not always mean you pay nothing towards your debt.

The Official Receiver will review your household income and expenses budget to assess whether you have any surplus income. Where you have no surplus, you will not have to make further payments. Your bankruptcy effectively writes off 100% of your debt.

However, if you do you have a monthly surplus income, the Official Receiver will require you to pay this towards your debts for 3 years. This payment is known as an Income Payment Agreement (IPA).

You can be issued with an IPA at any time during the year you are bankrupt if your income improves.

When can you become a company director again?

One of the concerns you might have about going bankrupt to write off personal guarantee debt is that you will no longer be able to act as a company director. This is correct. However, the restriction only lasts for 12 months.

You can become a director again any time after your discharge from your bankruptcy. At that time you will no longer have the burden of your personal guarantees.

In the mean time, there is nothing to stop you being an employee of, or contracting to a limited company. This could be an established business or a new one that has been set up to start trading as long as you are not the director.

A new company may have been set up to trade in place of the old business that you were running – a process known as ‘phoenixing’. You can become a director of the new phoenix business after you are discharged from your bankruptcy.


Can you work for a limited company as an employee if you are bankrupt?

After writing off your personal guarantee debts by going bankrupt, there is nothing to stop you from working for a limited company. You could work as an employee and receive a salary on a PAYE basis.

It does not matter who owns the company or who is the director. This could be a friend or family member. Your bankruptcy just restricts you from being a director of the business (or acting as one).

As an alternative to being an employee, you can also work for a company on a self employed basis. You can work as a self employed person while you are bankrupt.

While you remain bankrupt – usually for 12 months – you can’t take the role of a director. However, you can still work in for a company.

Managing personal guarantee debt if you are a home owner

Generally speaking, you will need to avoid going bankrupt if you are a home owner with equity in your property. This is because you would likely put the property at risk.

In these circumstances, you should consider an IVA to manage the personal guarantee debt you owe.

Unlike going bankrupt, an IVA is reliant on you being able to make reasonable monthly payments towards your debts (or being able to pay a one off lump sum).

You have to be able to show that you or your partner can reasonable sustain the monthly payment you make into an IVA. As such securing an income is normally necessary before this option can be deployed.

Where you use an IVA, you can continue to act as a company director. In addition, the IVA protects your property – although you may have to agree to release equity from it as part of the deal.

   Written by James Falla

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