Impermissible Reaffirmation Or New Guaranty?

Consider these facts: The sole shareholder (“Shareholder”) of the Borrower signs a personal guaranty for his Company’s loan. Due to circumstances unrelated to the Company, the Shareholder files for bankruptcy, eventually receiving a Chapter 7 discharge. Years later, the Company runs into financial difficulties and asks its Lender for forbearance terms. Under the terms of a negotiated Forbearance Agreement, the Shareholder agrees to execute a new guaranty for the Company’s obligations.

The new guaranty executed by Shareholder as part of the Forbearance Agreement may not be enforceable. Arguably, the debt guaranteed was discharged in the Shareholder’s earlier bankruptcy, and the new guaranty could be interpreted as a “reaffirmation” of the old indebtedness - requiring compliance with Section 524(c) of the Bankruptcy Code to be enforceable. Moreover, since the new guaranty was induced by acts of the Lender, the Lender may have violated the Shareholder’s bankruptcy discharge injunction exposing the Lender to liability.

This is a reminder for Lenders to consider the impacts Bankruptcy filings of guarantors have, not only on the immediate collectability of the original obligations but on the enforceability of any future debts arising out of the same transaction.   

For more information contact a member of the Bankruptcy and Creditors' Rights group at Barrett McNagny. 

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The author Michael O'Hara focuses his practice in the areas of:  Bankruptcy and Creditors' Rights Law, Corporate and Business Law, Financial Institutions.