Wildfires are an ever-present threat in California, and the recent Palisades and Altadena fires have once again reminded small business owners of the financial dangers that come with natural disasters. If your business has suffered damage or a downturn in revenue because of the fires, you may face tough financial decisions. But if you signed a personal guarantee on a business loan, the stakes are even higher.
What a Personal Guarantee Means
Small business loans, commercial leases, and lines of credit often come with a personal guarantee. Lenders use them to reduce their risk, ensuring they can still collect even if the business fails. Many business owners sign personal guarantees without fully considering what could happen if the business faces an unexpected crisis—like a wildfire shutting down operations for weeks or months or longer.
With a personal guarantee in place, a creditor isn’t limited to going after your business’s assets. If your business defaults, they can pursue you directly, which could mean lawsuits, wage garnishment, liens on your home, or draining your personal savings. Even if your business is structured as an LLC or corporation, a personal guarantee overrides the legal protections that normally shield your personal assets from business liabilities.
Unfortunately, wildfires and other natural disasters don’t trigger automatic relief from financial obligations. Even if your business is struggling due to circumstances beyond your control, lenders and landlords still expect payment. Without a plan, the financial consequences can spiral out of control quickly.
Besides direct financial liabilities, small business owners should also be aware of how defaulting on a personal guarantee can affect their credit scores. A default can remain on your credit report for years, making it harder to secure loans, rent property, or even qualify for certain jobs. Given the long-term implications, taking a proactive approach is essential.
Options if You Can’t Pay
If you’re facing financial trouble due to the Palisades or Altadena fires, the worst thing you can do is ignore the problem. Creditors will act to protect their interests, and delays in payment could lead them to take legal action against you. However, there are options available to navigate this difficult situation:
- Negotiating with Creditors: Many lenders and landlords are willing to work with struggling businesses, especially in disaster-affected areas. Loan modifications, deferred payments, or settlements could provide temporary relief and prevent a lawsuit. Some creditors may also be open to renegotiating terms to avoid the time and cost of legal action. When negotiating, be prepared to provide documentation of how the fires have affected your business, such as revenue losses, repair costs, or customer cancellations.
- State and Federal Disaster Relief: If your business has been affected by wildfires, government aid programs could provide financial assistance. California often offers grants and low-interest loans for businesses impacted by natural disasters. The Small Business Administration (SBA) also provides disaster relief loans that could help cover operational costs and keep you afloat. Business owners should research any tax relief programs that may be available, as disaster-affected areas sometimes qualify for deferred tax payments or other assistance.
- Legal Options to Limit Personal Liability: In some cases, personal guarantees can be challenged or negotiated. If a creditor did not properly follow California lending laws, there may be ways to reduce or eliminate liability. Certain legal strategies, including bankruptcy, could also help protect your personal assets if debts become unmanageable.
For business owners who have multiple personal guarantees across different loans or leases, it’s important to prioritize which debts to address first. Some obligations may be negotiable, while others may require immediate legal action to avoid a lawsuit. Reviewing all outstanding debts with an attorney can help you create a strategy to minimize personal financial harm.
How Bankruptcy Could Help
For business owners facing severe financial hardship, bankruptcy might be a solution. Chapter 7 bankruptcy can discharge personal liability on business debts, while Chapter 13 can help restructure debts into manageable payments. If your business is still viable but struggling with temporary setbacks, Chapter 11 could allow for reorganization and recovery.
Filing for bankruptcy is a serious decision, but it can prevent aggressive collection efforts and provide a clear path forward. It can also protect your home, retirement accounts, and other personal assets from being seized by creditors. Understanding whether bankruptcy is the right choice depends on the details of your financial situation and the terms of your personal guarantee.
Bankruptcy laws can be complex, and filing improperly could lead to unintended consequences. In some cases, business owners may qualify for exemptions that protect certain assets from liquidation. Others may find that certain debts are not dischargeable under bankruptcy law, making strategic planning even more important.
Protect Yourself
While it may be too late to undo a signed personal guarantee, there are steps you can take to protect yourself in the future. Before signing any business loan or lease agreement, carefully review the terms and consider negotiating for better protections. Some lenders may agree to limit personal liability or provide alternative security options instead of requiring a personal guarantee.
If you’re already facing financial trouble due to the Palisades or Altadena fires, taking action now can prevent deeper financial harm. If you have questions about your personal guarantee, your legal options, or how to protect your assets, speak with an attorney to help you evaluate your situation and explore solutions.
Natural disasters are unpredictable, but financial decisions don’t have to be. Knowing your options and taking proactive steps can make the difference between temporary hardship and long-term financial fallout.
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