The Risk-Shifting Effect of Business Bankruptcy: A Statutory Solution to Provide Additional Protections for Personal Guarantors of Debts by Closely-Held Business Ventures

Startups often require personal guarantors when securing credit relationships. Often, third parties enter into guarantee agreements unaware of the detrimental effect bankruptcy filing has on their rights. A primary bankruptcy protection goal is to shift risk associated with debt arrangements among interested parties to allow for the equitable distribution of assets among creditors of a bankrupt individual or entity. Filing for bankruptcy may increase risk to the guarantor beyond what he or she anticipated at the time of personally guaranteeing the debt.

This Article explores the preference liability of personal guarantors of a closely held business in bankruptcy and makes a statutory proposal to remedy the inequitable risk-shifting effect of the bankruptcy of a closely-held business.