Chapter 7 Bankruptcy in New Jersey When You Personally Guaranteed the Company's Debts

By Peter J. Lamont, Esq.

When a small business fails, the owner's first assumption is usually that the company's debts died with the company. That assumption is almost always wrong. If you signed a personal guarantee on the commercial lease, the bank or SBA loan, or the equipment financing, the dissolution of your LLC or corporation does nothing to those creditors' rights against you. They will pursue you individually, and for many owners a Chapter 7 bankruptcy in New Jersey is the tool that actually resolves the exposure. Here is how it works, and what it does not do.

Dissolving the Company Does Not Erase Your Personal Guarantee

A personal guarantee is a separate contract. It is a promise you made, in your own name, to answer for the company's obligation. Filing a certificate of dissolution ends the entity's legal existence. It does not touch that promise.

The Bankruptcy Code confirms the principle from the other direction. Under 11 U.S.C. 524(e), the discharge of a debt of the debtor "does not affect the liability of any other entity on, or the property of any other entity for, such debt." A guarantor is precisely that other entity. A bankruptcy filed by the company does not shield the owner who signed, and neither does a quiet wind-down.

The sequence is predictable. The landlord accelerates the balance of the lease term and sues the guarantor. The bank or SBA lender accelerates the note. The equipment lender repossesses, sells the collateral, and sues for the deficiency. In our Wyckoff office, the call usually comes after the first demand letter lands, and by then the guarantee language in the commercial agreements has long since been drafted in the creditor's favor. Those demands become collection suits and judgment enforcement faster than most owners expect.

Business Liquidation Versus a Personal Chapter 7 Bankruptcy in New Jersey

A corporation, LLC, or partnership can file a Chapter 7 case. A trustee sells the remaining assets and distributes the proceeds under the statutory priority scheme. What the entity does not get is a discharge. Section 727(a)(1) provides that the court shall grant a discharge unless "the debtor is not an individual," and the Administrative Office of the U.S. Courts states the rule plainly: a discharge is available only to individual debtors, not to partnerships or corporations.

The consequence for a guarantor is direct. A business Chapter 7 is an orderly liquidation, nothing more. It does not eliminate the company's debts, and because of Section 524(e) it does not eliminate yours. For most failed-business owners the entity case accomplishes little that a careful out-of-court wind-down would not, while a personal Chapter 7 bankruptcy in New Jersey is the filing that actually discharges the guaranteed obligations on the lease, the loan, and the equipment paper.

Individual cases are filed in the United States Bankruptcy Court for the District of New Jersey, which maintains courthouses in Newark, Trenton, and Camden. You attend a meeting of creditors, and if there is nothing to administer beyond exempt property the case moves to discharge on a relatively short timeline.

The Means Test, and Why Business Debt Often Changes the Answer

Section 707(b)(1) allows a court to dismiss or convert a Chapter 7 case for abuse, but by its own terms it reaches only "an individual debtor under this chapter whose debts are primarily consumer debts." That qualifier does real work. A guarantee signed to obtain a commercial lease, an SBA loan, or equipment financing is business debt, not consumer debt. When the guaranteed business obligations outweigh household debt in dollar terms, the means test frequently does not apply at all. Whether debts are "primarily" consumer turns on the composition of the schedules, so it should be measured rather than assumed.

If the test does apply, current monthly income is annualized and compared to the median family income for a New Jersey household of the same size; a debtor at or below the median clears the screen. Above the median, Section 707(b)(2) subtracts allowed expense standards, secured debt payments, and priority claims, and a presumption of abuse arises if what remains crosses statutory dollar triggers that adjust every three years. In our Bergen County practice, we regularly find that owners who assumed they earned too much to qualify were never subject to the test at all.

Exemptions in a Chapter 7 Bankruptcy in New Jersey: The Federal Election

Chapter 7 is a liquidation, and the trustee sells estate property that is not exempt, so exemption planning drives the practical outcome. Section 522(b)(1) lets an individual debtor elect one of two packages: the federal list in Section 522(d), or the applicable state and local exemptions together with federal nonbankruptcy exemptions. States may opt out of the federal list, and many have. New Jersey has not. As the bankruptcy court put it in Den Norske Bank v. Schwartz (In re Schwartz), 185 B.R. 479 (Bankr. D.N.J. 1995), New Jersey is not an opt-out state, so a debtor here may elect either the state exemptions or the federal exemptions under Section 522(d).

That election matters because New Jersey's own exemptions are narrow. N.J.S.A. 2A:17-19 protects goods, chattels, shares of stock, and personal property not exceeding $1,000 in value, exclusive of wearing apparel. N.J.S.A. 2A:17-56 caps most wage executions at ten percent of a judgment debtor's income, subject to exceptions.

The federal package is broader and, for most filers with equity in a home or vehicle, the better choice. Those amounts adjust every three years; the figures in effect since April 1, 2025 and running until the next adjustment on April 1, 2028 are: $31,575 in residential real property under Section 522(d)(1); $5,025 in one motor vehicle under 522(d)(2); $800 per item and $16,850 in the aggregate for household goods under 522(d)(3); $3,175 in tools of the trade under 522(d)(6); and a wildcard under 522(d)(5) of $1,675 plus up to $15,800 of unused homestead. Section 522(m) applies the section separately to each debtor in a joint case, so spouses filing together each claim a full set.

The election is all or nothing; you cannot take the federal homestead and the state wage protection. It also interacts with home equity, mortgages, and titled real property in ways best modeled before anything is filed.

What a Discharge Will Not Wipe Out

A discharge in a Chapter 7 bankruptcy in New Jersey is broad but not universal. Section 523(a) carves out categories that survive, and several show up regularly in failed-business cases.

• Recent income taxes. Section 523(a)(1) excepts taxes entitled to priority under Section 507(a)(8), which includes income taxes for a year whose return was last due, including extensions, within three years before the petition date. Older income taxes can sometimes be discharged, but the timing rules are technical.

• Most student loans. Section 523(a)(8) excepts educational loans and benefit overpayments unless excepting them would impose an undue hardship on the debtor and dependents.

• Fraud-based debts. Section 523(a)(2)(A) excepts money, property, services, or credit obtained by false pretenses, false representation, or actual fraud.

• Debts obtained through a false financial statement. Section 523(a)(2)(B) excepts a debt obtained by use of a statement in writing that is materially false, respecting the debtor's or an insider's financial condition, on which the creditor reasonably relied, and that the debtor caused to be made or published with intent to deceive. If you handed the bank an inflated personal financial statement to get the loan approved, the lender has a roadmap. All four elements must be proven in a timely adversary proceeding, but this is the most common nondischargeability fight in guarantee cases.

• Fiduciary defalcation and willful injury. Sections 523(a)(4) and 523(a)(6) except debts for fraud or defalcation in a fiduciary capacity, embezzlement, or larceny, and for willful and malicious injury to another entity or its property.

Separately, a discharge eliminates personal liability but does not remove a lien. If the SBA loan was secured by a mortgage on your house, or the equipment lender holds a perfected security interest, that lien rides through the case. The federal courts state the rule directly: a bankruptcy discharge does not extinguish a lien on property. Anyone evaluating a personal or business bankruptcy filing should separate the in personam question from the in rem one at the outset.

The Pre-Filing Traps That Cause the Most Damage

Most of the real harm in these cases happens before the petition is filed, usually with good intentions.

Preferential transfers. Section 547(b) lets a trustee avoid and recover payments made to a creditor on an antecedent debt while the debtor was insolvent, if made on or within 90 days before the filing. For a creditor who was an insider at the time of the transfer, the reach-back extends to one year. The loan you repaid to your parents, your spouse, or yourself as the company's lender ten months ago sits squarely inside that window, and the trustee sues the recipient, not you. Repaying family before filing is a reliable way to turn a private hardship into a lawsuit against a relative.

Paying one creditor ahead of the others. The same rule reaches the trade creditor you felt loyal to, the supplier you needed for one last project, or the landlord you paid to keep the peace. A preference claim does not require wrongdoing; it exists to force equal treatment among similarly situated creditors.

Fraudulent transfers. Section 548(a)(1) permits avoidance of transfers made within two years before filing, either where the debtor acted with actual intent to hinder, delay, or defraud creditors, or where the debtor received less than a reasonably equivalent value while insolvent, left with unreasonably small capital, or intending to incur debts beyond the ability to pay. Deeding the shore house to a sibling or retitling the company truck for a dollar are the classic examples. The exposure runs longer than two years: Section 544(b) lets the trustee stand in the shoes of an actual unsecured creditor and use state law, and New Jersey's voidable transactions statute at N.J.S.A. 25:2-31 permits certain claims up to four years after the transfer.

Risking the discharge itself. Section 727(a)(2) permits denial of the entire discharge where the debtor, with intent to hinder, delay, or defraud a creditor or the trustee, transferred, removed, destroyed, or concealed property within one year before filing. Section 727(a)(4) reaches false oaths and Section 727(a)(5) a failure to explain satisfactorily any loss of assets. Lose the discharge and the guarantees survive while the assets are gone anyway.

The instruction is short. Once the business is failing, stop moving money and assets, and keep the records. The wind-down of the entity and the timing of a personal filing are one problem, not two, and owners who treat their company obligations and their individual exposure as separate projects tend to make choices in one that cost them in the other.

Contact us today to discuss your business or legal matter. Put our 20+ years of legal experience to work for you.

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For detailed insights and legal assistance on topics discussed in this post, including bankruptcy and personal guarantees, contact the Law Offices of Peter J. Lamont at our Bergen County Office. We're here to answer your questions and provide legal advice. Contact us at (201) 904-2211 or email us at info@pjlesq.com.

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About Peter J. Lamont, Esq.

Peter J. Lamont is a nationally recognized attorney with significant experience in business, contract, litigation, and real estate law. With over two decades of legal practice, he has represented a wide array of businesses, including large international corporations. Peter is known for his practical legal and business advice, prioritizing efficient and cost-effective solutions for his clients.

Peter has an Avvo 10.0 Rating and has been acknowledged as one of America's Most Honored Lawyers since 2011. 201 Magazine and Lawyers of Distinction have also recognized him for being one of the top business and litigation attorneys in New Jersey. His commitment to his clients and the legal community is further evidenced by his active role as a speaker, lecturer, and published author in various legal and business publications.

As the founder of the Law Offices of Peter J. Lamont, Peter brings his Wall Street experience and client-focused approach to New Jersey, offering personalized legal services that align with each client's unique needs and goals.

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