Personal Guarantees

Lately I have seen a significant amount of frustration by businesses and individuals in the business industry concerning collection on accounts. Of special concern are loans and lines of credit being extended to other business that either have questionable ability to pay, or are on the brink of bankruptcy. In such a situation, it can be desirable to have the individual owners of the debtor business sign a personal guaranty wherein the person guarantees to pay the debt of the corporation. There are several types of guarantees, e.g. continuing guarantees and limited guarantees. Although the idea is simple, there are several legal requirements and subsequent actions that must be considered and handled with care.

To begin with, a guaranty is unenforceable unless it is in writing and supported by valid consideration. Also, the creditor must be careful after the guaranty is signed because certain creditor actions may cause the guarantor to be exonerated (released) from liability—e.g., where the creditor alters the underlying obligation without the guarantor's consent, or, in the case of a continuing guaranty, the guaranty may be revoked.

The language of the guaranty is very important as well. A well drafted guaranty will protect the creditor by providing that defenses be waived. If you are concerned about extending credit or lending money to a business or individual, we can help draft a guaranty that will help secure repayment.

Article Submitted By: Attorney Min Thai