Guarantees: Personal; Personal Guaranty; PG

A personal guaranty is a contract in which an individual agrees to guaranty payment to a creditor relating to the extension of credit to a company or corporation. A personal guaranty should be signed by the guarantor as an individual, not as someone acting in their capacity as an Officer or Director of a company.  For example, it should be signed John Smith, not John Smith, President or John Smith, CEO. 

Although governed by state law, a personal guaranty can be an effective method to obtain payment of an outstanding debt.  Owners of a large number of the outstanding shares of a corporation are good candidates to sign a personal guaranty.  Why?  Because they have a direct financial interest in the corporation's success, and part of that success requires or involves the company's ability to obtain goods and services from creditors on open account terms.

By using a personal guaranty, a creditor receives a personal financial commitment from one or more of the principals managing or operating a corporation. A personal guarantee should not be included within the body of the creditor's standard credit application form.  Instead, it should be separate and apart from the application.  The guarantee must include a separate signature line for the individual guarantor. The guarantee can appear after the application signature line, as a separate section, provided that it is conspicuously labeled as a personal guarantee and provided there is a separate signature line.

The Equal Credit Opportunity Act will not permit a credit grantor to require a spouse to sign a personal guaranty if that spouse is not directly involved with the business credit applicant. Care must be taken to make sure that there are policies established for dealing with this that there is not an accidental dark-compliance. The law does permit the requirement for a spouse to sign a personal guaranty if detailed procedures are followed to first verify that the participant spouse does not have the financial wherewithal to support a guaranty. Competent legal counsel should be consulted in order to establish the appropriate policies and procedures for each company as to execution of a personal guaranty.

Checklist for the Personal Guaranty:

• It is an Absolute and Unconditional Guaranty;
• The Guarantor(s) agree to interest rate listed and specified;
• The Guarantor(s) agree(s) to pay all costs of collection (attorney fees and court cost(s);
• The Guarantor(s) agree(s) to the specified governing laws;
• The Guarantor(s) agree(s) to be joint and severally liable with the debtor to the seller/creditor;
• The Guarantor's consent to jurisdiction (optional);
• The Guarantor's waiver of a jury trial (optional);
• The Guarantor's signature;
• The Guarantyshouldbe notarized to reduce the risk that the guarantor mayassertas a defense to payment that the signature was forged.

It is appropriate to warn the debtor company that you intend to notify the guarantor if payment is not received within a specified time frame.  One final comment:  Ask your attorney to review your company's personal guaranty form to be sure it is enforceable in every State in which you do business.  Sometimes the same contract or document can be used in every state but this is not always going to be true.  In a worst case scenario, the creditor may be holding an unenforceable guarantee and making erroneous decisions based on the assumption the guarantee is enforceable.

Edited by Michael C. Dennis.  Mr. Dennis is the author of several books relating to credit risk management and commercial collections.  He can be reached by email at mcdennis13@yahoo.com