Ten Tips Relating to the Use of a Personal Guaranty

A personal guaranty is a contract by one person to pay the debts of another in the event that the debtor defaults.

1. A personal guaranty does not guarantee that a creditor will be paid
2. If the guarantor does not pay voluntarily, the creditor may have no choice but to sue the guarantor to enforce the guaranty
3. Always look a gift horse in the mouth - meaning know the guarantor including their credit history, reputation, net worth and liquidity
4. Unless you know the financial strength and health of the guarantor, it makes no sense to proceed with obtaining a guaranty
5. It is difficult, time consuming and costly to try to verify the creditworthiness of the guarantor
6. Many companies simply request a signed personal financial statement from the guarantor and rely on this as the basis for accepting and relying on their guaranty
7. A personal guaranty must be signed by the guarantor and that signature should always be notarized
8. In community property states such as California, it is strongly advised that the creditor request the spouse’s signature on a personal guaranty
9. However, if the spouse is not active in the business, the creditor may be legally prevented from requesting or requiring the spouses signature.  However, without that signature there is a real possibility that the creditor will find it difficult to enforce the guaranty even with a court judgment in the creditor company’s favor
10. If the guarantor is the President of the corporation, there is a reasonable chance that the guarantor will file personal bankruptcy when the corporation files for bankruptcy.  Doing so limits the creditor’s options in collecting from the guarantor

© 2009 by Michael C. Dennis.  All Rights Reserved.