The joint and several clause appears in almost every legal loan document. Many people sign loan documents and guarantees after a quick glance because they want to make a deal. The issue with signing without reading the underlying documents is that if and when someone seeks to enforce the agreement as set forth in the document, you are charged with having read it and agreeing to the terms contained therein. Therefore, it’s important to know how joint and several liability can impact you, especially as it relates to debt collection in New York.
Joint and several liability exists when two or more people or entities are liable for the same debt. Each party signs a document containing a joint and several liability clause and agrees to be responsible for the entire debt. The creditor does not need to prove nor attempt to collect a portion due and owing from a particular person or company. Everyone may be responsible for the entire debt.
Lines of Credit and Personal Guarantees
Take for example when you personally guarantee a line of credit for a business. The business may or may not continue. Its long-term prosperity has no real impact on the creditor’s ability to pursue the guarantor for payment. The creditor may look exclusively to you, the signer and guarantor, to recover the entire amount owed. They do not have to pursue the primary corporation or borrower first unless the agreement provides otherwise.
The same is true for officers who signed a credit application containing a personal guarantee. Even though it’s the corporation that received the credit, goods, or services, the creditor can bypass suing the corporation and proceed against you for the full amount.
If you are being pursued with legal debt collection and the creditor has not named all of the liable parties, can you? Yes, if you believe other parties to the agreement can afford it, you can bring them into the case. Generally, the person being sued can claim that another is responsible for some or all of the debt. They may bring those people or entities into the case by starting a third party action. The guarantor, previously a defendant in the original case, then becomes a plaintiff in the third party action tied to the case. Depending on the facts and the judge involved, both claims may be adjudicated together.
For questions about how to best protect yourself in debt collection disputes, contact Frank, Frank, Goldstein & Nager. We have the experience that pays.