A personal guarantee is a promise to pay a loan, contract, lease, or other financial agreement if the primary borrower, be it a business or individual, cannot. If the primary borrower does not pay the debt, you may be sued because you signed a personal guarantee.
There are many reasons why you might sign a personal guarantee. Business owners are generally required to sign a personal guarantee when opening a line of credit. If the debt is not repaid, the bank may pursue the officer regardless of whether or not the business is operational.
As the officer of a company, you may pledge your personal assets as security for a business loan. In some cases, you may not formally sign a guarantee but agree to pledge your assets as security for a loan the bank would not normally make. If the business defaults on the loan, your assets may be pursued to satisfy the loan.
Alternatively, you may have signed as a co-borrower or guarantor for the debts of another. In most cases, you will be asked to guarantee the loan or act as a co-borrower if the prime borrower is not creditworthy. Should there be a default in payment, you will be pursued as the personal guarantor or co-borrower.
What Happens When Someone Defaults on a Loan
As the guarantor on the loan, you should expect the lender or creditor to pursue you if the primary borrower defaults on a loan. The Federal Trade Commission (FTC) advises that by becoming a co-borrower, you take a risk the bank was not willing to take. In addition to the unpaid principal, you may be liable for additional interest, penalties, and cost of collection including attorneys’ fees.
It’s a common misconception that the principal borrower gets sued first for monies owed and the guarantor sued after the lender is unable to recover monies. That is not the case. Unless the loan documents provide otherwise, you can be pursued for payment. New York does not require the creditor to pursue the primary borrower or any other party that might be liable before pursuing the guarantor. That means the lender or creditor can pursue the guarantor or co-borrower first.
Is Your Personal Guarantee Enforceable?
In order to win their case against you, the creditor or lender will need to prove a valid guarantee exists. They will need to show the written guarantee and that the guarantor had explicit intent to be responsible for the debt’s payment.
For the guarantee to be enforceable it must prove that a debt is owed and provide sufficient proof of a valid obligation and enforceable debt. The creditor must prove you intended to be responsible for the debt you are being pursued for.
All underlying conditions need to have been met, i.e. notice given or other actions brought against other parties as required in the underlying documents or note. They must also show that the guarantee was not terminated or, if appropriate, there was a continuing guarantee.
If you are being sued for a personal guarantee and need help, contact Frank, Frank, Goldstein and Nager for a free consultation.