When a lender, such as a financial institution, decides to approve a loan, one of its primary concerns is repayment. To that end, many lenders now require personal guarantees – most likely from business owners – to secure loans. Generally, a personal guarantee is a promise to pay a debt when the principal borrower (business requesting the loan) fails to meet its responsibilities under the loan contract.
If a default occurs, the guarantor (signer of the guarantee) must repay the amounts outstanding on the loan. Lenders can pursue the guarantor’s assets, forcing the liquidation of personal and real property. When disputes arise about personal guarantees, courts tend to side with lenders. Although obtaining a loan without a personal guarantee is possible, it is unlikely in the current economic climate. However, with the assistance of an experienced attorney who handles business and commercial transactions, there are several ways for guarantors to minimize risk to their personal assets.
Limit Amount of Liability in Guarantee: If the lender agrees to a limited guarantee, the guarantor will be partially liable for the debt as specified in the loan agreement. The contract can limit liability based on a fixed amount (called a cap) or a percentage of the loan.
Limit Term of Guarantee: The length of time a guarantor is liable for a loan may vary depending on the type of loan a business requests. The language in a loan contract may extend liability beyond payment in full. Other loan agreements may outline guarantor responsibility for loan renewals. Contracts can specify how long a guarantor is liable as well as reduce or eliminate liability for loan extensions and renewals.
Limit the Number of Waivers: Lenders will seek waivers from guarantors through the loan agreement. Typically, they want guarantors to waive limits on liability and rights or defenses they may have with respect to their obligations. Depending on state law, some waivers may be unenforceable; therefore, it is essential that trained, professional attorneys view loan documents before the guarantor agrees to accept responsibility for a borrower.
The best time for guarantors to protect their rights and assets is before loan documents are executed. They cannot rely on hope that the businesses they own or support will remain viable and continue to make timely payments. Without limiting liability, guarantors risk exposing and potentially losing their personal assets to lenders.
The Law Offices of Terry L. Gilbeau provides personalized counsel to clients in a variety of business and personal matters, including creditors’ rights, debt collection, products liability and international transaction issues. His office is located in Rocklin, CA, just outside of Sacramento, CA, near Roseville, Lincoln, Auburn, in Placer County and can be reached at (916-626-5539) or email Terry at firstname.lastname@example.org. Click here for the firm website http://www.gilbeaulaw.com/