What Does it Mean to Sign a Personal Guarantee?
A personal guarantee is an individual or business entity that guarantees responsibility for another’s financial obligation, should they ever fail to repay their lender. Personal guarantee’s usually come in when securing a debt for a loan such as a car finance or mortgage, but the guarantor is not contractually liable for any part of the loan unless the debtor fails to make a payment. When someone decides to take this responsibility and sign themselves as a guarantor, they become a secondary obligor to another person’s primary obligation.
How is a Personal Guarantee Enforced?
In instances where the primary debtor is in default of the loan, the lender will make a demand that is in accordance to the terms of the loan contract. The lender in typical situations will first go after the debtor before they demand repayment from the personal guarantor. This is to ensure that the debtor is given the opportunity to take immediate action and repay what they owe.
Once a lender serves its demand, the debtor should be given a reasonable amount of time to act upon the notice and make payment. Often times, the amount of time that will be given is stated in the loan agreement itself. Therefore, once time is up, a lender can immediately enforce the debt upon the personal guarantee. In other cases, some personal guarantors will provide full guarantees with terms that remit the requirement of having to first seek the debtor before seeking the guarantor. During these circumstances, both demands can be made simultaneously.
Making a Demand on the Personal Guarantor
Before demanding any kind of payment from the guarantor, the guarantee itself should be checked to make sure all formalities have been met. Additionally, the agreement should also be looked over to determine that the specific obligations of the debtor are backed and agreed upon by the guarantee. Some loan agreements will contain terms that circumstantially make the debt unenforceable against the debtor. For example, when the amount of the guarantee was modified after the agreement was originally enforced by the parties.
How Long is a Personal Guarantee Valid?
A personal guarantee must be made in exchange for consideration in order to be held valid. However, even if consideration is given, there are many defenses a guarantor can use in order to set aside their obligation. For example, contract law states that if a party to a contract was procured by fraudulent misrepresentation or unduly influenced into signing the agreement, the contract will be held void. Therefore, if a lender pursues a personal guarantor for their obligation to make a payment, they should be aware that potential defenses like this may arise and become apparent. As for individuals who wish to guarantee a loan, it is strongly encouraged to always reach out to an experienced attorney for the best advice and guidance on situations like these.
If you would like to continue to read part 2 of this blog post, click here.