Personal guarantee
A personal guarantee is a promise made by a person or an organization (the guarantor) to accept responsibility for some other party's debt (the debtor) in the event the debtor fails to pay it. In the case of a personal guarantee made by an individual on behalf of another, the person making the personal guarantee is usually referred to as a co-signer of a note for a loan. A guarantor can be any party that has a credit history, including an individual or another organization.
A common purpose of a personal guarantee is to allow an organization or person to obtain credit when they lack a credit history, or the do have one, but lack a credit rating sufficient to qualify for a loan.
In the case of a small corporation or limited liability company lacking a credit history, where they want the entity to be able to borrow funds, the managers and/or stockholders personally guarantee to be liable for the debt in the event the organization fails to pay the debt.[1][2] This is common in the case of corporate credit cards issued to small organizational borrowers, in which the person issued the card also accepts personal responsibility for the debt as well as the corporation, so the issuer can go after either party if the debt is not paid.
In the case of individuals parents will sometimes provide guarantees for their adult children when they are lacking a credit history.[3]
The issuer of the guarantee, in effect, provides joint and several responsibility for the debt so that while the organization, as the debtor, is primarily liable to pay the debt; the creditor can additionally go after the guarantor as a secondary responsible party if the debtor is unwilling or unable to pay the debt. Note that a personal guarantee means that even if the debtor declares bankruptcy and is discharged from responsibility for the debt, the guarantor is still liable for it.[4]
See also
References
- ^ "Banks expect personal guarantees from SMEs". stuff.co.nz. January 30, 2014.
- ^ "Until You're the Unicorn, Protect Yourself: Tips on Personal Guarantees". Davis Brown Law Firm. May 19, 2017.
- ^ Hilda Mannix (May 15, 2017). "Guarantee provided by father upheld as no claim of undue influence made". Ronan Daly Jermyn.
- ^ "Risks of being a loan guarantor". Rediff. November 11, 2013.
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