What is a Personal Guarantee?

A personal guarantee is often required by a lender when a business is in need of a loan and the business does not have assets to secure the loan. The personal guarantee is a document that secures the debt of a business against an individual’s assets. In the event of a default, the lender then uses the personal guarantee against the individual to repay the debt of the business. The following five questions should be asked before you sign a personal guarantee.

1. What is the Applicable Law?

Each state may have specific laws that allow for the bank to enforce the personal guarantee. These laws could be the laws of your state, or they could be another state’s laws based on the language of the personal guarantee. Therefore, you should know what laws will be used to enforce the personal guarantee.

2. Who can enforce the guarantee?

Often times, after a lender gives a loan, they then sell that loan to another investor or bank. This action presents the question; Can the new holder of the loan enforce the guarantee? While each state has different laws, California only allows a personal guarantee to be enforced by the specific party who was given the guarantee. Therefore, the only party that can enforce the loan is the lender.

3. What exactly did you guarantee?

A personal guarantee is used to secure your personal property in the event the business defaults on the loan. Often times, the lender will try to collect as much of your property as possible. California only allows for the lender to enforce the personal guarantee to the property stated in the contract.

4. Can the business cure the default?

Curing a loan default means that the guarantor is allowed to pay off the amount of the default and keep the loan in good standing. In California, the party enforcing a personal guarantee must allow the guarantor to cure the default otherwise the personal guarantee is unenforceable. This means that there must be an option to cure the default otherwise the personal guarantee would be unenforceable.

5. What terms of the guarantee are controlling?

Even though many states have strict rules that favor a borrower, often times these rules are left up to the contract. This means that even though a state may have certain rules, the contract between the lender and borrower are controlling over the law. Therefore, it is important to know what rules will be applied in the event of a default.

In most situations, clients bring personal guarantees to an attorney for review after being served with a lawsuit enforcing the terms of the personal guarantee. Instead, Afsar Law Group recommends that you be proactive. Have a licensed attorney review all contracts and personal guarantees before you sign them.

Amir H. Afsar, Esq. is an attorney and founder of Afsar Law Group, A.P.C. which represents clients in business, real estate, construction, and estate planning matters throughout California and the Coachella Valley including Indio, La Quinta, Bermuda Dunes, Indian Wells, Palm Desert, Rancho Mirage, Cathedral City, Palm Springs, Banning, Joshua Tree, and other cities located within Riverside and San Bernardino County. Mr. Afsar can be reached at Afsar Law Group, A.P.C. at 760.345.3110.