Liability of Personal Guarantors
Most companies have accounts receivable made up of payments owed to the company. Often, it is necessary to retain an attorney to make sure these commercial debts are collected. One way to make it more likely a debt will be collected is to require a company's corporate stockholder or LLC member to sign a personal guarantee on loans or credit. Generally, a company's founder chose a corporate or LLC organizational structure in order to avoid personal liability. When a business owner becomes a guarantor, however, the owner is more likely to pay back the debt to avoid losing personal belongings. The New York commercial debt collection lawyers at Klapper & Fass can advise creditors in this position on how to assert their rights.Establishing the Liability of Personal Guarantors
Personal guarantees are usually enforceable contracts. In order to make a guarantee enforceable, it should be supported by adequate consideration, unless it is executed as part of the original loan. The consideration required if the guarantee is entered into after the original loan can be a modification to the loan or new credit.
When a business owner becomes a personal guarantor, he or she loses the limited liability protection provided by incorporating or taking the form of an LLC. The individual guarantor is distinct from a corporation or limited liability company. If the debtor company defaults, the guarantor's personal assets are exposed to collection. However, guarantees are usually unsecured. They are not tied to a particular asset, such as a residence or motor vehicle. Some creditors ask the guarantor's spouse to sign the personal guarantee as well so that even the property or retirement accounts in a spouse's name are exposed in the event that the company defaults on the loan or files for bankruptcy.
Sometimes, it may also be helpful to get more than one personal guarantor. This makes the guarantors jointly and severally liable for the debt, irrespective of how much of the business they own. Joint and several liability means that any one of the guarantors may be held 100% responsible for the debt.
In some cases, a guarantor will want to negotiate to limit personal liability in the guarantee. He or she may want to cap the guarantee at a particular amount or place a limit on which personal assets can be reached. The guarantee can also be limited so that the guarantee is terminated if the debtor meets certain obligations within a particular period.
If a guarantee is entered into after the original loan, it may be appropriate to include a clause consenting to judgment. Otherwise, you may need to file a lawsuit to enforce the guarantee, and the lawsuit likely will move through the court system, with the time and expense that entails. In some cases, the guarantor may try to transfer assets or file for personal bankruptcy while the lawsuit is pending.Retain a Commercial Debt Collection Lawyer in New York or Beyond
In today's business climate, commercial creditors often seek the security of a personal guarantee of payment in case the primary business creditor defaults. An appropriately drafted, tailored guarantee can create an absolute, unconditional obligation. However, the laws in this area can become more complicated, and it is important to get legal advice during the negotiation process.
If you are concerned about ensuring the liability of a personal guarantor, you should consult the New York commercial debt collection attorneys at Klapper & Fass to draft a guarantee and pursue debtors that fail to make repayment. Our litigation attorneys have offices in Manhattan and White Plains, and we serve all five boroughs of New York City as well as Suffolk, Westchester, Rockland, and Nassau Counties. We also provide legal services in California, Michigan, Texas, Florida, and other states throughout the country. We accept referrals from commercial debt collection agencies. Contact us at 914.287.6466 or via our online form to set up a free consultation for a debt claim.