Personal Guarantees
HILLINGDON SOLICITORS – GUIDE TO PERSONAL GUARANTEES
Personal Guarantees
Many businesses are set up as limited companies or limited liability partnerships with the aim of separating one’s business liabilities from personal assets. In the event that a business goes bankrupt, in theory the owner’s personal assets will be safe from the reach of creditors unless they have traded recklessly.
However, in lean times especially, it can be difficult for new businesses that lack a track record or assets to secure the necessary finance.
What is a personal guarantee?
A personal guarantee will stipulate that a business owner will be responsible for paying back a loan or liability personally. Personal guarantees do not necessarily only apply to individuals – partners in a firm can jointly agree to secure a loan through using a personal guarantee under which all those concerned will be jointly liable.
Personal guarantees – two basic types
A general personal guarantee does not list any particular personal assets, so all of the business owner’s assets are potentially at risk to any creditor claims.
Specific assets can be pledged and a creditor will only be able to satisfy the debt using the pledged property before seizing any other assets.
What if I cannot pay back the debt?
If you cannot pay back the debt, declaring your business bankrupt will not protect your personal assets. The only way to protect your assets might be through personal bankruptcy, but if the debt is for a considerable amount, your home could be at risk.
Are personal guarantees only used by business owners?
Although personal guarantees are, for the most part, used to help new businesses secure finance, they are inherently flexible mechanisms which have numerous applications outside of the business sphere.
If, for example, your child goes to university, you might be personally liable in the event that he or she does not pay the rent for their room in student halls. Securing finance can be hard for first time property buyers. When your child graduates and buys their first home, if you are generous (or very rich!) you might act as a personal guarantor on their mortgage.
Almost anybody can act as a personal guarantor on behalf of somebody else – spouses, family and friends. In any case, careful thought should be given before anything is signed. If the debt is not repaid, what affect could that have on the relationship you share with the debtor? If you are married and get divorced, you have to bear in mind that you could be personally liable for the debt even after the divorce.
Given the inherent risks of using your personal assets to secure loans, it is essential to weighs up the risks and costs of agreeing to sign a personal guarantee,try to limit the liability by reference to time, an amount or certain trigger events and if possible to agree that the guarantee will automatically expire on the occurence of certain events.