Simple Personal Guaranty Repeatedly Saves Client
At our commercial collection agency we always prefer having a personal guaranty. Years ago, a new client started sending us claims along with their very simple, one page credit application. At the bottom of the page, immediately above the signature block, it reads exactly as follows:
NOTWITHSTANDING THIS ACCOUNT IS ESTABLISHED IN THE NAME OF A BUSINESS, I PERSONALLY GUARANTEE PAYMENT OF THE ACCOUNT (MUST BE AN OFFICER OR OTHER AUTHORIZED TO SIGN ON BEHALF OT THE COMPANY)
The signature block reads: Signature, Title, Printed Name and Date, and is the only signature location on the page for the entire credit application and personal guaranty.
When we first saw this guaranty, we were not confident that it would have much legal value. We have always been advised that the signature for the personal guaranty should be in addition to a signature committing to the other terms and conditions on a credit application or other agreement. Also, when someone signs with their title that typically is interpreted as them signing on behalf of the organization and not themselves personally.
While we collect the vast majority of our accounts without going to court, unfortunately, we have had to sue a number of times for this client. And each time the judge has ruled the personal guaranty as described above was valid.
We all know that personal guarantees are not a panacea – they do not guaranty that you will get paid. If the guarantor is not credit worthy then the guaranty may be worthless. But there are a number of advantages whenever our collection agency gets an account that has a personal guaranty:
- personally guaranteed invoices have a higher priority in the guarantor’s mind than those that are not guaranteed;
- this higher priority typically leads to greater access to the guarantor to discuss resolution and then get payments;
- the threat of litigation is more potent as the guarantor understands it will affect their personal credit as well, leading to higher collection success without litigation;
- even if both the company and the guarantor are broke, the guarantor has more incentive to share information that confirms the financial distress they are claiming, thus allowing us to make more informed recommendations to clients on how to proceed.
The personal guaranty described above is far from perfect. We are not saying that courts would always rule that it is enforceable. Nor are we saying that it guarantees you will get paid. But we are saying that this simple guaranty has helped our client minimize the number of accounts they send to collections and it has been instrumental in our success on a number of their claims.
About The Author:
Dean Kaplan is Principal at The Kaplan Group. Dean's expertise is widely recognized in the debt collection industry. His advice has been published in a number of industry newsletters such as Credit Today and InsideARM and he is a frequent speaker at industry events.