Do Banks Enforce Personal Guarantees?

There are many situations in which you may be asked to personally guarantee a loan. If you are operating a business and the business does not have its own separate legal identity and its own established credit, you may need to personally guarantee a loan so the business is able to get access to credit. You may also be asked to personally guarantee a loan for a person or a business who has bad credit and who is not able to qualify for the loan because the lender believes that the risk of default is too great.

Regardless of the circumstances under which you are asked to personally guarantee a loan, you need to think carefully about whether this is the right financial choice for you.  Banks enforce personal guarantees all the time, and if you agree to guarantee a loan, there is a very good chance that you are going to be the one who ends up financially responsible for the repayment of the debt. Before you sign any paperwork agreeing to guarantee a loan, you should strongly consider speaking with a Las Vegas business law attorney at Pintar Albiston LLP for advice about the obligations that you are taking on.

Banks Enforce Personal Guarantees

Banks ask for personal guarantees when they do not believe that the primary debtor has sufficiently proved that the loan will be repaid. Often, this should be a red flag for a person who is being asked to personally guarantee a loan. Lenders are trained to evaluate the risk of default. If they require a personal guarantee because they believe the risk of default is great, this means that there probably is a high risk that the primary debtor will not repay the loan. If the primary debtor does not repay the debt, the guaranteer is going to be obligated to do so.

If you are being asked to personally guarantee a loan for a business startup, this may be because the business simply does not yet have enough of a credit history to prove creditworthiness. However, new businesses are a risky venture and if the company is not able to become solvent and earn enough to repay the debt, you will be on the hook.

Banks enforce personal guarantees all the time when a primary debtor does not pay. The bank required the guarantee because of the risk of default, and factored in the creditworthiness of the guaranteer when deciding to make the loan. Naturally, this means that the bank is going to try to collect the money from one of the parties who was responsible for repayment.

The process of a bank enforcing a personal guarantee is virtually no different than the bank enforcing the debt obligations against the primary lender. While the bank does have to send a demand to the guaranteer if the debtor is not paying, there is no downside to the bank of doing so.

The obligation of the personal guaranteer, however, is a secondary obligation that is contingent upon the primary debtor’s liability. If the loan is invalidated and the primary debtor is no longer obligated to pay for any reason, the secondary guaranteer also does not have to pay.

A Las Vegas business lawyer at Pintar Albiston LLP can help you to understand what your rights and obligations are when it comes to guaranteeing a loan. Call as soon as possible if you have been asked to make a personal guarantee for debt.