Personal Guarantee – Definition

Cite this article as:"Personal Guarantee – Definition," in The Business Professor, updated April 2, 2019, last accessed August 10, 2020, https://thebusinessprofessor.com/lesson/personal-guarantee-definition/.

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Personal Guarantee Definition

A Personal Guarantee is basically a legal promise by an individual that she will pay the debt back if the borrower does not pay. This acts as additional protection to the lender of the debt.

A Little More on What is Personal Guarantee

One can use a personal guarantee in a credit deal to get the funds secured for a business. The executives or the founders of small business concerns will generally issue this guarantee. The company is responsible to make payment on the debt. The guarantor is a backup.

This guarantee actually provides the creditor with a legal claim to the guarantor’s personal assets. For a business, it makes the debt more accessible. Sometimes a personal guarantee is the only way to secure a loan based upon underwriting standards.

In the process of loan application, the person who gives a personal guarantee for debt is required to include his profile and credit history as well as debt information. Hence, the profile of the owner becomes the primary base for underwriting.

The credit card application or a small business debt formally requires the tax identification number of the employee and details on the financial statements of the business. If someone is using the personal guarantee, then the social security number of the person will be required for a hard credit inquiry and details on his personal income. Some lenders also ask for the detailed information of the person’s own assets.

Business owners must specifically be careful when they are going to apply for a business credit card because a personal guarantee of the applicant may be one of the required terms. As an individual, it is better for the applicants to look for language, e.g. “you, as a person and authorizing an officer of the firm…agree to severally and jointly liable with the firm for all dues to the account.”

Well-settled business entities that create an important commercial debt profile can get a loan without any personal guarantee. However, if an individual uses a personal guarantee in getting credit, then he is responsible in case of default. The use of a personal guarantee provides the creditor with a legal claim to the personal assets of an individual for a credit card or specific debt. Debt with a personal guarantee can be taken as a low-cost method for a business to get funds. However, if a business does not succeed in generating income and earning, then the individual may have to bear great losses. A personal guarantee provides a creditor with the rights to all the personal assets of an individual, such as savings accounts, real estate, checking accounts and cars. So, in a personal guarantee, the individuals should perform complete due diligence on his business aspects and the earning potential before he pledges his assets to the creditor.

References for Personal Guarantee

Academic Research on Personal Guarantee

Lessinger and Section 357 (c): Why a Personal Guarantee Should Result in Owen Taxes, Martin, C. M. (1990). Va. Tax Rev., 10, 215. Generally, a shareholder who contributes his assets to a corporation in exchange of stock recognizes no profit, no loss. The shareholder can contribute property with enough tax basis to avoid the section 357(c) recognition or the extra cash to the corporation. Section 357(c) states that the shareholder must identify any realized profit up to the excessive amount. The reasoning of the court are different. This paper debates on the important question of what can be the reason that a personal guarantee results in Owen taxes.

The DCFR–Guarantee and Personal Security Contracts, Carrasco, A. (2008). European Review of Contract Law, 4(3), 389-410. This research presents an approach to personal securities. An exact model of Law has been introduced on the best-evaluated rules selected from various European Law systems. The relation between personal and dependent security has been shown. The authors highlight the rules and regulations on international personal security and its relationship with other types of security.

Bankruptcy-Personal Guarantee Constitutes New Value under Section 547 (c)(1), Brandt, S. H. (1991). Temp. LR, 64, 1007. This paper aims to spread awareness on section 547 (c)(1) of the personal guarantee constitution related to the new value of bankruptcy.

Personal Guarantee-Contract, Hawkins, D. (2017). Wisconsin Law Journal. In this paper, the author throws light on the important points of the personal guarantee agreement between the debtor and the creditor.

Scope of Rules Concerning Personal Guarantee Agreements (Report of Workshops (4)), Sugimura, K., Itatani, M., & Bessho, M. (2017). (No. 17-E-4). Bank of Japan. Several new rules have been introduced in the revised Law of Obligations. It focuses on the procedural needs of the contract of personal guarantee. In Japan, these rules have got popularity because the guarantors do not consider the underlying risk. There are numerous contractual agreements that contain the same legal functions of personal guarantee. The workshop’s report on CFTRT (Contemporary Financial Transactions & Their Regulatory Treatment) elaborates the new requirements of a personal guarantee contract.

Personal Guarantees: How Helpful Are They; A Personal Guarantee May Aid in Collection of Outstanding Receivables-If Certain Key Elements Are in Place, Lubitz, M. S. (2012). Com. L. World, 27, 13. The author provides a detailed analysis of the personal guarantee terms, they are helpful or not. If they are, then to what extent. He states that in case, the specific key components are in place, then a personal guarantee can assist in collecting the outstanding receivables.

Mortgages-Land Mortgage-Personal Guarantee of Debt-Collateral Chattel Mortgage-Protection Given to Purchasers and Mortgagors by Judicature Act, SA 1964, c. 40 …, Tennant, M. (1968). Alta. L. Rev., 6, 113. This study makes a discussion on personal guarantee of loan collateral portable assets. The procedure for the mortgaged land has been described. The mortgage protection has been provided to buyers and mortgagers following the act of the Judicature Act, SA 1964 C.40, S.34(17).

Federal Bankruptcy Law-A Pthe ersonal Guarantee from a Corporate Insider May Mean That Payments Received by the Lender within One Year Prior to the Debtor’s …, Neal, C. E. (1988)-Levit v. Ingersoll Rand Financial Corp. U. Balt. L. Rev., 18, 589. This paper explains the Federal Bankruptcy Law which says that a personal guarantee from a large company insider means that the payment which the lender gets within 1 year before the debtor files for insolvency depends on the extended preference time period and recovery of the amount from the lender.

S Shareholder’s Personal Guarantee Did Not Allow for Increased Basis., Fiore, N. J. (2001). S Tax Adviser, 32(1), 74-74. This article examines the personal guarantee of S shareholders that did not permit for the basis of an increment.

Contracts of Adhesion–Some Thoughts About Freedom of Contract, Kessler, F. (1943). Columbia Law Review, 43(5), 629-642. Since when a free enterprise system has developed on the basis of labour division, the capitalistic economy requires an elastic legal organisation to protect the exchange of the market products and services. The reasonable expectations with promised behaviour get law protection. Otherwise, we will have to bear the Montesquieu’s Troglodytes who expired because of the non-fulfilment of the promise. So, the first condition is to respect the agreement.

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