Did You Know a UCC Filing Enhances a Personal Guarantee?
A personal guarantee (PG) is an individual’s legal promise to repay credit issued to a business for which they serve as a representative. Then, in the event the business is unable to repay its debt, the individual is personally responsible to pay the debt.
A PG signifies that the lender (obligee) can lay claim to the guarantor’s assets in case of the borrower (obligor) default. It is equivalent to a signed, blank check without a date. The obligee is generally not required to seek payment from the obligor’s assets before going after guarantor’s assets. (see BusinessDictionary)
The lender’s actions are usually based on whose assets are easier to take control of and sell. Once signed, a PG can only be cancelled by the obligee.
Personal Guarantees are Effective
PGs are an effective and popular credit tool; however, there are some things to take into consideration.
- A PG is just that — a guarantee by that person. It gives the creditor a chance to attach to the assets of the individual. If the personal guarantee has been signed individually, but the assets are in the names of both spouses of a married couple, the PG could be limited. Additionally, most states have homestead protection laws which protect homeowners from losing their homes to creditors. In this case, the debtor’s largest asset (their home) may be excluded from the personal guarantee.
- In order to enact its rights to a personal guarantee, the creditor must sue and get a judgement against the PG. This can be costly and time consuming.
- You don’t know how many personal guarantees the debtor has signed. The debtor may give you a personal guarantee, but they may have given the same guarantee to several other creditors.
UCCs Enhance Personal Guarantees
A properly perfected security interest can reduce risks associated with personal guarantees.
- A UCC filing gives you an interest against the assets of the business — not just the individual. If the business is a registered entity or partnership, chances are the assets of the business are much more plentiful than the assets of the individual.
- UCC filings create a system that establishes the priority of creditor claims, without going to court and suing each other. This minimizes the time and costs involved.
- With UCC filings, you know who has a stake the debtor’s assets (collateral), because UCCs are registered in the public record.
Remember, a personal guarantee is an individual’s promise to repay credit issued to a business for which they serve as a representative. This means, the personal guarantee attaches to the assets of the individual. Whereas, a properly perfected security interest grants you an interest in the assets of the business. (The assets of the business are most likely greater than the assets of the individual.)
Don’t assume a personal guarantee is enough; file a UCC!