Personal Guarantee Enhanced by UCC Filing

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!

Most Recent Resources

Blog

Will Safe Harbor Ever Exist for Florida UCC Filings? Zero Tolerance

Safe Harbor couldn't save this UCC. Florida's 'zero tolerance' policy means you must strictly comply with Article 9-503(a). Learn more here!
Read More
white paper
White Paper

NCS Credit Lien Index 2022 Q3

The Lien Index increased 4 points in Q3 2022, an 11% climb over Q2 2022. As expected, Q3 mechanic's lien activity rose 11% over Q2, and activity remained lower than Q1, which peaked at 43. We anticipate the Index will increase 2%-5% in Q4. Download the full report for details.

Read More
live webinars
Live Webinar

The Basics of the UCC Process

Worried about customers filing bankruptcy? Concerned about extending credit to marginal accounts? UCC filings secure collateral in agreement with your customer’s promise to pay.
Read More