The Power of the Personal Guarantee

Whether you are a commercial Landlord, financing the sale of a business, a commercial Tenant, or financing the purchase of a business or real estate, you have likely heard of a personal guarantee.  The question is how much does it protect you as a creditor and how much liability exposure does it create as a guarantor.  Like most areas of law, the only “guarantee” your attorney should provide is “It depends.”  Anyone who has ever retained an attorney has an innate dread of those two words.   But let us explore why “It depends” is so often the only answer a client can expect when analyzing the power of the personal guarantee.

Attorneys must clearly draft personal guarantees since the document will guide the Court.  Peoples Fed. Savings and Loan Ass’n v. Myrtle Beach Retirement Group, Inc., 387 S.E.2d 672 (1989).   There are two types of personal guarantees: an absolute guaranty of payment and a guaranty of collection:  (1)  Absolute Guaranty:  Under an absolute guaranty of payment, the creditor may maintain an action against the guarantor immediately upon default of the debtor. Southern Bank & Trust Co. v. Harley, 356 S.E.2d 410 (Ct.App.1987), modified 368 S.E.2d 908 (1988); and (2) Guaranty of Collection:  A guaranty of collection conditions liability of the guarantor upon prosecution of the primary debtor without success. McGee v. F.W. Poe Mfg. Co., 180 S.E. 48, 51 (1935).  The difference is also reflected in the amount owed.  An absolute guaranty of payment is an obligation of the amount of the contract.  A guarantee of collection is based on the amount owed after collection efforts have ceased against the underlying entity.

If you are pursuing an absolute guaranty of payment, the action against the personal guarantors is a separate cause of action that must be pled or is waived.   Ellie, Inc. v. Miccichi, 594 S.E.2d 485 (Ct. App. 2004).  A guarantee of collection is typically brought as a second action after the conclusion of litigation against underlying entity.

Personal guarantees may be further delineated between (1) unlimited guarantees and (2) limited guarantees.  Creditors will attempt to negotiate personal guarantees whereby the guarantors are held “jointly and severally liable” with the debtor itself in order to ensure the easiest collections process.  Creditors obviously want unlimited guarantees and even if guarantees are limited, creditors should seek provisions allowing a limited guarantee to transform into an unlimited guaranteed based upon borrower fraud.

So now we have a basic idea of the types of personal guarantees available, but what is their power in South Carolina?  The answer is also “it depends,” but presuming a party has drafted a legal and enforceable guarantee, the “it depends” is contingent upon the creditworthiness of the guarantor.  All creditors need to be aware that South Carolina is not an easy place to collect.  With few exceptions South Carolina does not allow wage garnishment.  South Carolina also permits husbands and wives to own separate property, so a guarantee against a husband would not permit the creditor to attach to property owned separately by the wife.

While creditors would always be advised to seek personal guarantees from borrowers and small businesses, no one should mistake a personal guarantee as a true guarantee of collection.  If the small business has no assets and the guarantor has no assets, collection will be difficult.  While a creditor could force a debtor into bankruptcy, such an approach rarely results in full repayment and such an approach is anything but efficient.  If credit is a concern, ensure that you have properly evaluated the guarantor’s credit before consummating the transaction.

On the other hand, let the borrower beware.  Everyone has dreams of their business being the next Facebook, but the reality is many small businesses fail or at a minimum do not provide the income the business owners had expected.  Watch your exposure.  If the creditor does not ask your wife or legal partner to sign the personal guarantee, do not volunteer their name.  To the extent you are married, if you are the only guarantor, do your best to limit the assets you accumulate in your individual name.  Regardless of your marital status, negotiate for a limited personal guarantee.  Attempt to limit the guarantee to what you would be comfortable losing.  Many creditors will not negotiate, but depending on the situation it may be worth searching for creditors willing to work with you and share the risk.

Whether a creditor or a debtor, the best thing to do is seek legal advice prior to entering into any personal guarantee.  The Miller Law Firm, P.A. can help you review your personal guarantee and assess the legal risk to you or your company.   In the end the power of the personal guarantee depends on you.

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