What are the implications of my personal guaranty of my company’s bank debt?
Answer: A business owner’s guaranty of that business’s debt has two components:
1. The primary benefit of a guaranty by the business owner to the lender (or lessor or supplier) is that the owner herself will be highly motivated to ensure that the lender is repaid in full; but
2. The actual credit enhancement provided by the guaranty is truly limited in the context where most of the business owner’s wealth is tied up in that same business that is obligated to repay the loan.
If the holder of the guaranty is not ultimately repaid 100 percent, then most typically it will ask the guarantor for a personal financial statement and attempt to negotiate a solution with the guarantor. If that is unsuccessful, then litigation may ensue. In our experience, however, most guaranties are resolved through negotiation and the guarantor’s prior efforts to maximize the lender’s recovery will be an important factor in those negotiations.
If you ever do have to make a payment in respect of the guaranty, though, don’t just cut a check to the lender. Either try to purchase a “last out” participation interest on the loan, or at least route the money via the company, so as to increase your basis and perhaps be able to recognize some losses.
What if I guaranteed a loan for a friend or relative, but I did not get anything in exchange?
Answer: Unfortunately, even if you execute a guaranty simply as an accommodation to a friend or relative, such a guaranty is enforceable, as the lender will have relied on that guaranty as a condition of extending credit to your friend or relative. The same analysis for addressing the guaranty if the lender is unsatisfied, as described above, will hold.
We will continue to provide any guidance on companies under distress. If you have additional questions, our Distressed Company Task Force can answer, please email firstname.lastname@example.org.
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