If the debtor fails to pay, then the guarantor becomes legally responsible for the debt, based on the terms of the document that was signed by the guarantor.
Personal Guarantees are in writing. They are often seen in lending situations where the lender requires a personal guarantee by the owner of a business. The lender may require this due to offering reduced loan terms or if the business does not have adequate equity.
If the business defaults on the terms of the loan, then the lender (usually a bank) would call upon the personal assets of the owner of the business (or someone who signed the personal guarantee) to settle the company's outstanding debt.
According to an article in smartasset.com titled "How Business Owners Can Protect Their Assets..." by Rebecca Lake, Sept. 27, 21019 - it is best to avoid personal guarantees whenever possible.
If a business owner must make a personal guarantee, then try to negotiate a cap on the personal assets that you are placing at risk. Another option is to offer specific collateral instead of a personal guarantee.
In a small business loan situation the owner is basically laying their own finances on the line to obtain the loan.
Another type of guarantor which is common is the third party guarantor. Examples of this would be when a parent (or grandparent) co-signs on a child's car loan or on their student loan.
In this case the parent or grandparent becomes the third party guarantor. If you want to help your child to buy a car, attend college or buy their first home, there may be other mechanisms rather than signing as a third party guarantor. Ask a professional about the alternatives.
Above all, if you have questions about what you are signing with respect to a personal guarantee of your assets, consult a professional to review the terms of the document.
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