Pitfalls of a Personal Guarantee
If you signed it, you are liable.
Directors are often required to provide a personal guarantee as security for business loans. This often seems like a good idea at the time; however, you are liable for the full amount if your business begins to struggle.
Often these guarantees are drafted heavily in favour of the lender and designed to give them maximum protection. Countless directors have signed personal guarantees under the belief that there is an easy loophole to avoid payment of their debt. THIS IS NOT THE CASE.
If your creditor calls in the personal guarantee, you will be left fully liable, and lenders can demand payment in full. An inability to satisfy this demand can lead to your personal assets such as your home being at risk.
Therefore, it is crucial for directors to take legal advice and carefully consider the risks to them before signing.
Joint and several – You’re all liable
A personal guarantee can be provided by one individual or several parties.
Where there are multiple people involved, the creditor may make each guarantor “jointly and severally” liable. The creditor can then make a partial or full claim against any guarantors for sums due under the personal guarantee.
This means that if there are two guarantors and one cannot pay, the creditor can pursue the other for the whole amount guaranteed.
Full value is owed once the personal guarantee is called in
If your creditor requests repayment, you will be liable to pay the total amount in a lump sum. Your creditor will invalidate any previous payment arrangement, and they will often demand that you pay the remaining balance immediately.
This can cause severe issues as it is rare that the guarantor has the cash reserves to satisfy the creditor.
Some lenders may agree to payment plans, but these are rare and often involve large monthly sums. The lender is under no obligation to agree to a payment plan.
Additionally, the guarantor is liable for any additional interest due on the loan, so the longer you take to pay back the loan, the more you will ultimately repay.
Personal Liability: Bankruptcy or Assets at Risk
The clue is in the name; Personal Guarantee. Your personal assets are at risk.
This includes personal assets, the most important being your home. A creditor can apply a charging order on property or land to recover the money owed. Alternatively, they may make you Bankrupt via a Creditor’s Petition; this will allow the Trustee to sell your assets to pay your creditors. In this scenario, any other debts you owe will likely be included in Bankruptcy. You will also be liable for the fees incurred in disposing of your assets.
This can mean a singular debt can snowball and become a much more severe issue.
Loan Sales – From Bad to Worse
Above, we have outlined what your creditor might do if you can’t satisfy your liability however, this isn’t the worst-case scenario.
If you cannot pay back your loan, your creditor may sell your loan to a 3rd party.
These companies make a profit by buying debt for lower than its value. As a result, these companies are often willing to invest more time and effort to recover the liability. It also means they are more aggressive, harder to negotiate with and less likely to accept settlement offers.
What are my options?
As with any client, we recommend you arm yourself with the best advice. Although they can be a saving grace, personal guarantees can quickly become a curse. The number of directors defaulting on these loans has massively jumped due to the COVID-19 pandemic. In situations like these, the most important thing is to regain control. If you think your personally guaranteed loan may be called in or if you are struggling with your loan, get in touch with our team today to find out your options.
You can call us on 0330 159 5820, email us at [email protected] or fill in a web form.