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Personal Guarantee

A promise by an individual - usually a business owner - to pay a company's debt personally if the company does not, which puts the owner's own assets behind the loan or lease regardless of the entity's liability shield.

Informational only - this is not legal advice. These definitions explain general legal vocabulary in plain English. They are not advice about your situation, reading them creates no attorney-client relationship, and the law differs from state to state and changes over time. For advice you can rely on, speak to a lawyer licensed in your state.

What it means

A personal guarantee is a contract in which an individual agrees to be answerable for someone else's obligation - most often an owner standing behind their company's loan, lease or supplier account. Its whole point is to reach around the liability protection an LLC or corporation provides. The company remains the borrower; the guarantor becomes a second source of payment, and if the company defaults the creditor can pursue the guarantor's personal assets without first exhausting the company's.

The terms decide how far it reaches, and they vary widely. An unlimited guarantee covers the entire debt and everything that later accrues; a limited one caps the amount or the share. A continuing guarantee covers future advances and renewals, not just the original loan, and can outlast the guarantor's ownership of the business unless it is formally revoked. Many guarantees waive defences the guarantor would otherwise have, such as the right to insist the creditor pursue the company first. Spouses are sometimes asked to sign as well.

Because a guarantee is a promise to answer for another person's debt, the statute of frauds in every state generally requires it to be in writing and signed by the guarantor. A guarantee cannot ordinarily be implied from conduct or an oral assurance.

Where this comes from

Guarantees are governed by state contract and suretyship law. The writing requirement traces to the Statute of Frauds of 1677 and is now found in each state's own statute of frauds - New York's, for example, at N.Y. Gen. Oblig. Law § 5-701(a)(2). Federal law does not create guarantees but does require them in one common setting: SBA regulations at 13 C.F.R. § 120.160 generally require a personal guarantee from each owner holding at least a twenty-percent interest in a borrower.

When people hire a lawyer for this

Read a guarantee before signing it as if the company had already failed, because that is the only time it will be read again. The clauses worth a lawyer's hour are whether it is limited or unlimited, whether it continues past a sale of the business, what defences it waives, and how it can be revoked - and whether a co-owner who has signed the same guarantee is obliged to share the loss.

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Part of the LawyerLand plain-English legal glossary. Definitions are written from primary sources - statutes and court rules - and each entry states the authority it rests on, or says plainly when the doctrine is state law with no national rule.

If you cannot afford a lawyer, civil legal aid programmes provide free help with many of these problems: civil legal aid programmes by state.

Related free reference tools: statute of limitations for a personal-injury claim, by state, quoted from each state's official text - part of LawyerLand's legal reference tools.