A personal guarantee may help with business debt collection

On Behalf of | Jun 15, 2023 | Business, Litigation

Every reputable business’s lifeblood involves contracts. They stipulate terms for sales and services provided, price and dates for suppliers, and should include clauses that address foreseeable issues that cause one party not to meet the terms. While it makes good business sense to keep business finances separate from personal ones, Business A may request a personal guarantee if Business B is a partnership, LLC, C corporation, trust or other legal structure.

The signee/guarantor for Business B becomes legally liable for a business’s unpaid debt regardless of the business’s structure. Vendors and business partners who work on credit do this to better ensure that Business B pays its bill.

How they work

There are two common types of guarantees:

  • Unconditional: The signee is obligated to pay under all conditions.
  • Conditional: The signee is obligated within specific guidelines, often based on a time frame or amount of money. Conditional can do either of these or both.

Enforcing the agreement

There is a long list of protections and rules for collecting a debt, whether a business or an individual. Still, a personal guarantee empowers Business A to cut through the red tape and directly approach the guarantor of Business B, regardless of whether the company dissolved, filed bankruptcy or simply does not pay its bill.

The contract must be valid in Kentucky if the plaintiff expects to enforce it here. Business B’s guarantor may also dispute the validity of Business A’s claim, which can lead to litigation before a judge.