A personal guarantee is a legally binding agreement that an individual (you as guarantor) will be responsible for the repayment of a debt, should the debtor (usually a business) fail to do so. It is often required by lenders such as banks to provide additional security for loans and credit facilities extended to businesses, particularly for small or medium-sized enterprises (SMEs) with limited credit history or assets.
The personal guarantee can be either ‘limited’ or ‘unlimited’. A limited personal guarantee means the guarantor is only responsible for a specific amount of the debt, typically around £20,000, while an unlimited guarantee means the guarantor is liable for the full amount of the debt, including any interest, fees, and legal costs that may be incurred.
What Happens When a Personal Guarantee is Called In?
If the debtor defaults on the loan, the lender can call in the personal guarantee, requiring the guarantor to repay the outstanding debt. This may involve seizing the guarantor’s personal assets, such as their home or other properties, if the guarantor is unable to make the required payments.
It’s important to understand that being a guarantor can have significant financial and legal implications. Before agreeing to become a guarantor, it’s essential to seek professional advice to fully understand the risks and potential consequences involved.
Can I Negotiate a Settlement for My Personal Guarantee Debt?
If called upon, you may be possible to negotiate a settlement with the lender to reduce the amount you owe under a personal guarantee. This is particularly true if you can demonstrate real financial hardship or a genuine inability to repay the full amount. However, negotiating a settlement requires careful planning and expert advice to ensure the best possible outcome.
If you’re struggling with a personal guarantee debt, it’s important to seek professional advice from a reputable, experienced debt negotiator who can help you explore all of your options and help you take the best course of action for you. As insolvency practitioner I do not do that, but I know people who can do it for you.
Does a Personal Guarantee Affect My Credit Score?
A personal guarantee itself does not directly impact your credit score. However, if the debtor defaults on the loan and you are unable to repay the debt as guarantor, this could lead to a negative entry on your credit report. This could make it more difficult for you to obtain credit in the future, as lenders may view you as a higher risk.
How Can I Protect Myself When Signing a Personal Guarantee?
Before signing a personal guarantee, it’s crucial to take several steps to protect yourself:
- Seek professional advice: Consult with a lawyer specialising in insolvency or commercial law to help you understand the risks and potential liabilities involved.
- Review the loan agreement: Carefully read and understand the terms and conditions of the loan, including the specific requirements and consequences associated with the personal guarantee.
- Negotiate terms: If possible, try to negotiate for a limited personal guarantee.
- Keep records: Ensure that you have a copy of the signed guarantee and any related documentation for your records, including details of all payments made by the debtor and you.
- Monitor the debtor’s financial situation: Stay informed about the debtor’s financial health and be prepared to take action if the debtor begins to struggle with repayments.
- Talk over the request for a personal guarantee with your significant other, do this before you sign it.
In conclusion, while personal guarantee debt can be challenging to navigate, the right advice and support can help you understand your options and find a solution that works for you. But don’t do it on your own, get the right professional advice.