A guide to personal guarantees

An increasing number of people have been getting in touch with us about personal guarantees. In the following article, Anna Curtis provides an overview of what personal guarantees are and how they work.

What is a personal guarantee?

A personal guarantee is a promise by an individual (a ‘guarantor’) that if a borrower or debtor fails to meet a payment obligation under an agreement, the individual guarantor will fulfil that obligation.

A personal Guarantee provides security for the creditor as it guarantees that the obligations under the contract will be met, even if by the individual guarantor.

When is a personal guarantee used?

Personal Guarantees might arise on agreements such at tenancy agreements or loans/hire purchase agreements.

Creditors will often ask for personal guarantees where a debtor has a low income or has a bad credit history.

Can a personal guarantee be enforced?

If the debtor fails to meet their obligations, the creditor will then look to the Guarantor instead. This means that the guarantor’s personal assets are at risk as the liability to meet the obligations set out in the guarantee is personal to the individual guarantor.

The creditor can seek to enforce the terms of the guarantee by issuing court proceedings against the Guarantor.  Any court Judgment can then be enforced against the Guarantor’s assets including their property.

Can a personal guarantee be transferred or cancelled?

If a Guarantor wants to be released from a Guarantee, they must obtain the creditor’s permission. The very reason for a creditor seeking a Guarantee in the first place is usually because they have concerns over the debtor’s ability to meet their obligations.

Creditors will not usually agree to the removal of a guarantor unless a replacement guarantor agrees to take their place. Even then, the creditor may not agree if the proposed guarantor does not have the ability to meet any payments required under the guarantee.  

How long does a personal guarantee last for?

A guarantee lasts as long as the debtor’s obligations under the Agreement. For example, a Guarantee signed by a director of a company does not automatically come to an end when that person ceases to be a director of a company.

Does a personal guarantee come to an end on the death of a guarantor?

The death of the individual guarantor does not automatically discharge the guarantee obligations under the guarantee. The payment of any sums due under the guarantee as a result of the default of a Debtor may become the debt of the Guarantor’s estate.

Should I sign a personal guarantee?

Any personal guarantee should advise you to seek independent legal advice. It is your responsibility as the guarantor to weigh up the financial risks involved, as you will ultimately be held responsible for the debt or payments if the debtor fails to keep to the terms of the agreement.

If you have any questions about guarantees, our solicitors offer specialist advice and a free consultation to all new clients at our Christchurch or Ringwood offices, call us on 01202 499255 or click here.