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Personal guarantees make a difference when collecting a debt

Binding contracts are a cornerstone of every successful business. They stipulate the goods, services, delivery date, and cost. They also should include various clauses, including what happens if the customer does not pay their bill. Some go a step further in asking the person who signs the agreement also to include a personal guarantee even if the company is an LLC, C corporation, partnership, trust, or other legal structure.

How personal guarantees work

A personal guarantee makes the signee personally liable for the business’s unpaid debt. The owner typically tries to shield themselves from liability using a business structure, but a personal guarantee gives the creditor a second source for payment. This arrangement can also further motivate the signor/guarantor to ensure that the business pays its debts.

There are two common types of guarantees. Unconditional guarantees have no limits, and the guarantor pays the total amount. Conditional guarantees will have stipulations, possibly including:

  • A time frame for recovering payment from the guarantor
  • The amount the guarantor is obligated to pay
  • Both conditions

There are many rules and protections in collecting a debt from a business. A personal guarantee simplifies the collection process because it cuts through that red tape and enables the creditor to directly approach the guarantor regardless of what the company is going through.

The contract must be valid

Business contracts must meet Texas’s legal requirements if the creditor expects the court to enforce the agreement. Businesses interested in using personal guarantees can consult with an attorney who handles business agreements and collections here in Texas.