Not to sound cliché, but extraordinary times call for extraordinary measures. With the economy struggling, and even customers that we thought were “built to last” experiencing tight budgets and cash flow problems, we never know who the next serious past due account will be.
As you can imagine, along with this unprecedented economic downturn, there has been a dramatic increase in the number of claims being submitted to our agency, which in many cases require litigation.
When it comes to suing the corporate debtor, obtaining the judgment is often the easy part, since most debtors may want to pay but don’t have the capacity to pay. The hard part however is finding and securing assets that can help to satisfy the judgment. With funds in corporate bank accounts drying up and other current assets, such as inventory, not easily sellable, being able to pursue the owners or executive management personally is now taking on new importance.
Although obtaining personal guarantees on new and existing customers is presently a very prudent thing to do, requesting that a current customer personally sign a guarantee is going to be difficult. However, if they need your product and services, then hopefully they’ll understand the new normal.
On a few of the claims that have been recently submitted to us, we’ve seen a personal guarantee included in the signed customer credit application. Chances are that when the customer signed the document, they were probably more concerned about obtaining credit, rather than being personally on the hook for what the company would owe down the road. Nonetheless, a personal guarantee is giving the collection effort much needed leverage.
Since personal guarantees may become part of your normal credit operating procedure, here are a couple of ideas to keep in mind.
1) The enforcement of any document is only as good as the correctness of its content. If the personal guarantee has ambiguous clauses, and terms that are legally questionable, its enforcement may be greatly diminished. Therefore, it’s always well advised to have your attorney draw up this document in order to maximize its effectiveness.
2) Although the name of the guarantor is usually included within the body of the guarantee content, the guarantor’s name should also be printed or typed under the signature line. So often, we’ve seen the signature is nothing but a scribble, making it very difficult to identify the individual. Please note that even if the guarantor is the owner or part of the executive leadership of the company, their title should not be included anywhere since that may imply they are signing as a corporate officer, and not as an individual.
3) It’s also a good idea to make sure that the signature is in fact that of the guarantor. On occasion we have come across personal guarantees that were signed by the principle’s secretary as part of their clerical work. A staff person requested to sign the personal guarantee on behalf of the guarantor can easily impact the legality of the document. Of course, having a personal guarantee notarized is another very important level of strengthening the legality.
4) As much as possible, and within a personal confidential information legal framework, a guarantor’s social security number, home address, telephone number, cell phone number and e-mail address are all part of the information that should be requested and held in a very secure file. When guarantors have left, moved away, or just gone missing, the personal information becomes a critical part of the collection pursuit assembly line.
5) Depending upon the situation, if the guarantor could also submit personal financials (this request is usually declined but it never hurts to ask), the creditor has at least a snapshot of the current financial situation, along with liquid assets and real property that could be seized in an effort to fulfill the claim.
As we all plod along in our best efforts to make sense of our new credit and collection landscape, I hope the above will be helpful to you in strengthening your credit risk management system.
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This article has been edited by Steven Gan
* Please note that the above article is not legal advice and should not be relied upon in making legal decisions.