In business, a personal guarantee is when a business owner puts his own personal finances on the line to guarantee payment of a loan taken out on behalf of his company. So if the business cannot make payments on the loan, then the business owner himself will be responsible for paying off the remainder of it. Furthermore, if the business owner cannot afford to make payments on the loan, then the lender can go after his personal assets and even take him to court to ensure repayment. As such, personal guarantees limit the way in which the business owner can protect his assets since those assets are now being used as collateral.

One common scenario involving personal guarantees is that faced by entrepreneurs or small business owners. Often, entrepreneurs seeking a small business loan will be asked to make a personal guarantee of the loan. To do this, he will guarantee his own personal finances to back the loan. Regardless of whether or not the business is successful, the business owner who makes the personal guarantee will be held responsible for paying back the loan even if it defaults.

If you’ve made a personal guarantee on a loan and end up defaulting, then you should be careful in how you proceed. Although it may be a temptation to transfer your assets out of your name in an attempt to avoid collection, doing so might be unlawful. This could be considered a fraudulent transfer, which occurs when you as the debtor transfer your property with the intent to defraud your creditors. It’s always best to act in good faith and cooperate with creditors, as they may be more willing to work with you. Additionally, creditors may request your liability planning, so any liability planning you do needs to be done carefully with transfer laws in mind. Overall, avoiding the consequences of making a personal guarantee is a sure way to end up in court, a place where dodging your debts will not be viewed favorably.

When considering making a personal guarantee for your business, it’s important to consult an attorney for legal advice. Signing a personal guarantee greatly affects your ability to protect your assets. But, an attorney can be used to review the bank’s agreement and help you determine the best possible route for you and your company.

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