Personal Liability
With the economy dropping off the edge of a cliff, personal liability is becoming a frequent topic of advice with clients and board members; see my prior blog on the subject of liability of officers and directors. Right now, I want to make a note on personal guarantees because either clients are worried about having to make good on them or because creditors are asking for them to shore up a risky situation.
You may remember the three rules of real estate: Location, location, location.
The three rules of personal guarantees are: Don't, don't and don't.
When someone asks you to sign one, use the Nancy Reagan defense: Just say "no." This is, of course, easy advice to give without any situational context. If you choose to ignore it, be aware that these contracts are generally speaking enforceable obligations and they are often open ended in the sense that you may be guaranteeing recovery of costs such as the creditor's legal bill (in addition to the underlying obligation). If guaranty you must, try to get a cap on the amount. At least that way you know what the maximum liabiltiy is. Also, get your attorney to read the guaranty -- who knows what a creditor might put in there?
Also, consider that there is often a personal dimension. A claim for payment can put a lot of pressure on you personally (unless you can comfortably afford to pay up). Think about explaining to your spouse that you have to write a big check to a landlord, bank, equipment lessor or someone else.
If you already have a guaranty in place, you may find that it limits your range of motion in any negotiation you may have with creditors.
Unfortunately, in this climate, we are likely to see personal guarantees asked for and called upon.
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