By Alex Barthet
Extending credit gives you an advantage over your competitors and increases sales. While this is very beneficial, especially in the construction industry, it doesn’t come without some risk. Extending credit creates a financial exposure for you, and this may need to be absorbed if things don’t go well. Not everybody to whom you extend credit will always pay on time or, unfortunately, at all. It’s always possible that the job where you extended credit or delivered materials goes into bankruptcy or foreclosure. So, understand when you extend credit, you are taking a big risk. In this article, we will discuss different ways you might secure your rights to get paid, the most important of which will be through personal guarantees.
A personal guaranty is a written promise from an individual to pay the debt of a business. For a personal guaranty to be most effective, it should include the signatures of both husband and wife. This is important because, in Florida, the liabilities of one spouse are not automatically the liabilities of the other.
Here is a practical example. We had a client who supplies windows and doors. Unfortunately, they did not secure their lien rights, but they did have a personal guarantee from the husband/owner of the company. So we filed the lawsuit and obtained a favorable judgment against the husband. We garnished his bank account, and there was ample money there to satisfy the debt. Great, you would think, but unfortunately, the account was held jointly by the husband and his wife in what’s known as tenancy by the entirety. As a result, even though there was enough money in the account and the personal guarantor (the husband) was a joint owner of the account, none of the money – not even half of the money or a portion of the money – was available to satisfy the judgment.
Understand that while a personal guarantee is good and definitely better than not having one, there are limitations in what you can do if you don’t have the spouse on the guarantee as well. So, if you really want to protect yourself, then you need the guarantee of both the husband and the wife.
Also, note that the guarantee should not be conditioned on the business not paying you. You don’t want to be limited in going after the guarantor only if the business doesn’t pay the debt. You don’t want to