A Closer Look at Personal Guarantees

Definition of a personal guarantee

A surety bond or personal guarantee is a written contract under which an individual or legal entity (the guarantor) agrees to pay the debt of another person (the debtor or issuer) to a creditor (the lender) in the event that the debtor is unable to do so.

Benefit

The main advantage of a surety agreement is that it establishes, for the benefit of the creditor, a second debtor known as an accessory debtor (the surety).

Disadvantage

The main drawback of a guarantee is that it is ancillary to the loan agreement or bond issue (the principal contract) from which the claim to be secured arises.

Thus, if the main contract is void, the surety agreement in turn becomes void, meaning that it no longer serves any purpose.

The Different Types of Surety Bonds

1. The Simple Surety Bond

In the case of a simple guarantee, the creditor must first seek payment from the debtor and make every effort to recover the amount owed. The creditor may not seek recourse against the guarantor until all other available remedies have been exhausted.

Example: A financial institution (the lender) grants a loan of 10,000 euros to a company (the debtor). The company’s executive acts as a guarantor (the guarantor) for the amount of 10,000 euros. Under a simple guarantee, the lender must first seek to recover the amounts owed from the debtor or borrower. Only if the debtor is insolvent and legal proceedings against them prove unsuccessful will the guarantor be held liable.

2. Joint and several liability

In the case of a joint and several guarantee:

• The bank or lender may claim the full amount of the guarantee from the guarantor as soon as the borrower fails to meet their obligations.
• When multiple individuals have acted as guarantors for the same debt, the bank or lender has the right to recover the full amount of the guarantee from just one of them (which is why the guarantee is joint and several). The guarantor against whom the bank takes action may not require the bank to first take action against the debtor.
• In the event of the guarantor’s death, the bank or lender may seek recourse against any of the guarantor’s heirs who have unconditionally accepted the estate. In this way, the bank or lender may recover the full amount of the guarantee.

Example: A financial institution (the lender) grants a loan of 10,000 euros to a company (the debtor). The two executives of this company act as guarantors (the guarantee) for 10,000 euros. Under a joint and several guarantee, if the borrower defaults on payment, the lender may sue either guarantor directly without first pursuing the borrower.