Asset Protecting Against Loan Guarantees

By Stephen Speiser, Esq.

May 2024

There is, perhaps, nothing more destructive of personal wealth than a personal guarantee.  Of all the parties to a commercial loan transaction, guarantors are the ones who are the most “at risk” following a default.  The reasons are several:

  • lenders can proceed against the guarantor without first foreclosing on the collateral;
  • guarantors have no recourse to collateral pledged to the lender;
  • guarantors have no legal control over the sale of assets in foreclosure;
  • there are very few, if any, defenses to a valid loan guarantee;
  • guarantors cannot piggyback on the borrowers’ defenses or claims against the lender;
  • legal claims against the borrower cannot be asserted against the lender;
  • legal claims against fellow guarantors cannot be asserted against the lender; and
  • a borrower’s bankruptcy will not stay the legal proceedings on the loan guarantees.

Simply put, guarantors have few, if any, defenses to a contractual liability that can completely wipe them out.  Yet, despite these risks, personal guarantees are often freely given without any thought or planning.

Part I – Protecting Assets After a Guarantee is Signed

While asset protection planning is most effective when implemented before a guarantee is given and before a loan is in default, there are still legal options and strategies that may allow a guarantor to preserve and protect some or all their wealth. 

The most powerful and effective option available is foreign asset protection, which is discussed at the end of this article.  Let us begin our analysis, however, with an examination of domestic asset protection planning options that may be available after a guarantee is given.

A. Domestic Legal Options & Strategies

To understanding the options and strategies a guarantor may be able to employ to preserve and protect their wealth, one must first understand the law relating to fraudulent transfers[1].  

[1] NOTE: The term “fraudulent transfer” comes from English common law and is not “fraud” in the common sense of the word.  It is merely a civil remedy that allows a creditor to recover assets transferred by a debtor.

Fraudulent transfers are transfers of property that can be set aside by a court and recovered by the creditor.  Once we know what constitutes a fraudulent transfer, we can focus on permitted transactions that fall outside the scope of fraudulent transfer statutes.

Types of Voidable Transactions

Fraudulent transfers, now commonly referred to as “voidable transactions,” are governed in many states by the Uniform Voidable Transactions Act (“UVTA”), which provides as follows:

  • UVTA § 4(a) – “Actual Intent” Test. This is your classic form of fraudulent transfer in which there is some evidence that the assets were moved with actual intent to avoid paying a creditor. There are several factors listed in the UVTA (referred to in the statute as “badges of fraud”) that a court may consider in deciding whether such intent is present. Actual Intent transfers are generally voidable as to both current and future creditors.
  • UVTA § 4(b) – “Constructive Fraud” Test. This is an alternate test that may be employed where evidence of actual intent is not present. UVTA § 4(b) says that “constructive fraud” may be found to exist where a transfer was made without receiving an exchange of reasonably equivalent value and (i) the debtor is about to engage in a business or transaction for which the debtor’s remaining assets are unreasonably small, or (ii) the debtor incurs debts that are beyond their ability to pay.
  • UVTA § 5 – “Balance Sheet” Test. The Balance Sheet test is another alternate test that may be employed where evidence of actual intent is lacking. The Balance Sheet test applies where the transfers at issue render the debtor insolvent. Such transfers are voidable by an existing creditor, but not by a future creditor.

In the case of a loan guarantor, banks (or other lenders) would qualify as “existing” creditors under all these tests.  Therefore, any transfer falling within one of the three categories listed above could potentially be set aside by those creditors. 

Badges of Fraud

In most states, a single factor i.e., a single badge of fraud, will cast suspicion on the transferor’s intent but will not, by itself, sustain a finding of actual intent to defraud.  It is only where several factors are present in the same transaction that courts may rightfully conclude a fraudulent transfer occurred.

Badges of fraud under the UVTA generally include, though are not limited to: (1) a transfer to a close relation or insider; (2) a transfer for no consideration (or where the consideration was unreasonably small compared to the value of the asset); (3) a transfer of substantially all the debtor’s assets; (4) a transfer that was concealed or not disclosed; (5) a transfer that was made when there was a known creditor or liability event; (6) where the transferor retained control of the property after the transfer; and (7) where the debtor was insolvent or was rendered insolvent by the transfer.

The existence of badges of fraud creates a prima facie case of fraudulent intent and raises a rebuttable presumption that the transaction is void.  Once a prima facie case has been established, the burden shifts to the guarantor (or to the party defending the transfer) to show that it was made without intent to “delay, hinder or defraud creditors“.

In conclusion, badges of fraud under the UVTA (and other fraudulent transfer statutes) are a set of factors that courts may consider in determining whether a transaction was made with fraudulent intent. These factors are not conclusive when only one is present but can provide a basis for inferring fraudulent intent when several are considered together.

So, now that we have a general understanding of the law relating to fraudulent transfers, let’s examine how they may or may not apply in a given situation. 

Avoiding Voidable Transfers

A common knee-jerk reaction to the threat of legal proceedings on a guarantee is to transfer assets.  Whether a guarantor can protect their assets by doing so, however, will depend upon how title is held, where the property is located, the state in which they are domiciled and the consideration paid for the transfer, if any. 

How Title is Held

The first question that needs to be examined is how title is how held.  If title to the property is held in a legal entity (such as a limited partnership or a limited liability company) or is held jointly by the guarantor and their spouse as “tenants-by-the-entireties”, these assets may already enjoy some measure of protection from the guarantee given to the lender.  Let’s examine each, in turn.

Title Held In An EntityIn some states, such as New York and Florida, assets held by a limited partnership or in a limited liability company cannot be seized by a creditor[2].  In such states, a creditor’s sole remedy is something called a charging order.  In simplest terms, a charging order is a court order that says that any distribution of money or other assets by the LP or LLC that would otherwise be paid to a debtor who is a limited partner or member must, instead, be paid to the creditor.  In effect, a charging order gives a creditor the right to intercept any distribution of cash or other property leaving the LP/LLC and going to the guarantor.  While that may not sound like “protection” from a creditor, in effect, it is.  The reason is as follows.  If you live in a state where a charging order is a creditor’s sole legal remedy, a creditor cannot foreclose the guarantor’s ownership interest in the LP/LLC and cannot force these entities to make a distribution.  Rather, the creditor must wait for the entity to make a voluntary distribution, and an LP/LLC is under no obligation to do so.  Again, the key legal takeaway is that a charging order does not give a creditor the right to force these entities to make a distribution, nor does it give the creditor any management powers or control over these entities. 

[2] In Florida, single member LLC’s may not enjoy this protection.

The net effect, therefore, is that the creditor has no way of knowing if or when they will ever see a distribution from the LP/LLC.  This gives a guarantor the ability to go to the lender and say “Look, as long as you are standing there with a charging order in your hand, the LP/LLC will NEVER make a distribution.”  Most creditors (and their lawyers) want to get paid; they do not want to wait years to see if they will ever be able to collect on their judgment.  That gives the guarantor serious negotiating leverage to settle the claim for pennies on the dollar.  So, if assets are held inside an LP or LLC, the property may already be protected and need not be transferred. 

Unfortunately, some states also allow a lender to foreclose on a guarantor’s ownership interest in an LP or LLC and seize its assets.  If that is the case, other strategies will be needed. For a state-by-state list of charging order laws click here

Title Held As Tenants By The EntiretiesAnother type of protection comes in the form of property that is held jointly by married couples as “tenants-by-the-entireties” (“TBE”).  A tenancy by the entireties is a type of joint ownership that comes from English common law and is only available to married couples.  The key characteristics of tenancies by the entireties are as follows:

  • The married couple jointly owns an indivisible, 100% interest in the property.
  • A creditor of one spouse cannot force a partition or sale of the property.
  • The property cannot be seized to pay off debts of just one spouse.
  • A creditor can only seize the property if both spouses are jointly liable for the debt.
  • When one spouse dies, the surviving spouse automatically becomes the sole owner of the property.

At present, 25 U.S. states[3] and the District of Columbia recognize tenancies by the entireties. Some of these states, allow both real estate and personal property to be held as TBEs, and other states limit ownership to real property only.  The specific laws, and the requirements for establishing tenancies by the entireties, vary greatly from state to state.  Nevertheless, if a guarantor is fortunate to live in a state such as New York or Florida and hold their real estate and their stocks, bonds, and other personal assets as tenants by the entireties, these assets may already be protected from the lender on the guarantee.  For a state-by-state list of TBE laws, click here.

[3]  Alaska, Arkansas, Delaware, District of Columbia, Florida, Hawaii, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia and Wyoming.

Title Held in the Personal Name of a GuarantorIn general, real estate and other assets held in the personal name of a guarantor can be seized by the lender holding the guarantee.  So before moving assets, let’s examine which of the following transactions will constitute a fraudulent transfer:  

Transfer of Property to Family or Friends for Safe Keeping. When confronted with a catastrophic lawsuit or major liability event, a guarantor may seek to transfer assets to family members or a close friend for safe keeping. This will not work. Such transfers will be voidable under one or more of the UVTA tests discussed above.

Transfer to a Spouse. The laws on inter-spousal transfers are more complex and nuanced and may provide a partial solution. In most states, a spouse has an equitable claim to a portion of proceeds from the sale of marital assets. Provided the assets are not released by a spouse under a prenuptial agreement, the spouse should be entitled to a marital share of those assets (typically 50%).

In this situation, a transfer of 50% of the assets to the spouse (or 50% of the proceeds from the sale of the assets) would arguably not be a fraudulent transfer.  A lender would be hard pressed to establish actual intent to avoid paying the loan guarantee where the spouse has a pre-existing legal right to their marital share.  So, absent clear evidence of motive, the transfer may not be set aside.

The “constructive fraud” test wouldn’t apply to this transfer either because the guarantor is not about to engage in a “business or transaction” or “incur debts beyond their ability to pay” (both requirements of the statute).

Last, the “balance sheet” test won’t not apply where the assets are jointly owned or where the spouse is legally entitled to a marital share of the sales proceeds because, arguably, those are not the sole assets of the guarantor. 

So, we conclude that in certain states, an existing creditor may not be able to set aside a claim by a spouse to their share of jointly owned property or to their marital share of the sales proceeds.  This analysis, however, is fact and state specific and may not apply in all instances.  Further, if the guarantor were to transfer 100% of the proceeds to their spouse, such a transfer may be voidable under the actual intent test and may also be voidable under the “balance sheet” test because it would reduce the guarantor’s net worth by the guarantor’s share of the proceeds gifted to their spouse.

• Transfer to a Domestic Trust. Very often, a guarantor will want to transfer assets to an irrevocable trust for the benefit of their children to avoid a judgment. Unfortunately, a transfer to a trust would probably constitute a voidable transaction under the actual intent test and/or the balance sheet test. While this type of inquiry is fact-specific, meaning that there may be legitimate means by which a guarantor could transfer the funds in trust, in most cases such transfer will run afoul of the UVTA.

• Transfers To An LLC. What if a guarantor decided to transfer sale proceeds or other assets to a newly formed limited liability company? Let’s assume further that both the guarantor and their spouse each transferred their respective marital assets in exchange for proportional (50/50) interests in the LLC. Is this a voidable transaction? Not necessarily. UVTA § 4 Comment 8 tells us that transfers of assets to capitalize newly formed LLCs are not per se voidable. According to the Uniform Law Commission, state legislatures clearly intended that LLCs would be used in “ordinary circumstances” for asset protection, such as where a group of entrepreneurs start a business. It is only where those entrepreneurs organize an LLC to avoid the financial claims of a creditor, that such action might be considered a “badge of fraud” under Section 4(a)(1). So, if the motive behind the formation of the LLC was it to achieve a legitimate business goal, such as efficient wealth planning or to make a legitimate investment, it would not be a voidable transfer. If, on the other hand, it was organized to avoid paying creditors, it would.

• Transfer to an LLC Owned as Tenants By The Entireties. This is another legal strategy that may be available to a guarantor. What if a married couple formed an LLC, capitalized the company with sale proceeds or other assets, and held their membership interest jointly, as tenants by the entireties? If the marital assets used to fund the company were TBE property, they would be free to sell, transfer and invest those TBE assets into the newly formed LLC, and a lender would not be able to set aside the transfer of those assets or take the guarantor’s TBE ownership interest in the LLC.

Can a Guarantor Sell Their Property?

Selling property is not usually a voidable transaction when the seller receives reasonably equivalent value.  Nevertheless, if a guarantor were to sell assets where the clear intent was to avoid a creditor, the sale would violate the actual intent test and constitute a voidable transaction under § 4(a) of the UVTA.  Bear in mind, however, that the lender must show evidence of actual intent, which would be very difficult to prove.  What kind of evidence would tend to prove ill intent in this situation?  Perhaps an exchange of correspondence with a real estate agent in which the seller makes statements suggesting actual intent to avoid paying the guarantee.  Barring something like that, however, there should be no prohibition on the sale of real estate or other assets.  The real question, however, is what can a guarantor do with the sales proceeds?

Purchase of a Replacement Property

Purchase of a replacement property would not be a fraudulent transfer because the guarantor is merely trading proceeds received from the sale of one property to purchase another.  Generally, absent evidence of actual intent to avoid a creditor, the purchase of replacement real property is not a voidable transaction.  Just as with the receipt of cash proceeds from the sale of a house, the purchase of a new house at market price represents an exchange of equivalent value; the guarantor’s net worth has not changed.  Therefore, neither the constructive fraud test nor the balance sheet test would apply to that purchase.

The problem with purchasing a replacement property, however, is that it can still be seized by the lender to whom the guarantee was given unless it is purchased by a married couple using assets held as tenants-by-the-entireties, or if a homestead exception applies.

Homestead Exemptions

Many states provide for homestead exemptions that shield all or a portion of the equity in a person’s primary residence from the claims of their creditors.  In New York State, the homestead exemption amount varies from county to county.  In New York City, the exemption amount is $300,000 for a married couple.  This means, if a married couple owned a home in NYC and a creditor were to force the sale of that property to satisfy a judgment, the first $300,000 in net sale proceeds would go to the owners and the excess would go to pay the creditor.  In the case of a high-net-worth guarantor with an expensive home, the NY homestead exemption would not be of any meaningful help because the lender could force the sale of the property and guarantor would only receive $300,000 from the judicial sale of their home. 

Some states, however, have an “unlimited” homestead exemption, which means that all the equity in their primary residence – 100% – is shielded from the claims of creditors.  In such a jurisdiction, a home could be worth tens of millions of dollars, and all of it would be exempt from the claims of creditors.

At present, 7 states and the District of Columbia offer an unlimited homestead exemption[4].  Florida and Texas are perhaps the most well-known homestead locations used to shield assets from a catastrophic judgment.  If a guarantor were fortunate to live in a state that offers an “unlimited” homestead exemption, their home would be untouchable.  For a state-by-state list of homestead exemption laws, click here.

[4]  Arkansas, Florida, Iowa, Kansas, Oklahoma, So. Dakota, Texas, and the District of Columbia

Purchase of Replacement Property using a Homestead Exemption

If a guarantor were to use sales proceeds (even in combination with other assets) to purchase a multi-million-dollar replacement property in a state such as Florida, they could shield that portion of their fortune from the loan guarantee given to the bank.  A non-resident guarantor, however, would have to relocate to that state and make it their permanent, primary residence.

Fraudulent Transfer Law Does Not Apply to Florida’s Homestead Exemption

The Supreme Court of Florida in Havoco of America, Ltd., v Hill, 790 So.2d 1018 (Fla. 2001), held that using proceeds from unprotected property to purchase a homestead – even if done with intent to frustrate a creditor – is not a fraudulent transaction.  In many other states, however, this would be deemed a “fraudulent conversion of assets” and disallowed. 

As confirmed in Havoco, the homestead property can be purchased at any time, even after a lawsuit has been filed and a judgment entered (provided the judgment has not been recorded in the county before the homestead property is purchased).

Effect of Bankruptcy on Homestead Exemption

The only limit on the use of Florida’s homestead exemption to protect assets from a judgment-creditor, arises in the context of a bankruptcy filing.  While Florida law provides that the homestead exemption attaches the second you move into your new home, bankruptcy law says that you will lose that protection if you have not lived in your home for a continuous period of at least forty (40) months prior to filing (i.e., 1,215 days to be more precise).  However, if you owned a previous home in the same state and used the proceeds from the sale of that home to buy the replacement property, you can apply the time that you lived in the first home to meet this requirement.  The purpose of the continuous 40-month requirement is to prevent a debtor from moving to a state such as Florida, buying a home and then filing for bankruptcy.  If, however, a guarantor was to move to Florida but not file for bankruptcy, then the continuous 40-month period would not be a problem unless they were subsequently forced into an involuntary bankruptcy by their creditors.  

Nevertheless, if a guarantor only had one creditor, i.e., just the bank on a loan guarantee, this risk may be somewhat mitigated.  While it is possible for a single creditor to force a debtor into bankruptcy, bankruptcy courts are generally reluctant to allow such cases to proceed and will only grant involuntary relief where it is demonstrated that there are special circumstances such as real fraud, or where the creditor cannot possibly obtain adequate relief outside of a bankruptcy setting.

If the 40-month requirement is still a problem for some guarantors, there is a second exemption provision in the Bankruptcy Code that might offer a workaround, and it relates to the purchase of a home as tenants-by-the-entireties.

The Tenancy By The Entireties LoopholePurchasing a homestead in Florida as tenants by the entireties offers a potential loophole that could protect a guarantor from the lender’s claims on a loan guarantee previously given.  First, as previously discussed, a TBE property cannot be taken to satisfy the individual debts of only one spouse.  Rather, it is only where there are joint debts (such as where they both spouses sign the same guarantee) that the property may be taken.

Second, if the guarantor is forced into bankruptcy by the bank, the guarantor has two different Bankruptcy Code exemptions they can use to protect their homestead: (1) the Florida homestead exemption, or (2) a “tenancy by the entireties” exemption.  As noted above, if the client were to choose the homestead exemption, they must be able to satisfy the 40-month residency requirement.  If, however, the client was to choose the “tenancy by the entireties exemption”, that 40-month requirement would not apply.

Therefore, while outcomes may vary due to the specific facts of each case, the “tenancy by the entirety loophole” in bankruptcy may be an effective tool that allows a guarantor to shield their homestead.

International Asset Protection

If a guarantor cannot fully protect their assets using the domestic legal strategies discussed above, then an international asset protection trust (“IAPT”) offers a powerful solution.  An IAPT is often referred to as the “gold standard” of asset protection.  They are widely used by high-net-worth families because the trust can lawfully hold assets outside the jurisdiction of the United States and can also be used as a multi-generational estate planning tool.  While the assets are typically held for safe keeping by reputable Swiss trustees and bankers, the trusts themselves are formed, legally governed, and operate out of the most highly protective asset protection jurisdictions in the world.  Among the more popular offshore jurisdictions are Belize, Nevis, and the Cook Islands which have long recognized the validity of IAPTs.  While the trust statutes in these jurisdictions vary to some degree, they all provide the following legal protections not otherwise available in the United States:

  1. U.S. Judgments Not Recognized.  Under international law, no foreign nation is bound by U.S. law, except by treaty.  This is the essence of offshore asset protection.  IAPTs are simply immune from U.S. law.  One reason Belize, Nevis and the Cook Islands are popular IAPT jurisdictions is because there are no treaties which obligate them to recognize a U.S. judgment.  In practical terms, this means that if a lender holding a U.S. judgment on a personal guarantee wants to sue an IAPT, they must file a new lawsuit in that foreign jurisdiction and prove their case all over again.  Moreover, since the foreign trust is not a guarantor on the loan, the IAPT cannot – as a matter of law – be found liable to the lender on the guarantee.  Rather, the sole legal claim a lender could ever bring against the IAPT is a fraudulent transfer claim for the funds it received from the guarantor, which as discussed below, is far more difficult to prove in an IAPT jurisdiction than in the U.S.
  2. Fraudulent Transfer Laws.  In both IAPT jurisdictions and in the United States, a fraudulent transfer case is a civil – not a criminal – matter.  Nevertheless, it is far more difficult to prove a fraudulent transfer case in a foreign asset protection jurisdiction because a transfer of assets to an IAPT can only be challenged by proving actual fraud “beyond a reasonable doubt”.  This is a much higher burden of proof than what is required in the U.S.  In the U.S., “beyond a reasonable doubt” is only used in criminal cases, where the evidence presented must be so strong that it leaves jurors firmly convinced of the defendant’s guilt, with no reasonable doubt remaining in their minds.  The rationale for such a high standard in U.S. criminal cases is that “it’s better to let nine guilty people go free, than to convict one innocent person”.  By contrast, the burden of proof in U.S. civil cases is the much lower “preponderance of the evidence” standard.  Under proof by a “preponderance of the evidence” a creditor need only show that their fraudulent transfer claim is more probable than not, requiring a mere 51% or greater probability.  For these reasons, it extremely difficult for a U.S. creditor to meet the higher burden of proof and prevail on a fraudulent transfer claim in foreign asset protection jurisdictions.
  3. Statute of Limitations.  Another protection afforded to IAPTs is the extremely short statute of limitations applicable to fraudulent transfers.  In IAPT jurisdictions, a creditor will only have 1 or 2 years from the date of transfer in which to bring a claim (the exact timeframe will depend upon the specific IAPT jurisdiction).  If the lender fails to file a fraudulent transfer claim within that time, the case is forever barred.  Since lawsuits in the United States typically take years to wind their way through the courts, the statute of limitations may pass before the creditor even becomes aware of the existence of the IAPT.  By contrast, the statute of limitations for fraudulent transfer claims in the U.S. is 4 years from the date or transfer, or 1 year from the date of discovery, whichever is later.
  4. Other Legal Requirements.  There are also high bars to filing a lawsuit in an IAPT jurisdiction.  Local rules require that the plaintiff post a bond as a pre-condition to filing a lawsuit and pay the defendant’s legal fees should they lose the case.  The bonding requirement in Belize, for example, is one-half the amount of the claim, which in the case of a loan guarantor would likely require a multimillion-dollar bond.  Further, contingent fee arrangements are prohibited in IAPT jurisdictions, which means the creditor must hire a licensed attorney in that foreign jurisdiction and also pay a substantial legal retainer in advance as well.
  5. Beneficiaries.  In most U.S. states, the settlor of a trust cannot also be a beneficiary.  With an IAPT, however, both the guarantor-settlor and their family can be beneficiaries and receive distributions from the trust.
  6. Trustee Protections.  With a U.S. trust, the trustees are subject to U.S. law and must therefore comply with court orders directing them to turn over trust assets.  With an IAPT, however, the trustees are not U.S. citizens, are not subject to U.S. laws, and are not bound by the orders of a U.S. judge.  In fact, a foreign trustee would be prohibited under the terms of the trust and the statutes of the IAPT jurisdiction from complying with such a court order.  Further, in the event a U.S. judge issued an order directing the settlor to instruct the trustees to turn over IAPT assets, the trustees would be duty bound to ignore those instructions because they were not the voluntary wishes of the settlor but, rather, were the product of legal duress.  This discretionary power is an important trustee protection because it allows a U.S. settlor to fully comply with a court order, sign whatever legal document is required of them, and thereby avoid contempt of court charges.

The foregoing is but a brief list of some of the benefits and protections afforded by an IAPT.  It also bears repeating that the trust assets themselves need not be held in the IAPT jurisdiction.  Rather, they can be held safely in Switzerland or wherever else the guarantor-settlor wishes, while at the same time a creditor would be forced to litigate their claims in the asset protective jurisdiction designated by the guarantor in the trust agreement.  So, for a guarantor who has no other means to protect their stocks, bonds, cash or other liquid assets, an international asset protection trust offers a powerful solution.

Part II – Pre-Planning for a Guarantee

Having considered several domestic and international asset protection strategies to protect a guarantor after the fact from the consequences of the guarantee signed and delivered, let us consider some pre-planning strategies that can and should be implemented before any guarantee is ever given.

Limited v. Unlimited Personal Guarantees

There are the two main types of personal guarantees:

  • Unlimited personal guarantees. These guarantees require a guarantor to accept full liability for the loan. This means the guarantor is responsible for repaying the entire loan amount. So, if the borrower fails to repay the loan, the guarantor must repay the entire outstanding loan amount. This is the default guarantee most lenders ask for.
  • Limited personal guarantees. Limited personal guarantees (as the name suggests) limit a guarantor’s financial exposure in one or more ways. For example, it might limit the guarantee to a certain dollar amount or percentage of the total loan debt. Effort should always be made to negotiate a limited loan guarantees where a guarantee cannot be avoided.

Negotiating Personal Guarantees

The simple truth is that one should never sign a personal guarantee. They are simply too destructive of personal wealth. Refusing to sign a personal guarantee should always be your default opening.  Obviously, this will not always work, but one thing is for certain, you will never succeed if you don’t try.  Far too often guarantees are signed as presented in the mistaken belief that they are not negotiable.  As a result, no effort is made to get the lender to waive the guarantee or to negotiate its terms.  Sadly, all too often, guarantors and their lawyers don’t even bother reading the loan guarantee. 

If a lender insists that a guarantee be given, one should work to negotiate one or more of the following limitations:

• Avoiding Joint and Several Liability. Where there is more than one guarantor, most personal guarantees will seek to impost “joint and several liability.” This gives the lender the legal right to obtain repayment in full from any one loan guarantor. Should that occur, the paying guarantor would then have to sue their fellow guarantors to try to collect reimbursement of their pro-rata share of the debt.

• Limit The Guaranteed Amount. As an alternative to “joint and several liability”, allocate a specific percentage or dollar amount of the loan amount to each guarantor. If there is only one guarantor, limit the guarantee to a maximum dollar amount or to a percentage of the outstanding loan. Never agree to pay more than 100% of the loan amount.

• Burn Off. Request that the personal guarantee “burn off” (be reduced) upon reaching certain milestones. For example, if the borrower makes timely payments, then, after 12 months, the guaranteed amount gets reduced by 25%; after 24 months, 50%; and after 36 months, the guarantee “sunsets” (become void). Alternatively, ask to be relieved of the personal guarantee once a certain percent of the loan has been repaid.

• Kick-In Guarantees. As the name suggests, the guarantee only “kicks-in” upon the happening of one or more specific events or defaults, such as non-payment, a breach of the loan documents, borrower misconduct (i.e., “bad boy acts”), etc. A “kick-in” eliminates all loan risks not specifically enumerated. For example, if the lender called the loan because it deemed itself insecure based on a reduced loan to value ratio or debt service coverage ratio, a guarantor would not be liable to repay the loan unless that was listed as a “kick-in” event.

Limit on Further Extensions of Credit. Guarantees should never apply to loan increases or further extensions of credit or loan renewals without the guarantors written consent, because those events expose the guarantor to risks never agreed to and which are outside the guarantors’ control.

• Modify Reporting Requirements. Lenders typically require that guarantors submit annual financial statements so they can locate assets should the need arise. Try to eliminate or limit any further obligation to provide updated statements. Also, not listing assets on a financial statement could be grounds for a claim of fraud against the lender, even if the lender is not relying on the guarantor’s assets in making the loan. Many times, lenders simply want some additional leverage over the borrower and getting a personal guarantee from a partner is an effective way to do that. So, whenever possible, the obligation to provide a personal financial statement should be negotiated so as to impose a minimum acceptable disclosure and seek to limit the guarantee to those assets disclosed.

• Carve-Outs. It may be possible to negotiate a carve-out of specific assets from the guarantee, such as a personal residence or stock in your business.

• Personal Liability Caps. It may also be possible to negotiate a cap on your liability under the guarantee. For example, you could request that the financial obligation under the guarantee be limited to a percentage of your net personal wealth.

• Alternate Security. Another strategy is to create a holding company, transfer certain assets to it, and limit your obligation under the guarantee to those assets. Also, if you have more than one business entity, you may wish to have the guarantee run from that other business, rather than from you, personally.

• Never Include Spouse. As A Guarantor. Never have a spouse co-sign on a personal guarantee. This is a recipe for disaster – both personal and financial. By keeping your spouse off the guarantee, all assets held under the spouse’s personal name will not be included should the personal guarantee be called.

• Personal Guarantee Insurance. Most people are unaware that there is such a thing as personal guarantee insurance which may be available to limit your financial risk under a personal guarantee.


Whether seeking to protect assets after the fact, or seeking to limit liability through pre-planning, shielding assets against a personal loan guarantee can be achieved through careful analysis and planning. Every situation is unique, however, and will present different challenges and opportunities. Should you need help with a personal guarantee, or any other type of asset protection call us today for a complementary consultation.

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