Receivable/Accounts - Information for Credit and Collection Issues

Wednesday, August 29, 2012

Personal Guarantees and Co-Signors



Often we are asked by clientele what sort of preventative tools are able to be used to prevent files from being sent to collections, or if collections are necessary, ensuring that our company has the wherewithal to execute on the balances owed.

This week, we look at credit managers’ options for guarantors and co-signors, and the legal obligations of the consumers or commercial entities that sign.  Obviously, the use of guarantors and co-signors is an instrument by the creditor to add an extra level of security to repayment.  Each tool has its place to be used under specific circumstances, but when applied properly, it can significantly reduce a creditor’s losses.

A guarantee is a contract, or a clause in a contract between a third entity beyond the creditor and client.  The guarantee is for a debt owed to the lender by a debtor. The guarantor agrees to repay the lender if the debtor defaults. The extent of the guarantee depends upon the terms of the contract, but is usually for an unspecified (and likely unlimited) amount, which would be the total amount(s) owed by the debtor.

From a third-party collections perspective, when an individual owes funds, the consequences of affecting their personal credit rating or executing directly against their personal assets with a judgment is often far more expedient than if dealing with a corporate entity.  As well, far too often a creditor is left short-handed when the limited liability company ceases operations, whether they file for receivership or not.

One of the huge and subtle advantages our company has is that we are exposed to hundreds of clients’ service contracts, leases, and other legal documents – through ongoing experience, we are able to see what contracts are well-researched, properly executed, and stand up in civil court proceedings.  While the examples below are certainly not an exhaustive resource, or specific legal advice to creditors on securing their debts, it does include some successful examples used by our clients, and reprinted with their permission.


CO-SIGNORS ON CONSUMER DEBT

Often on leases, loans, or other open-ended credit that can become viable for legal action, the creditor may require a co-signor to add their name to a debtor’s contract if they are unsure the debtor will reliably remit payment due.  In many cases a co-signor and a guarantor are the same thing, but there are subtle differences.  In any case the co-signor is accepting to be jointly and severally liable for any debt arising from the contract – meaning, all parties who have signed the contract are liable for the full debt owing at any given point, until the debt is resolved or discharged.

Of course, whatever limitations on liability exist for the principal debtor also apply to the co-signor, whether it concerns legal action or credit bureau reporting.  Our article that details those limits can be found in the link below.


Here is a sample co-signor agreement on a consumer’s tenancy lease:

THIS CO-SIGNOR AGREEMENT (“The Agreement”) is entered into this [DATE] by [TENANT NAME] of [ADDRESS] (the “Tenant”) and [CO-SIGNOR] of [ADDRESS] (the “Co-Signor”)
 
I, [CO-SIGNOR], agree and understand that, in executing this Agreement, I am taking full responsibility for the terms and conditions set forth in the lease agreement (the “Lease”) between the Tenant and [LANDLORD NAME] (the “Landlord”).  The Lease, commencing [DATE], governs the occupancy of the property located at [ADDRESS].
 
In executing this Agreement, the Co-Signor agrees to perform all of the Tenant’s duties as set forth in the Lease, and will fulfill all provisions, terms, and conditions contained in the Lease fully and unconditionally.  This shall include, without limitation, the payment of Rent due.
 
If the lease is extended, renewed, or amended, or if the Tenant holds over past the termination date of the Lease, the Co-Signor’s duties as set forth herein will also be extended.  The Co-Signor’s obligations will pertain to the most recent modification, renewal, or extension of the Lease, if applicable.
 
(Signatures, Dates, and Witness)


PERSONAL GUARANTEES ON COMMERCIAL CLAIMS

Creditors with limited liability commercial clients often have limited recourse to recovering their funds, and in certain cases can require of their customers a guarantee by a principal of the company.  One of our commercial clients in Ontario that provides services to commercial entities uses the following wording when requiring a personal guarantee:

I/We, individually jointly and severally agree to irrevocably guarantee all outstanding invoices, orders, and amounts owing by [COMPANY], a duly registered company in the province of Ontario, registered [DATE], corporation number [NUMBER] to [THE CREDITOR], and any their heirs, successors or assigns.
 
I/We agree to secure all outstanding amounted owed from [COMPANY] to [THE CREDITOR] including, but not limited to all outstanding debts, dishonoured cheques, or fees owed to [THE CREDITOR] upon demand, by way of this duly authorized General Security Agreement or any other security as stipulated by [THE CREDITOR].

I/We further agree to provide to [THE CREDITOR] a copy of my/our personal credit card or a void personal cheque, upon request, in order to process any outstanding funds owed.

I/We grant full authority to [THE CREDITOR] to register any and all necessary PPSA registrations, credit bureau registrations, or legal matters in favour of [THE CREDITOR] as security under this Agreement. Said registrations shall be in contemplation of the aforementioned General Security Agreement, which shall be duly executed with this Agreement.

(Signatures, Dates, and Witness)

 
SURETY BONDS

As well, for larger commercial clients, there is often a protective option open to creditors such as a surety bond, which is a three-party agreement by which the surety (the third entity acting as guarantor) agrees to discharge the contracted obligations of the debtor to the creditor, if the debtor fails to fulfil their obligations.  This is most often used in the construction industry, but many other creditors extending high levels of credit may also employ this option.

Often insurance companies will offer surety bonds as a product, in which a fixed amount is guaranteed by the insurance company, with the option to pursue the debtor for the amount of the executed surety if the guaranteed amount is required to be issued to the creditor.

Because surety is a huge topic on its own, if as a creditor you wish to explore the options of surety bonds for your clientele, we suggest you consult with your insurance provider or legal counsel that specializes in this area.


CONCLUSION

Part of any company’s credit management or risk assessment should consider what tools are being used to prevent bad debt write-off.  Many of our clients use co-signors and guarantors from balances ranging from $45 to $450,000.  If you have questions regarding what steps you can take in the early stages of your credit cycle to protect your receivables, we would be happy to share our resources.  Feel free to give me a call at our Cambridge office, at 226-444-5695, or email me at bwettlaufer@kingstondc.com.

Blair Wettlaufer
Kingston Data and Credit
226-444-5695