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
you must known the details about the landlord responsibilities and rules.
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