I spend my days fielding phone calls from people around the country, almost all of whom have an ongoing issue with an SBA loan. One of the most common complaints that I hear from people pertain to the personal guarantee, and usually fall within one of these variations:
QUESTION: I signed a personal guarantee for my friend’s business, but I had nothing to do with the business. Why are they coming after me and not my friend?
ANSWER: When you agree to personally guarantee debt, your have personally committed to repay the debt if the business fails to do so. In most cases, the bank is under no obligation to pursue the guarantors in any particular order. The bank can choose to pursue all the guarantors at once, or alternatively, they can pursue the guarantor that they believe has the most assets. If when the loan was granted, the friend who guaranteed the loan had a significant net worth while the business owner had a minimal net worth, you can be sure that the bank will spend their time and money pursuing the more wealthy of the pair. While you may not think it’s fair that a bank would sue a person who had no ownership interest in the business, that’s the reality of a personal guarantee. This is why agreeing to personally guarantee debt for a friend should never be taken lightly.
QUESTION: I personally guaranteed an SBA loan for my ex-spouse. The divorce decree states that my ex-spouse is solely responsible for repaying the debt, but I just got a letter stating that I am liable. What gives?
ANSWER: Let me start with my disclaimer: I’m not an attorney, and this is not legal advice. You should see an attorney in your area for all legal matters. Now, with that said, I will tell you what I’ve seen as far as this situation is concerned. When two people get divorced, it’s common to split all the assets and liabilities. It’s important to note that the agreement is between the individuals, NOT THE CREDITORS. In other words, unless the banks agrees to release one of the spouses, they will pursue both of you regardless of the agreement between you. Even though it seems unfair, logically it makes perfect sense. The bank, after all, may have required both spouses to guarantee the SBA loan because both spouses were brining attributes to the table. Furthermore, if it were possible for one personal guarantor to indemnify the other, this would be a huge loophole. It would basically mean that if two business partners signed personal guarantees, they could easily get one of them off the hook by establishing an agreement between them stating that one would be handling the loan, and the other was not responsible.
So if a divorce agreement won’t help with creditors, what good is it? Well, if you are the spouse who was indemnified, and your ex fails to make their loan payments, you’d have recourse against your former spouse. Of course, that won’t help you out of the personal guarantee, which is a very tough pill for most former spouses to swallow.
Overall, when it comes to personal guarantees of SBA debt, you should always ponder the worst case scenario when signing one. If you aren’t prepared to deal with a worst case scenario (they borrower defaults), you should re-evaluate whether signing one is the right way to go.