Commercial Debt Collection: How a Personal Guarantee Works

Posted by Marilyn Miller on September 20, 2017  /   Posted in Uncategorized

Commercial debt collection is collection of a debt incurred by a business, as opposed to a debt incurred by a consumer.  In many ways, commercial debt collection is similar to the collection of many debts, with two exceptions. The first is that commercial debt collection is not bound by the standards of the Fair Debt Collection Practices Act, FDCPA, a law for consumer debt collection that prohibits absuive or deceptive tactics. However, commercial debt collection should always be practiced in a professional and lawful manner.

The second difference concerns a very effective tool that can make a big difference in the effectiveness of commercial debt collection Рa  personal guarantee. a legal agreement in which the business owners accept personal responsibility if the business is unable or unwilling to pay.

If a company owes you money, and refuses to pay you, you can certainly sue them. However, if the company has no assets in its name, there will be nothing to get. Also, if the company discharges the debt in bankruptcy, and you have no personal guarantee, you are out of luck. However, with a personal guarantee, you can pursue the owners themselves.

Here is an real-life example of how a personal guarantee can work. We have a customer who licensed a e-commerce website to a small business owner. Our customer was to receive a monthly payment plus a percentage of sales from the website. The small business owner defaulted on his payment and would not disclose any sales information. He was referred to us for collection. When he did not respond to a written demand for payment, we sued him in small claims court. We had a personal guarantee, so we were able to sue the business and the business owner and received judgments on both.

The small business owner still refused to pay, claiming financial difficulties, although our research led us to believe he had the means to pay. Shortly thereafter, he declared a business bankruptcy and the debt was successfully discharged for the business. Had we not had a personal guarantee, we would have been done. However, we were able to lien the home of the owner, and he will be unable to sell his home without paying the debt first.

You may believe that no small business owner will pledge their personal asssets. Think again. If you have a small business loan or lease, you likely have signed a personal guarantee. Banks use them all the time. So be like a bank and secure the money owed to you with a personal guarantee

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