Beware of an Unconditional and Continuing Guaranty
A standard business loan often requires an owner to execute a guaranty. Before signing a guaranty legal advice should be obtained regarding the ultimate financial exposure.
A standard business loan often requires an owner to execute a guaranty. Before signing a guaranty legal advice should be obtained regarding the ultimate financial exposure. Lenders often insert continuing and unconditional guaranty language. This type of guaranty renders a guarantor liable for all past, present and future obligations of the business. The exposure is almost unlimited. The business may incur a mountain of debt and in the event of default the guarantor is ultimately liable.
A dangerous aspect of executing a continuing guaranty is that the guarantor need not be contacted before new debt is obtained. A business may incur debt to the detriment of the guarantor without his or her knowledge.
A continuing guaranty remains effective until revoked. The guaranty is not limited to the life of the loan obtained contemporaneously with the guaranty and will not expire simply by a lapse of time.
Furthermore, even though the loan is paid in full the guarantor is not relieved of liability for new debt acquired by the business years after the original loan was paid.
The continuing and unconditional guaranty also applies to vendor and supplier accounts. Guarantees are routinely required in credit applications submitted by suppliers. If a business fails, closes its doors and files for bankruptcy the guarantor remains liable on all debt. Therefore, an individual should avoid signing an unconditional and continuing guaranty if he or she does not control the business debt or business accounts.
ABOUT THE AUTHOR: Houston E. Short
Houston Short grew up in the Central Florida area, and continues to reside in Orlando with his family. He provides representation in arbitration actions for the American Arbitration Association and engages in alternative dispute resolutions including mediation both binding and non-binding arbitration, and settlement negotiations. He is an active member of the American Arbitration Association Panel Review Committee, the Orange County Bar Association, and the Florida Bar. He graduated from Florida State University in 1984 with a bachelors of science degree (cum laude) and received his juris doctor from the University of Florida in 1987 (with honors). Houston co-authored, "The Constitutionality of the Legislatures Mandate to Sever Counterclaims in Mortgage Foreclosure Action," the Real Property, Probate and Trust Law Section, The Florida Bar.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.