One of the most common and effective means of collecting past due accounts or judgments is through the use of personal guarantees. Personal guarantees while providing written assurance of payment more importantly provide a second source of funds and assets in the event that the primary obligor defaults on his/her account. However, there are many potential pitfalls to the use of personal guarantees which every credit manager should be aware of and avoid.

Personal guarantees are prepared in a variety of forms and styles. They are generally executed in one of two forms: 1) negotiable instruments (i.e. within a promissory note) or 2) contracts.

When a personal guarantee is contained within a negotiable instrument there are very specific definitions and guidelines which govern how the guarantee is to be interpreted. For example Official Code of Georgia Annotated 11-3-416 indicates the two principal types of personal guarantees with respect to negotiable instrument are 1) those containing "payment guaranteed" or equivalent words added to a signature which means that the signer promises that if the instrument is not paid when due the signer will pay according to its terms without resort by the holder to any other party and 2) those containing "collection guaranteed" or equivalent words added to a signature means that the signer promises that if the instrument is not paid when due the signer will pay it according to its terms, but only after the holder has reduced his claim against the maker or acceptor to judgment and execution has been returned unsatisfied, or after the maker or acceptor has become insolvent or it is otherwise apparent that it is useless to proceed against him/her.

Accordingly, if a personal guarantee is contained within or is made in conjunction with a negotiable instrument the language "payment guaranteed" should be contained in order to most quickly and efficiently bind the guarantor. Unlike the term "collection guaranteed" where "payment guaranteed" is appropriately placed in the terms, it allows for an immediate binder of the signor without first being required to obtain a judgment against the debtor and exhaust collection avenues before being allowed to collect against the guarantor.

In contrast, personal guarantees entered into contractually (i.e. open accounts) are not bound or restricted by the above Official Code of Georgia definitions and limitations. Personal guarantees entered into contractually are open to whatever limitations or requirements the guarantee contains. It is possible to utilized a personal guarantee designed for a negotiable instrument in the contractual situation but not visa versa.

Regardless of the form, it is always prudent that a personal guarantee contain certain language and terms. First, one should usually style a personal guarantee "unconditional personal guarantee" underlined and in bold print. A personal guarantee should name the party giving the guarantee, the party to whom the guarantee is given and the party for whom the personal guarantee is given. Personal guarantees also should contain language endorsing the account being guaranteed and waiving presentment, demand for payment, protest, notice of nonpayment, protest of account and all notices and demands. Further a personal guarantee should be binding on the guarantor, his/her legal representatives, and assigns and shall continue until revoked in writing by certified mail with any revocation not limiting or terminating the guarantee as to goods already sold. In addition, a personal guarantee should contain language indicating that the personal guarantee shall mature immediately upon the obligor's insolvency, filing of a voluntary or involuntary bankruptcy, appointment of a receiver, making an assignment for the benefit of creditors, or the calling of a meeting of creditors. If a guarantee is in a form document fill in all blanks, date the document, and obtain a witness to the guarantor's signature. Finally, it is always prudent to indicate that the guarantee is of payment not collection and that any liability is direct and immediate.

In conclusion, personal guarantees can be a powerful tool to bind a person individually, however, if prepared or applied improperly it is of little or no value. Thus, it is critical not to take short cuts on personal guarantees since it will come back to haunt you. Far to often personal guarantees are mailed to knowledgeable customers who intentionally omit critical information, provide incorrect information, fail to date or sign properly and in the hurry to open the account the tainted personal guarantee is accepted. If one truly wishes the protection afforded by personal guarantees he or she should take the time necessary to obtain a quality personal guarantee form which is properly executed by the guarantor.