When a contract is entered into between a business and an individual customer, it is clear that the individual is the one responsible for payment and/or performance if he or she were to breach the contract. However, contracts between two businesses are different, as corporations and/or LLC’s are created by business owners to shield themselves from personal liability on any debts or obligations that the business may incur. Experienced debt collection lawyers are routinely asked how business creditors can further protect themselves when contracting with closely-held businesses or startup companies with a single business owner. The best way to accomplish this goal is to have PA debt collection lawyer add a personal guarantor to the contract in question and have the individual sign the contract as an individual and not as an owner or officer of the company.
PA Debt Collections and the Personal Guarantor
A personal guarantor, or personal guaranty, is typically added to a contract when a business is a party to the contract and is responsible for paying for goods or services. In these situations, the other party to the contract wants personal assurance that the business will pay the debts. When the business owner signs as an individual and not as an owner or officer, he or she is obligated to pay the debt when the business defaults. This is the personal guaranty.
While the personal guarantor often does not allow for recovery from the individual unless the company cannot first pay, if that contingency is met, the business creditor can utilize all available remedies to collect from the personal guarantor, including sending a demand letter, filing a breach of contract complaint, obtaining a judgment, and executing on that judgment. However, if it is determined that the business would not be liable for a debt, neither would the personal guarantor.
As with any breach of contract claim, those brought against a personal guarantor must be made within the applicable statute of limitations. The statute of limitations for a breach of contract claim in PA is four years (42 Pa. C.S.A. § 5525); however, there are different statutes of limitations for different types of contracts. The statute of limitations generally begins running on the date the breach occurred, although this calculation can be extremely complex. For example, the contract itself can provide for a limitations period of less than four years, or there may be certain legal rules or exceptions that apply to a particular debt collection case.
PA Debt Collection Lawyers Thrive on Personal Guaranty Clauses
Consider the example when a commercial real estate business wants to lease office space to a startup company. The startup company sign a lease for 5 years. Everything is going well, but the startup company fails to turn a profit and is forced to shut down in its first year. While this is not anyone’s fault, the startup company still owes the real estate business money for rent until the end of the lease term, as it was a contractual obligation. What options does the real estate business have? Sure, they could attempt to sue the company to enforce the lease and collect payments; however, the startup company was forced to shut down and is insolvent. Even if a judgment is obtained against them, more likely than not, they will not be able to pay.
That being said, if the real estate business had experienced PA debt collection lawyers prepare or review the contract, a personal guaranty clause would have been added. Many startup companies end up failing and having this clause provides for recourse against the business owner if the company fails to make its payment obligation. The individual may have money or other assets that can be used to satisfy the debt which will increase the ability to collect payment.
It is always important to consult with experienced PA debt collection lawyers for contract drafting and review and in the event of a default or non-payment. PA debt collection lawyers often know how to properly draft contracts such as commercial lease agreements in order to increase the likelihood of debt collections if the other party defaults.
The Martin Law Firm | PA Debt Collection Lawyers
Business creditors should always consider having an individual owner of a business guaranty payment or performance under the contract, as it provides a more secure avenue for collecting payment. Contact the skilled PA debt collection lawyers at The Martin Law Firm at 215-646-3980 or visit our blog for more information regarding PA debt collection practices.