In a perfect world, debt collection situations would always be as simple and straightforward as we believe they will be when we initially agree to terms and extend credit.
However, we do not live in a perfect world, and almost every situation that requires a commercial debt collection agency ends up being more complicated than anyone imagined possible when the debt was established.
One way that many creditors attempt to insure themselves when extending credit to customers is to add a guarantee from a second party, which is often someone who is considered a better credit risk than the primary debtor. But debt situations involving guarantees can often be even more complex than standard credit terms, so creditors need to know all of the ins and outs before agreeing to any arrangements, especially here in California.
To help creditors that are looking to add this additional level of insurance to their accounts, let’s take a closer look at four of the most critical aspects of guarantees here in California.
Guarantees Must Be in Writing
The most important qualification for any guarantee to hold up when you need it to is that it absolutely has to be made in writing. This will make sure that you meet the standard burden of proof if you need to demonstrate that the second party did knowingly guarantee the debt.
The most important thing for any written guarantee is that it must be signed by the person or businesses that is acting as the guarantor. Having the primary debtor sign as well will enhance your documentation, but the guarantor is always going to be the key here.
Guarantors Must Have Ownership Interest
Another thing that is required for a guarantee to hold up when you need it is that it needs to document that the guarantor has some form of ownership in the product or services that incurred the debt.
Contract law requires that for anyone to be held responsible for a contract, some form of money or ownership must change hands. By establishing that the guarantor has an ownership in the product or services rendered, we are making a specific point to meet this requirement.
Specific Conditions Must be Stated
While they are not essential for a written guarantee to be valid, it is always helpful for the agreement to detail the specific conditions that must be met for the guarantor to become responsible for the amount owed.
Conditions like exhausting all options of collecting from the primary debtor or the primary debtor falling behind by a specific percentage can be written into the contract to detail exactly when the guarantee can be enforced.
Protections Afforded to the Guarantor
By signing up to guarantee a debt, the guarantor is willingly accepting the possibility that they could find themselves on the hook for the entire amount owed. However, they are still protected by all of the same rules and regulations that are afforded to primary debtors by legislation like the Fair Debt Collection Practices Act and the California Fair Debt Collection Practices Act.
In theory, the guarantor becomes an alternative option that can stand in for a primary debtor if the primary debtor should become unable to make good on their obligations. But in actual practice, it is always to the advantage of the creditor to have the proper written documentation stating the exact terms of the agreement. This is the best way to make sure that the guarantee holds up when it is eventually put to the test.