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Related Articles: Business Law/Commercial Landlord/Litigation
Guarantees - Should the Spouse Sign?
Often, a guaranty of a debt or lease may mean the difference
to the creditor between getting paid and taking a loss. The
first to get paid when a business is failing are the creditors
who can pursue the operators of the business. Guarantors,
who are not operators of the business, have a unique incentive
to pressure the business to pay.
Spouses may be particularly attractive as co-guarantors because
an individual guarantor's principal asset is often a residence
or some other asset owned as "tenants-by-the-entirety," which
cannot be seized unless both spouses are judgment debtors.
(See The Edward Gross Report, Spring 1992.) However,
several recent cases indicate that enforcing guarantees against
spouses may violate the Equal Credit Opportunity Act, 15 U.S.C
§1691, when the guarantees were required solely on the basis
of marital status. NationsBank v. Sarelson, (Fairfax
Circuit Court, 1992); CMF Virginia Land, L.P. v. Edward
L. Brinson, et.al., (U.S. District Court, Eastern District
of Virginia, 1992). These cases indicate that creditors may
have difficulty enforcing guarantees against spouses who are
not parties to the contract when the applying spouse would
independently qualify for credit under the creditor's standards.
In order to protect yourself, be sure to document your reasons
for requiring a spouse to sign as a guarantor. Make sure that
you can prove a legitimate business purpose behind your requirement,
such as showing that the spouse was an owner, officer, or
other active participant in the business at the time the contract
was made, or, alternatively, that the spouse in the business
would have been ineligible for credit without the spouse's
co-guaranty. Since circumstances will often have changed,
accurate documentation of your reasons at the time guaranty is executed is critical to the successful enforcement of the
guaranty at any later date.
Beware! These same rules will apply to consumer debts, for
which the Equal Credit Opportunity Act was originally intended.
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