For many financing or lending companies and sellers, the use of a personal guaranty is a common step to secure an extension of credit to a purchaser. If a company chooses to lend money or credit to another company, it may well request that this type of guaranty be signed by a purchaser’s officer to meet certain loan or credit requirements. A personal guaranty can secure the creditor by providing it with an interest in that officer’s personal property or personal real estate in the event that the borrowing company defaults or becomes insolvent. However, the creditor may not be secure as a result of the guaranty if the officer is married and living in a “community property” state. In those states, if the lender has not obtained the signature of the officer’s spouse, the officer’s shared assets may be shielded entirely from the reach of the personal guaranty or the creditor’s interest may come second to another company which has properly obtained an executed personal guaranty.
A community property state is one in which property obtained by either spouse during the marriage is treated as property equally owned by the marital unit—the “community”—regardless of which spouse “earned” that property. Other states may take an equitable view by taking into account each spouse’s contribution to property acquired during the marriage. This distinction has implications most commonly seen in divorce cases, where property is divided among the divorcing spouses. However, community property law can also seriously impact creditors if proper steps are not taken to obtain a proper personal guaranty.
The effect of the laws in those states using the community property approach can be significant, and require a careful analysis for a company extending credit. Most of these states create statutes protecting the marital “community” by requiring signatures of both the husband and wife on instruments that create obligations through a negotiable instrument, personal guaranty, or real estate transaction. While the creditor may think it is entering into an arm’s-length transaction with another sophisticated business, it may well find itself needing to gather information about the guaranteeing officer’s marital status. If a lending company properly obtains a spouse’s signature in a community property state, many of these states have the additional requirement that the creditor name both spouses as defendants to any lawsuit in order to assert an interest in the community property.
It is important to know that certain federal laws and regulations limit the ways creditors can inquire into the borrower’s marital status and require a spouse’s signature. In some cases, the signature of a spouse may only be required if credit is being extended to an individual living in a community property state. Therefore companies extending credit should carefully examine the law of the guarantor’s state and the state in which its property is located, so that they do not find themselves in the unexpected position of extending credit based upon documents that do not afford them any protection or ability to reach a guarantor’s personal assets.