Published in the Union Leader
Q: As a business that frequently extends credit to business customers, we often insist on personal guarantees from the owners of our business customers. Is it appropriate for us to also seek the personal guaranty of a business owner’s spouse?
A: It depends on the specific circumstances, and you should bear in mind the significant limitations on this practice imposed by the Equal Credit Opportunity Act (“ECOA”). ECOA is a federal law that prohibits lenders or creditors from making decisions on whether to extend credit on factors other than the individual applicant’s creditworthiness. Particular to your question, ECOA prohibits discrimination based on the applicant’s marital status. Many businesses extending credit are unaware of how this affects their ability to seek personal guarantees of spouses.
When extending credit, the practice of seeking personal guarantees is common, and insisting on personal guarantees often makes good sense when the assets of a business customer may be insufficient. In many situations, it may also seem like good business sense to seek a personal guaranty from the business owner’s spouse, particularly when the owner’s assets are jointly owned with his or her spouse.
Regulations enacted pursuant to ECOA, however, prohibit creditors from requiring a spouse to sign a personal guaranty simply for the sake of reaching the spouse’s assets. Courts have ruled that businesses having blanket policies of requiring all borrowers’ spouses to sign personal guarantees violate ECOA’s prohibition of marital status discrimination.
Spousal guarantees are not always improper under ECOA. If a business owner herself is not individually creditworthy, it is appropriate for the creditor to ask the applicant that there be a co-guarantor. If the applicant offers her spouse to be a co-guarantor, then it is lawful for the creditor to assess the spouse’s assets and to permit the spouse to act as a co-guarantor.
So if your company’s customer seeks credit, which will require the personal guaranty of the customer’s owner, your company should first evaluate the individual creditworthiness of that individual owner. Your company should not simply require a spousal guaranty without further analysis. However, if the customer’s owner is not individually creditworthy, or if his assets are jointly held with his spouse, your company likely may permit his spouse to sign as a co-guarantor. Courts have interpreted the ECOA restrictions differently, so you should consult with an attorney if you questions regarding your company’s policies with regard to personal guarantees.
Jeremy Walker can be reached at [email protected].Know the Law is a bi-weekly column sponsored by The McLane Law Firm.
We invite your questions of business law. Questions and ideas for future columns should be addressed to: Know the Law, The McLane Law Firm, P.O. Box 888, Manchester, NH 03101 or emailed to [email protected]. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation