Published in the Manchester Union Leader, February 2011
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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.