A personal guaranty is one of the most powerful tools a creditor has, and one of the most commonly mishandled when it comes time to enforce it. When a business borrows money and a principal of that business signs a personal guaranty, the creditor has two avenues for recovery: against the business entity, and against the individual personally. If the business is insolvent, the guaranty is often the only thing standing between the creditor and a total loss.
We enforce personal guaranties in Texas courts. A few things are worth knowing before you try to collect on one.
What a Personal Guaranty Is
A guaranty is a promise by one person, the guarantor, to be responsible for someone else’s debt if that person does not pay. In commercial lending, the guarantor is typically an owner, officer, or principal of the borrowing business. The guaranty is a separate contract from the promissory note, and it must be in writing to be enforceable in Texas.
The guaranty can be absolute, meaning the creditor can go directly after the guarantor without first trying to collect from the primary borrower, or it can be conditional, requiring the creditor to exhaust remedies against the borrower first. Most well-drafted commercial guaranties are absolute.
Texas Courts Read Guaranties Narrowly
This point governs guaranty enforcement in Texas. Courts here apply what is called the “strict construction” rule to guaranties. That means if there is any ambiguity in the guaranty language, the court tends to interpret it in favor of the guarantor, not the creditor.
Because of that rule, the wording of the guaranty document decides whether the claim succeeds. A guaranty that is too vague about what obligations it covers, that fails to include a proper waiver of defenses, or that has gaps in its coverage can be much harder to enforce than it appears.
Before we take on a guaranty enforcement matter, we read the document carefully. We identify any provisions that could create a defense for the guarantor, and we advise our client on the strength of the claim before any lawsuit is filed.
Common Defenses Guarantors Raise
Guarantors do not give up easily. These are the arguments we see most often.
The creditor modified the underlying loan without the guarantor’s consent. If the creditor extended the maturity date, changed the interest rate, or otherwise materially altered the terms of the loan without the guarantor’s knowledge or agreement, the guarantor may argue they are released from the guaranty. A well-drafted guaranty will have a provision expressly permitting the creditor to modify the loan without releasing the guarantor. Many do. Some do not.
The creditor’s conduct impaired the collateral. If the creditor had collateral securing the loan and dealt with it in a way that reduced its value, for example by releasing a lien on the collateral without getting the guarantor’s consent, the guarantor may argue their exposure is reduced by the amount of the loss.
The debt was already paid. This one sounds obvious, but it comes up. If the foreclosure sale or other collection effort partially satisfied the debt, the guaranty claim must be reduced accordingly. The guarantor is liable for the deficiency, not the full original debt.
Waiver of defenses language in the guaranty is specifically designed to cut off most of these arguments. We verify whether that language is present and enforceable before relying on it.
The Statute of Limitations
A claim on a written guaranty in Texas must be brought within four years of the date the claim accrues. When that clock starts running depends on whether the guaranty is a continuing guaranty covering future advances or a guaranty of a specific obligation. Getting this analysis right matters, because a claim filed one day too late is dismissed regardless of how strong it is on the merits.
Working Through a Foreclosure and a Guaranty Together
When a loan is secured by real property and also backed by a personal guaranty, we typically pursue both tracks. We foreclose the real property, apply the sale proceeds against the debt, and then pursue the guarantor for whatever deficiency remains.
The guarantor may have the same defenses a borrower would have in a deficiency suit, including the fair market value argument we describe in the deficiency judgment section. Whether a particular guaranty waives those defenses is a document-specific question we analyze for each matter.
In this section: Notes & Guaranties · Suing on the Note
Frequently Asked Questions
Can we sue a guarantor before suing the primary borrower?
It depends on the guaranty. An absolute or unconditional guaranty, which most well-drafted commercial guaranties are, allows the creditor to proceed directly against the guarantor without first exhausting remedies against the primary borrower. A conditional guaranty may require the creditor to pursue the borrower first. We review the guaranty to determine which type you have before advising on strategy.
What if the borrower's bankruptcy prevents us from suing them: can we still sue the guarantor?
Yes. The automatic stay protects the debtor but generally does not protect guarantors or co-debtors in commercial cases. While the borrower is in bankruptcy and the stay prevents collection from them directly, you can typically proceed against guarantors without restriction. This is a primary reason commercial lenders require personal guaranties: to preserve a collection path when the primary borrower is in bankruptcy.
What if we modified the loan after the guaranty was signed?
This is a common guarantor defense. Texas courts take the position that a material modification of the underlying loan, one that increases the guarantor's risk or changes what they agreed to guarantee, can release the guarantor unless the guaranty expressly permits such modifications. Well-drafted guaranties contain language allowing the creditor to extend, modify, or renew the loan without releasing the guarantor. We review your guaranty for this language before you modify any loan terms.
How long do we have to sue a guarantor in Texas?
The limitations period for a written guaranty is four years, running from the date the guarantor's obligation accrues, typically when the underlying borrower defaults and the creditor makes a demand under the guaranty. Monitoring this deadline is important, particularly when a guaranty claim is being held in reserve while a workout or foreclosure is in progress.
Does the guaranty have to be in writing to be enforceable in Texas?
Yes. A guaranty is a promise to be responsible for someone else's debt, and in Texas it must be in writing to be enforceable. The guaranty is a separate contract from the promissory note, even when the same person signs both. Before we pursue a guarantor, we confirm that we have a written guaranty in hand and that it covers the specific obligation you are trying to collect.
Why do Texas courts seem to favor the guarantor when we try to enforce?
Texas courts apply what is called the strict construction rule to guaranties. If there is any ambiguity in the guaranty language, the court tends to interpret it in favor of the guarantor rather than the creditor. This rule sits at the center of guaranty enforcement in Texas, which is why the exact wording of the document carries so much weight. A guaranty that is vague about what it covers, that lacks a proper waiver of defenses, or that has gaps in its coverage can be much harder to enforce than it appears. We read the document carefully and identify any provision that could create a defense before we advise you on the strength of the claim.
If the foreclosure sale only partially paid the debt, how much can we collect from the guarantor?
The guarantor is liable for the deficiency that remains, not the full original debt. When a loan is secured by real property and also backed by a personal guaranty, we typically pursue both tracks: we foreclose the real property, apply the sale proceeds against the debt, and then pursue the guarantor for whatever deficiency is left. Any payment or recovery that reduced the debt must be credited, so we calculate the remaining balance carefully before making demand on the guarantor.
Can the guarantor raise the same defenses the borrower would have in a deficiency suit?
Often yes, unless the guaranty waives them. A guarantor may have the same defenses a borrower would have in a deficiency suit, including the fair market value argument that can reduce a deficiency. Guarantors also commonly argue that the creditor impaired the collateral, for example by releasing a lien without consent, or that the debt was already paid. A properly drafted waiver of defenses provision is specifically designed to cut off most of these arguments, so we verify whether that language is present and enforceable before relying on it.