A business debtor that cannot or will not pay is often an empty entity by the time a creditor gets a judgment. A personal guaranty changes that. It makes an individual, usually the owner, personally liable for the company’s debt, and it brings that individual’s wages, bank accounts, and property within reach. For a commercial creditor, the guaranty is frequently the difference between a collectible account and a write-off. This article covers how guaranties are enforced in Illinois, the defenses guarantors raise, and why the time to review your guaranty form is before you need it.
What a guaranty is
A guaranty is a promise by one person (the guarantor) to answer for the debt of another (the principal debtor). In commercial practice it is usually a separate signed document or a signature block within a credit application, lease, loan agreement, or supply contract. Because it is a promise to pay the debt of another, Illinois requires it to be in writing and signed by the guarantor to be enforceable (740 ILCS 80/1, the Frauds Act). An oral assurance from an owner that “I’ll make sure you get paid” is not a guaranty.
Illinois courts construe guaranties strictly in favor of the guarantor. The guarantor’s liability is measured by the words of the document, and ambiguities tend to be resolved against the creditor who drafted it. That rule is why the drafting matters so much.
Enforcing a guaranty
The guaranty is a separate contract, so the creditor sues the guarantor on it as a separate claim, typically in the same lawsuit as the claim against the business. The creditor must prove the underlying debt, the guaranty, and the guarantor’s signature. If the guaranty is a continuing one, meaning it covers all present and future obligations of the business rather than a single transaction, the creditor must also show the debt falls within its scope.
Once judgment is entered against the guarantor individually, enforcement proceeds against the guarantor’s personal assets: a citation to discover assets, third-party citations to the guarantor’s banks, a wage deduction if the guarantor is employed (including by their own company), and a judgment lien on real estate the guarantor owns. Individual debtors do have exemptions under 735 ILCS 5/12-1001 that business entities lack, including a portion of wages, a homestead exemption, and retirement accounts, so the enforcement plan accounts for those. Our judgment enforcement page covers the tools.
The statute of limitations on a written guaranty is ten years from breach (735 ILCS 5/13-206), the same as other written contracts.
Defenses guarantors raise
Guarantors who contest liability usually rely on one of a handful of arguments.
Lack of consideration. A guaranty signed at the time credit is extended is supported by the extension of credit itself. A guaranty signed later, after the debt already exists, needs separate consideration, such as the creditor’s agreement to forbear from suit or to extend further credit. Guaranty forms recite consideration for this reason.
Material modification of the underlying obligation. Under traditional suretyship principles, a guarantor is discharged if the creditor and the principal debtor materially change the underlying contract without the guarantor’s consent, for example by extending the payment terms or increasing the credit line. Well-drafted guaranties include the guarantor’s advance consent to modifications, extensions, and renewals, which defeats this defense.
Release or impairment of collateral. If the creditor releases the principal debtor or releases collateral securing the debt, the guarantor may argue discharge to the extent of the release. Again, a waiver in the guaranty addresses this.
Lack of notice. Guarantors sometimes argue they were entitled to notice of the debtor’s default or of the creditor’s acceptance of the guaranty. Forms routinely waive these notices.
Scope and termination. A guarantor may argue the debt falls outside the guaranty, or that the guaranty was revoked before the debt was incurred. Continuing guaranties should state how they are revoked (typically only by written notice) and that revocation does not affect obligations already incurred.
Signature and capacity. Occasionally a guarantor claims the signature is not theirs or that they signed only in a corporate capacity. The signature block should make the individual capacity unmistakable, with the guarantor’s name as an individual, not as an officer.
What your guaranty form should say
Because Illinois construes guaranties strictly, the form controls the outcome. A guaranty form built for collections typically includes: a clear statement that it is absolute, unconditional, and continuing; joint and several liability where there are multiple guarantors; the guarantor’s consent to extensions, modifications, and renewals without notice; waiver of notice of acceptance, default, and demand; waiver of any requirement that the creditor first pursue the business or any collateral; a provision that the guarantor pays the creditor’s attorney’s fees and costs of collection; the interest rate applicable to unpaid amounts; consent to jurisdiction and venue in Illinois, or in the forum your contracts use; and a signature block that names the guarantor as an individual. If your contracts route disputes to arbitration, the guaranty should match, so the claim against the guarantor is not left in a different forum from the claim against the business.
Review the form before you need it
The time to find out that a guaranty form lacks a fee-shifting clause, or does not consent to modifications, is before an account is in default. When a client comes to us with a recurring flow of accounts, reviewing the guaranty and contract forms is part of onboarding: we read them, flag the clauses that will cost money at collection time, and build the client’s template system around what the documents actually say. For a one-time account, we read the guaranty at intake and tell you what it supports. If you hold a guaranty on an account that has gone bad, or you want your forms reviewed before the next one does, see commercial collections or schedule a consultation.
This article is general information about Illinois law, not legal advice for your situation. Humza Ansari is licensed in Illinois only.