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Business Debt/Debt guarantee after death

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Expert: - 9/22/2010


Question
My folks personally guaranteed a large business loan through a bank.  The loan is structured to take 15-20 years to repay and there is no reason to assume the business will default.  Since they are not personally the debtor, but they are legally the guarantor, what happens to that guarantee obligation if/when they pass?  

Answer
Cheri- The answer depends upon many factors, beginning with the language in the contract itself.  

The most likely outcome depends upon the status of the loan at the time of death.  If the loan is not in default, then there is (almost) no basis for a claim upon the estate.  The executor is required to notify any “creditors,” but as I said if the loan is not in default the bank may not be considered a creditor.  If however the loan is in default at the time of death, then the bank does have a claim upon the estate and such a claim is likely to preempt the heirs.  If the loan passes into default after death but before the probate and distribution of the estate, then the executor has a duty to inform the bank.

The next question is if the bank filed a UCC with the secretary of state, which some may call a “lien.”  This is not required but is likely given your indication of “large loan.”  Such a claim is most often associated with the home.

I’m sorry that there was no black-and-white answer, but there seldom is.  The above should give you a very good outline of the most likely steps as well as some homework that you will need to do in order to fill in some details to get a better answer.

Michael

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Michael Fay

Expertise

My focus and specialty is in credit, so that the risk of the debt itself is minimized. This means understanding it, predicting it, and helping to correct it. Having worked in contracts & credit, I have also worked with all of the related documents such as Guarantees (personal and corporate), and Security Agreements (aka UCC’s or “liens” – but I caution you in using those interchangeably).

Experience

I have a broad background with more than 15 years in the credit industry. Ten years with Dun and Bradstreet, first as a field reporter creating reports, then in customer service, finally I served as the credit manager designing risk models for many national and international customers through D&B’s Outsourcing function. Five years with another publicly traded firm where I created the credit department and then served as credit manager for North America. At both companies we used both business and consumer data. You probably know that both business and personal credit have scores; what you might not know is how many different types of scores there are. I am familiar with and have used many different scores in each. Also be aware that each credit type (business & personal) is unique with different processes and different time frames. I have served on the board of directors for companies in many states and still serve in some capacity in a few. I contribute to credit publications and work with the non-profit arm of the SBA called SCORE.

Organizations
ACA International * NACM * Credit Risk Managers * SCORE (SBA)- Counselors to America’s Small Business * Payment Card Industry Network * PaymentSource.com * D&B Alumni * Psi Chi, National Honor Society for Psychologists

Education/Credentials
BIS in Business and Psychology, University of Minnesota * MBA is still in progress (on-line)

Awards and Honors
State of Colorado - State finals in Accounting and Advanced Accounting. * D&B Leadership Winner (3 times) * D&B Leadership Finalist (3 times) *

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