Full guaranty or carve-out: the same word, opposite exposure

Two documents both called a “personal guaranty” can mean opposite things. One puts your entire net worth behind the whole loan. The other puts it behind nothing unless you do something specific and bad. They sit in the same spot in the closing stack, use the same word, and carry the same signature line. The difference between them is the difference between losing a fee and losing your house, and most guarantors never confirm which one they signed.

A guaranty is either full or limited, and the word “guaranty” tells you nothing about which. The scope clause does. Read it before the signature line.

The full guaranty puts everything behind the whole debt

A full payment guaranty is what it sounds like. If the entity does not pay, the guarantor owes the entire unpaid balance, personally. There is no cap tied to conduct, no carve-out list, no limit but the size of the loan. Foreclosure happens, the sale leaves a deficiency, and the lender collects that deficiency from the guarantor’s own assets. This is the guaranty a first-time borrower, a weak entity, or a construction loan usually draws, because the lender wants a human being fully on the hook.

The carve-out guaranty puts nothing behind it, until you trip a trigger

A carve-out guaranty, the bad-boy guaranty, is the opposite starting point. The guarantor owes nothing personally unless a defined event happens: fraud, misapplied insurance or rent, waste, an unpermitted transfer, a voluntary bankruptcy filing. Absent one of those acts, the loan stays the entity’s problem and the guarantor walks away from the deficiency. This is the guaranty an experienced sponsor negotiates on a stabilized, nonrecourse deal, and it is the guaranty that pairs with the recourse carve-outs on the loan itself. The loan’s carve-out schedule defines the triggers; this guaranty is the instrument that makes the person pay when one fires.

Within the carve-out family the split matters again. A loss carve-out makes the guarantor liable only for the lender’s actual loss from the bad act. A full-recourse (springing) carve-out makes the guarantor liable for the entire loan the instant the trigger fires. Same document heading, and the number moves from a slice to everything.

The number the two produce

Take a $5 million loan, a foreclosure sale of $4 million, a $1 million deficiency, and a guarantor who mishandled $150,000 of rent after default. Under a full guaranty the guarantor owes the whole $1 million, the rent handling irrelevant, because a full guaranty never needed a trigger. Under a loss carve-out guaranty the guarantor owes $150,000, the actual loss from the act, and nothing more. Under a springing carve-out that names rent diversion as a full-recourse trigger, the guarantor owes the whole $1 million, because the act flipped the entire loan to recourse. One deficiency, three answers, decided by which guaranty is on the signature page.

What to confirm before you sign

Find the scope clause and read it as the whole document. Is this a guaranty of the entire debt, or only of losses, or only of defined acts. If it is a carve-out guaranty, is each carve-out a loss carve-out or a springing one, because that word decides whether a slip costs you a number or the loan. A borrower who negotiated a limited guaranty in the term sheet and signed a full one at closing gave away the entire negotiation without noticing, and the two documents look nearly identical until the deficiency arrives. The scope clause is the guaranty. Everything else is machinery around it.