There are four passages in the book of Proverbs which discuss the scenario in which one person (Guarantor) takes on the responsibility to pay the debts of another person (Debtor) should the debtor default on his payments. Here are the passages:
Proverbs 6.1-6
My son, if you have put up security for your neighbor, if you have shaken hands in pledge for a stranger, you have been trapped by what you said, ensnared by the words of your mouth. So do this, my son, to free yourself, since you have fallen into your neighbor’s hands: Go—to the point of exhaustion— and give your neighbor no rest! Allow no sleep to your eyes, no slumber to your eyelids. Free yourself, like a gazelle from the hand of the hunter, like a bird from the snare of the fowler.
Proverbs 11.15
Whoever puts up security for a stranger will surely suffer, but whoever refuses to shake hands in pledge is safe.
Proverbs 17.18
One who has no sense shakes hands in pledge and puts up security for a neighbor.
Proverbs 22.26-27
Do not be one who shakes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you.
Discussion
What can we learn about doing business from these four passages? First, it is abundantly clear that we should not become voluntarily liable for another’s debts. The reason for this is clear: if we cannot pay those debts, then our “very bed” – our basic provisions – will be snatched from us.
Secondly, if we do put up security for another’s debts, we’re described as one “who has no sense”, literally, “one who lacks judgement”. It doesn’t make sense to do this – under any circumstances.
Finally, we are told that we will surely suffer – that, by comparison – we place ourselves in a place of danger. The danger, of course, is that the debtor will act rashly and either incur more debt for which we are responsible to pay or will simply walk away from his obligations, causing us to use all of our wealth to repay his debts and putting us in ruin. The Bible is clear that avoiding such a position is “safe”: you don’t expose yourself to the dangers inherent in taking on the responsibility for another’s debts.
Passing on Your Business to Your Children
Many parents would love to pass on their business to their adult children who work in the business. But they should be careful how they do this. Here is a true story that resulted in heart-break and a permanent family rift that will likely never be fully repaired.
John and Sandy spend 40 years growing a strong business as an insurance broker for a highly reputable insurance company. They employed a number of people in their business and were considered one of the top agencies in the country for this particular insurance company. John and Sandy earned, literally, millions of dollars in profits, which they saved. They lived well below their means and were known as people who loved the Lord and were generous in their giving.
When their 28 year old son came to them with (what appeared to be) a thoughtful, well planned real estate business, they were delighted to fund his business. He would purchase apartment and retail strip malls, manage them and return a profit to himself and his parents. So, John and Sandy co-signed the mortgages for the properties using their savings as collateral. He was the sole owner in his corporation and the properties were purchased under the corporation’s name. John and Sandy did not protect themselves by insisting that they hold majority ownership in his new venture until such time as the mortgages were repaid. So they had co-signed for his loans and left themselves no legal power to alter their son’s decisions.
At first, the son (Andy) worked hard and was making a profit. As the values in the properties increased, Andy refinanced the loans to pull out the equity with a view to investing the equity back into the properties to make them more profitable. John and Sandy were not happy with this refinancing decision, but had no power to stop him. Roughly 24 months later, the recession hit (2007-2008), and the value of the properties plummeted. Andy’s tenants started to pay their rents late because they had lost their jobs. Enough of them were either late or non-paying tenants that Andy was unable to make full, monthly payments to the mortgage company.
The mortgage company became concerned. They met with Andy. He had such a strong sense of entitlement coupled with an out-of-touch-with-reality view of his situation. The company didn’t feel that he was taking his late payments seriously enough. He didn’t have a plan to return his properties to profitability. Andy was in over his head. It was clear he wasn’t willing to evict those who were not making payments on time. They lost faith in Andy’s abilities. So, they called John and Sandy.
After talking with John and Sandy, it was clear to the mortgage company that Andy had lied to his parents, telling them that “everything is OK” when, in fact, his business was facing foreclosure. The mortgage company called the loans, forcing John and Sandy to empty out their savings to pay back the loans. At age 70, they were left penniless and facing the prospect of having to work again simply to live.
But more importantly, they lost all trust in their son. Andy never apologized to them for needlessly reinvesting profits into the properties. John and Sandy were literally stunned at Andy’s “it’s no big deal” attitude about their situation. After a few more months, Andy decided to take a full-time job and put the responsibility of running the properties onto John and Sandy. He signed over the stock in the corporation and literally walked away with no personal harm from the experience. He decided mom and dad were just “too uptight” about the whole thing and stopped talking to them. He didn’t want to be “bothered” anymore.
John and Sandy were able to sell the properties – eventually – and recoup a minority of their investment monies. But the loss of the relationship with their son was what really stung them the most. I recall watching Sandy devolve into a pool of tears as she talked about her own son’s lack of respect and honor for what she and John had done for him and how she rarely gets to see her grandchildren because of the rift their business caused.
Putting up security – even for a family member – is not something you should do.
One Last Thought
If you own a business and want to pass it onto your children, there are a number of ways to do this. But one way you should reject outright is the method of giving over the stock of the company to your children with only a promise to pay you in the future. This is, in essence, putting up security for your children’s debt to you. If you want to gift them the business – that’s fine. But don’t put yourself in a position where you’re expecting to receive payments from them. If they mismanage the business, you may not get paid and in essence, you will have lost your future life savings to their mismanagement of your business.
Make them pay you up-front. You scrimped and saved to build your business. Make them scrimp and save to buy it from you. If you hand it to them on a silver platter, you’ll probably do more harm than good and there’s a good chance they’ll mismanage it and not be able to pay you back.
You don’t want to be in this position. So don’t become, in essence, both the co-signer and the bank for your kids.
Bill English
Founder, Bible and Business
