Guaranteeing Somebody Else's Debt? WAIT!

Sometimes a financial institution or other form of lender will not grant credit to an individual or company (the “borrower”) unless someone else provides a guarantee. This can be potentially dangerous because if the borrower defaults on the loan, the lender will pursue you (the “guarantor”) for payment.

If the borrower is being asked to provide a guarantor, you must assume that the borrower does not meet the financial institution’s lending criteria and for this reason, perhaps they are considered to have a moderate to high risk of defaulting on the loan. It’s important to understand the responsibility and potential liability that you may encounter if the borrower does not make the required payments as stipulated in the credit agreement. Consider obtaining legal advice where necessary and ask yourself the following:

• How well do you know the person applying for credit and does their cash flow support the repayment of the loan?


• What other financial obligations does the borrower have?


• Are you familiar with their credit history? For example, are they presently receiving collection calls regarding other debts or have they in the past?


• How will you know if the borrower takes on other debts or stops making payments on the loan you are being asked to guarantee?


• Can you afford to service the debt if called upon? What if the lender did not allow you to make monthly payments but instead sought immediate repayment of the debt in full?


• If the nature of your guarantee involves providing security in the form of land or other property, are you prepared to potentially lose that property if the borrower defaults on the loan?


• Is there a limit or “cap” on your guarantee? For example, the loan is for $50,000 but your guarantee is capped at $25,000.


• Are you able to terminate or otherwise cancel your guarantee at any time?

Credit agreements and guarantees can be complex. For instance, if there is no limit set on the guarantee, you may become liable for 100% of the debt if the borrower does not make the payments. In addition, if there are multiple guarantors on the loan, the lender can typically collect from whomever they choose and will presumably attempt collection from the party deemed to be in the best financial position to repay the debt. For example, if you are one of two guarantors on a loan and you are identified as being the best source from which to collect, the lender can by-pass the borrower and other guarantor and attempt to collect 100% of the debt from you. Similarly, if you have guaranteed a debt that is secured by the borrower’s home or other property, understand that the lender may attempt to collect payment from you as the guarantor while also enforcing their security on the borrower’s property.

It’s also important to note, terminating or cancelling a guarantee can be very difficult. If you are able to do so, you may remain liable for the debt that existed as of the date the guarantee was terminated. However, in my experience lenders generally do not allow personal guarantees to be terminated.

Before providing a guarantee, make sure you have a comprehensive understanding of the borrower’s financial situation, read and understand any agreement that you intend to sign and consider obtaining legal advice before doing so.