How do you not get into trouble as a guarantor?

Chapters of the article

• What is liability and how does it arise?
• Benefits of liability
• Who can be a guarantor and how to deal with multiple guarantors?
• Relationship of the surety obligation to the debt
• Duration and termination of the guarantee
• When must the guarantor repay the original debt?
• How can you defend yourself as guarantor?
• Option to get out of the guarantee
• What happens after the guarantor has discharged the debt?

What is a liability and how does it arise?

Suretyship is one of the two most common options for securing a debt. It involves an arrangement between the guarantor (who is usually a relative or other close person of the debtor) and the creditor. The guarantor guarantees to the creditor that if the debtor fails to pay the debt, the guarantor will pay it for the debtor. The guarantor’s declaration requires a written form. The surety is therefore, in effect, a contract between the creditor and the guarantor, and the debtor is not a party to the contract.

A guarantee can also secure an obligation that is yet to arise in the future or is linked to a specific condition.

A guarantor typically takes on a burden for many years with his or her commitment, so it is more than advisable to consult an experienced attorney for all legal documentation.

Benefits of liability

Suretyship gives the creditor significantly more security by providing an additional option to satisfy his debt. It is also advantageous for the borrower, as it makes it easier to go through the process of arranging the loan. The guarantor does not have many advantages and should therefore at least eliminate the disadvantages.

Who can be a guarantor and how to deal with multiple guarantors?

The guarantor of a loan or mortgage can be anyone who has the capacity to enter into a guarantee agreement and who is accepted by the lender. Therefore, it is not obligatory for the lender to accept anyone as guarantor. If the lender of the original debt is a bank, then the guarantor is vetted in the same way as the borrower.

The borrower may arrange for several guarantors to act as co-guarantors. They may then jointly and severally guarantee the entire debt, or each may guarantee a certain part. However, if the parts are not defined in the written declaration, then all of them are liable for the entire debt.

If the creditor (after fulfilling the conditions set out above) wants to fulfill a claim (debt) for which several creditors are liable, they can decide which of them they will pursue, or they can approach all of them at the same time.

Relation of the surety’s obligation to the debt

A suretyship obligation is derivative from the original debt (it is of an accessory nature). If the original obligation is void, then the suretyship will also be void. If the ground of invalidity is resolved, then the invalidity of the surety obligation is resolved (healed) and if the original obligation is extinguished, the surety obligation is also extinguished. The exception is where the original obligation is void because of the debtor’s incapacity, of which the guarantor was aware.

Duration and extinction of liability

As stated above, a guarantee is created by a written declaration of guarantee. As a rule, it is not agreed for a specific period, but nothing prevents it from being agreed. The unlimited guarantee then lasts for the duration of the original obligation.

As a rule, the guarantee expires upon the termination of the main obligation (i.e. the original debt between the creditor and the debtor) which it secures. The only exception would be if the debt were extinguished because of the debtor’s inability to perform.

On the other hand, a guarantee does not terminate in the occasion of the death of the debtor. It has no effect on the obligations of the guarantor. If the obligation of the guarantor is not linked to the person of the guarantor, then the death of the guarantor does not extinguish the guarantee. In such a case, the obligation passes to the guarantor’s heirs.

However, it is possible to imagine a situation in which the principal obligation would be linked directly to the person of the guarantor. If, for example, both the debtor and the guarantor were practitioners of a particular trade or skill and the guarantor’s heirs did not possess such skill, then the guarantor’s obligation would be extinguished in the occasion of their death. 

When must the guarantor repay the original debt?

A creditor may seek to enforce a debt against a guarantor if the debt has not yet been repaid and one of the following conditions has occurred.

• The debtor has been called upon in writing to perform the debt, has been given a reasonable period of time to perform and has failed to do so.

• The debtor could not be called upon because the call cannot be made (for example, the debtor’s address is unknown).
• The debtor has been called upon to perform, but the call will have no effect (for example, because of the debtor’s insolvency). However, there must be objective reasons for this, it is not merely a presumption.

How can you defend yourself as a guarantor? 

Being a guarantor is not a very advantageous position, and the debtor’s mere liquidity can cause you a lot of trouble. But you don’t have to let everything go. When can you defend yourself as a guarantor against the recovery of a secured debt?

The first situation is the right to withhold performance if the debtor cannot perform the debt because of reasons caused by the creditor.

The guarantor has another possible defense, which is to raise objections that the debtor also has against the creditor. This implies, for example, asserting invalidity, limitation, etc. However, unlike before, the Civil Code does not explicitly include the possibility for the guarantor to set off the debtor’s claim against the creditor. Nor does it provide the guarantor the right to refuse performance to the creditor if, for example, the debtor has been passive and has not asserted the claim themselves.

The Supreme Court has put an end to the ambiguity in the understanding of this provision by stating in its judgment that “under the Civil Code of 2012, the guarantor has no right to set off the debtor’s claim against the creditor.”

However, a guarantor may set off their own claim that they have against the creditor against the creditor’s claim.

Option to get out of liability

If you have committed yourself as a guarantor and later change your mind, while it is not completely impossible, it is certainly not an easy thing to do. First you need to make arrangements with the borrower and get their consent. He then arranges with the lender for a change in the contract. If the lender is a bank, it usually requires the borrower to provide other collateral, such as another lender or a lien on the property.

The process is not easy and often the debtor does not want to undergo it or does not have the possibility to provide other collateral. Another setback can be the lender’s reluctance to change the contract. It is therefore best to think things through before committing to a guarantee. 

What happens after the guarantor has fulfilled the debt?

Once the guarantor has discharged the debt, the guarantor becomes the creditor. They can then claim from the debtor what they have paid to the original creditor. The latter should notify the debtor that their debt has been discharged by the guarantor.