How do you not get into trouble as a guarantor?

What is liability and how does it arise?

Suretyship is one of the two most common options for securing debt. It is 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 de facto 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 with an experienced attorney for all legal documentation.

Advantages of suretyship

A surety bond provides significantly more security to the creditor by giving them another option to satisfy their debt. The borrower also benefits from a surety bond as it makes it easier for them to go through the loan negotiation process. 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 a creditor (after fulfilling the prescribed conditions) wants to fulfil a claim (debt) for which several creditors are liable, he can decide which of them he will pursue, or he can approach all of them at the same time.

If you’ve done a crossword puzzle at least a few times in your life, you’ve probably come across the answer “bill guarantor” or “bill guarantor” for four (aval). Aval , however, is more the actual form of bill of exchange liability, which is created by a written declaration on the bill of exchange. The guarantor in such a case is called the avalist and the party for whom the avalist guarantees is called the avalate.

Relationship of the surety bond to the debt

The surety bond derives from the original debt (it is of an accessory nature). If the original obligation is void, then the guarantee 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 termination of the guarantee

As we have already stated above, a guarantee is created by a written declaration of the guarantor. As a rule, it is not agreed for a specific period, but nothing prevents it from being so 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 on 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 on his 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 any of the following conditions have occurred:

• The debtor has been requested 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 have been summoned because the summons could not be made (e.g. 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 his insolvency. However, there must be objective reasons for this, it is not merely a presumption.

How can you defend yourself as a guarantor?

The position of guarantor is not a very advantageous one and the debtor’s mere liquidity can cause you considerable problems. But you don’t have to let everything go. When can you defend yourself as a guarantor against enforcement 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 defence, which is to raise objections that the debtor also has against the creditor. This implies, for example, asserting invalidity, limitation, etc. However, the legal regulation of liability in the NPL does not contain an explicit possibility for the guarantor to set off the debtor’s claim against the creditor. Similarly, there is no express possibility for the guarantor to refuse to pay the creditor if, for example, the debtor was passive and did not set off the claim himself. 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 against the creditor the debtor’s claim that it has against the creditor.”

However, a guarantor may set off his own claim that he has against the creditor against the creditor’s claim.

A set-off is a situation where you owe someone something, but they also owe you something. Instead of you sending CZK 100,000 to the person’s account and him sending you CZK 80,000, it is sufficient if you settle the difference between you, i.e. you send CZK 20,000 to the account. However, the set-off does not happen automatically, you have to tell the other party that you are doing the set-off.

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. He can then claim from the debtor what he has paid to the original creditor. The latter should notify the debtor that his debt has been discharged by the guarantor.

Summary

A suretyship is a form of security for a debt where the guarantor gives a written undertaking to the creditor to repay the debt if the debtor fails to do so. The debtor is not a party to the contract. A guarantee can also be given in respect of a future or contingent debt. It is mainly advantageous for the creditor and the debtor; the guarantor often bears the obligation for many years without significant benefit and should therefore consider everything carefully and consult a lawyer before signing.

Any self-responsible person who is accepted by the creditor can be a guarantor. Multiple guarantors may guarantee jointly, severally or each for a portion if the contract specifically states so. As a rule, the guarantee ceases with the extinction of the principal debt, but not with the death of the debtor or the guarantor – if the obligation is not personal, it passes to the heirs.

The creditor may turn to the guarantor if the debtor has not fulfilled the debt even after a reasonable notice, or if he cannot be contacted or is insolvent. The guarantor may defend itself, for example, by claiming that the debt cannot be performed due to the creditor’s fault or by invoking the debtor’s objections (e.g. statute of limitations). However, he cannot set off the debtor’s claim, only his own against the creditor.

Getting rid of a guarantor’s obligation is difficult – it requires the debtor’s consent, replacement of the collateral and the creditor’s willingness to accept the change. Once the debt has been paid, the guarantor becomes a creditor against the debtor and can claim compensation from the debtor.