A Guarantor Story

2011 April 23

Becoming a guarantor for a friend or relative can endanger your most precious assets. Consider the following story:

In 2004, a young girl wanted to purchase a piece of property and build her dream home. She asked her mother to sign as guarantor for a loan in the amount of $380K and her mother agreed. The bank did not advise the mother to seek legal counsel or financial advice, and the mother signed the guarantee. The daughter purchased some land for $150K and saved the remaining money (supposedly) to build her home.

Later that year, it came to the mother’s attention that her daughter was using the loan money for purposes other than home construction. The mother made a trip to the bank to discuss the matter. The loan was not being used the way it was supposed to be and she did not want her daughter to draw on the loan for anything other than building her house. The bank assured the mother that any further drawings would require a receipt.

Shortly after this conversation at the bank, the mother called to make sure that everything was okay with regard to the loan. The bank informed her that they could not tell her anything about the loan for privacy reasons and that she would need to discuss the matter with her daughter directly. Her daughter told her that everything was fine, so the mother put the issue to rest.

In June of 2009, the mother received a notice from the bank informing her that her daughter had defaulted on the loan and that $4000 was owed. The mother immediately called the bank and was told that $380K was now owed on the loan. She also learned that her daughter had been taking money out over and over again without any receipts. The bank further informed her that this type of loan did not require her daughter to produce receipts. None of the money borrowed was used for home construction.

This bank should never have agreed to allow the mother to sign as guarantor. She did not understand the process, and yet they never advised her to seek counsel from a professional. In addition, when the mother had initially complained to the bank about the way her daughter was using the loan, they never told her that the loan did not require receipts. In fact, they assured her of exactly the opposite. The bank had essentially given a young girl a $380K credit card in her mother’s name.

At this point in time, the mother and daughter are no longer behind in paying off the home loan. However, the daughter will never be able to pay the loan off fully until she is well past retirement age. In addition, the health of the mother has been affected, and, as can be expected, so has her relationship with her daughter.

What is the Answer?

This story is very frightening indeed. Most all banks will ask anyone wishing to act as guarantor to obtain legal or financial advice prior to allowing them to sign the paperwork for liability reasons. In this case, since the bank did not do this, they may be subject to legal action.

In order to rectify the situation, the mother should first call the bank and request copies of all the documents associated with the account including the loan application, signed guarantee, and final loan document. Next, the mother needs to educate herself about the Credit Ombudsman guidelines, as well as call them to talk about the situation. The mother would then need to visit the bank with her complaint about their negligence and let them know that she plans to take further action if they don’t help her. Finally, the mother would have to seek legal action if the bank refuses to cooperate.

It is made clear in this tale that the mother has suffered from this arrangement. Her health, her relationships, and her credit have all been affected. However, because the situation has not yet caused the mother direct financial loss, a court may be reluctant to offer sympathy. In fact, she may need to reach the point of direct financial loss before she will be able to successfully battle the bank in court.

As anyone can see from this situation, becoming a guarantor is no simple decision. Signing a guarantee makes you personally responsible for the debt or mortgages in question in the event that your friend or relative is not able to pay. If the payments are passed to you and you can’t afford them, your assets are up for grabs. Before you become a guarantor for anyone, it is essential that you seek financial and/or legal advice to ensure that you are well-educated about the process. In addition, you need to make sure that you have the funds to pay off the loan should you have to. Finally, don’t sign any forms until you are certain that you agree with all of the conditions they impose.

More information about guarantor loans.

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