Consequences of a Guarantee

2011 April 15

Becoming a guarantor for a friend or relative can be a very risky business. Consider the case of Nadia and John Abdelkodous. This couple from Sydney decided to help their son purchase a home in the Prestons in 2001, so they borrowed $494,000 from Adelaide Bank and used their home as collateral.

In 2005, their son defaulted on the payments and the bank issued a default order. The Abdelkodous couple began making the repayments, but were unable to continue in 2009. The bank acquired a default judgment against the couple, and they claimed that their son had forged their signatures when he obtained the loan.

A lot of cases similar to the case of the Abdelkodous family have been in court lately. All of these cases involve guarantees, promises made by a third party to repay a loan if the borrower defaults on it. Guarantees are usually made when the lender does not feel certain that the borrower has the capacity to repay the loan. If for any reason the borrower does not make all of the required payments, the guarantor will be held personally responsible for the debt, as well as any outstanding interest, fees, or charges.

Many people who agree to become a guarantor don’t understand the risks of doing so. In most cases, the guarantor’s home is all they have to offer as collateral, and they may also have limited income. If the borrower defaults on the loan and the lender asks for payment from the guarantor, he or she will often not be able to afford it. In addition, fraud is also involved in many cases of this sort.

Some professionals in the mortgage law industry feel that the process of becoming a guarantor for anyone should be made illegal. Most guarantors end up in trouble as a result of the decision, especially when a business loan is involved. It is possible to create a business plan that does not involve a guarantor, and this is a much better course of action.

In recent cases, judges have been likely to cancel a loan if they feel that the guarantor did not understand what he or she was getting into. In these cases, it is decided that the lender should not have accepted the guarantee. Sometimes lenders will allow a guarantor to sign based solely on the value of his or her assets, which simply isn’t enough. However, though some judges are sympathetic to the plight of an unsuspecting guarantor, it is more common for the court to hold the guarantor responsible for the loan. In fact, in cases where it is discovered that the guarantor was involved in some sort of fraud to help the borrower, the courts almost always force the guarantor to take responsibility for the debt.

Guarantors often say that they only agreed to sign a guarantee because they felt pressured into doing so. However, there are other options that should always be considered before agreeing to act as a guarantor. The individual could instead agree to loan the borrower money for a deposit interest-free. You could also suggest that the borrower save money for a while before attempting to acquire the loan.

Another example of a guarantee gone wrong comes from the case of Fast Fix Loans v Mladenko Samardzic. The guarantors in this case were the parents of a son who needed additional funding for his business. The son arranged for his parents, who were older and not native English speakers, to take out a mortgage on their property. The court ruled that the parents were not coerced into signing the paperwork and that they were willing to take the risk. However, the court also ruled that the loan would be canceled due to the fact that the lender did not verify that the parents would be able to repay the loan.

Though it is not recommended that anyone become a guarantor, some people will inevitably choose to do so anyway. If you decide to become a guarantor, there are several things you should consider before signing a guarantee. First of all, you should make certain that the borrower has a consistent, reliable source of income that he or she can use to repay the loan.

If you are signing a guarantee for a business loan, you should ask to see financial statements from the business. You may also want to get the opinion of an accountant. Next, you need to verify your own financial situation to make certain that you would be able to take responsibility for the debt if the borrower defaults on the loan. You should also discuss the details of the loan with the lender to find out exactly what amount you will be held accountable for.

Finally, you need to obtain a detailed copy of the loan contract so that you have a record of the agreement. Never agree to sign as a guarantor for a loan with no end date, such as a line-of-credit loan. You don’t want to be tied to a loan that will never be paid off. Deciding to be a guarantor is a very important decision and is not to be taken lightly in any case. Before you sign on the dotted line, make sure you know what you are getting yourself into.


3 Responses leave one →
  1. June 19, 2016

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  2. June 19, 2016

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  3. June 19, 2016

    Very educational… look forward to coming back again

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