Should you be a 'guarantor' for someone elses debts?

Being a parent involves nurturing and caring for your children.  While it would be nice to think that this obligation ended at age 18 or 21, the reality is that it tends to exist for many many years into your children's adulthood.  My mother continually reminds me that although I am a well established adult - I am still 'her little girl'.

One of the dangers that this nurturing and caring for your children can bring is if your child asks you to be their 'guarantor' for their debt.  This might be if they want to purchase their first home, without the minimum deposit required by the banks.  Helping with a deposit on a home, where there is valid security is probably not as dangerous to you as the other options.

But, it is dangerous to you to be a 'guarantor' for your children in other situations, where there is limited or no security.

Being a 'guarantor' is not just putting your name on a piece of paper to help out your family or friends.  It is committing your full financial resources to fulfil any debts that are subject to your 'guarantee', when those debts are called.

This could mean financial disaster for you if the business venture/investment or other venture that your family or friends are entering into doesn't work out.

At Moneyworks we STRONGLY RECOMMEND that you take INDEPENDENT LEGAL ADVICE before entering into a 'guarantor' role for anyone, so that you can understand all the implications of your commitment.  In particular review the options outlined below by Citizens Advice Bureau for having a 'Limited Guarantee'.

To help you understand what 'being a guarantor' means, here are some useful links:
Consumer Affairs - Guarantors
Being a Guarantor - from Citizens Advice Bureau

What is a guarantor?

Sometimes lenders may insist that a person taking out a loan has a guarantor for that loan. This is usually if the lender is concerned that the person may default on their loan repayments, if the person is under 18 years of age, or if the person does not meet some of the lender's lending criteria.

Guaranteeing a loan or other credit contract makes you responsible for paying the debt if the borrower doesn’t pay it.

Being a guarantor is risky, so if you’ve been asked make sure you know what the implications are (see below).

What should I consider before agreeing to be a guarantor?
Before you agree to be a guarantor, ask yourself:

  • Why do they need a guarantor (do they have a poor credit history? Is it likely they will have problems making the payments?)
  • Is the borrower responsible enough to have a loan?
  • Is the loan a wise one (is it for something they really need, or could they just save up for it?)
  • Would you be willing and able to back the loan (plus debt recovery costs) if the borrower can’t or won’t?
  • What would you list as security, and are you willing to risk having it repossessed if the money can’t be paid back?

It’s best to seek legal advice before agreeing to be a guarantor. You can visit a Community Law Centre, or the CAB can help you find a lawyer.

What can I do to protect myself as a guarantor?

If you agree to be a guarantor then you are taking on a serious risk and will be responsible for paying a debt if the borrower can’t or doesn’t. This is far more than giving someone a character reference. It is important to know that, if the borrower defaults, the lender is entitled to come after the guarantor (you) for repayment before they go to the borrower, if they think you are more likely to be able to pay up.

Try to limit your liability -
Many guarantees cover all of a borrower’s obligations to a lender (these are called “All Obligations” guarantees). This means that if you agree to guarantee someone’s car loan, you could be unwittingly guaranteeing their mortgage, other personal loans, and credit card debt as well. You can ask that the guarantee agreement limits the amount you guarantee (i.e. “limited guarantee”).

Make sure you receive the documentation -
When guaranteeing a loan, the lender (creditor) must give you a copy of the credit agreement so that you know what their payment schedule is, and also a copy of the guarantee contract (a contract of guarantee must be in writing and must be signed, otherwise it cannot be enforced).  For a credit contract, they have to do this within fifteen days of the guarantee contract being signed. The creditor must inform you of any changes to the credit contract which either increase’s the debtor’s obligations or shortens the payment period, within five working days. Any other notices sent to the borrower (debtor) must also be sent to you.

If the borrower misses payments and the creditor starts the repossession process, they must send you a copy of the repossession notices.  If you do not receive the notices, your liability may be reduced.

If you think the credit contact is oppressive, then as a guarantor you are entitled to apply to the Court to have the contract changed.

Take care in choosing security for the loan or credit contract -
If you provide a 'secured guarantee' by listing items of property that can be claimed as repayment (i.e. security), they will be taken if you cannot pay the loan. Because of this it is important you do not list any items worth more than the debt, for instance your house.

Get a written agreement with the borrower -
As a guarantor, you have no direct control over the borrower's (debtor's) loan repayments. You can insist on a written agreement with them, which:

  • requires the debtor to keep you informed of their financial decisions
  • allows you to see how much money is in the debtor's accounts
  • states exactly who is responsible for which part of the loan

It’s best to seek legal advice before agreeing to be a guarantor. You can visit a Community Law Centre, or the CAB can help you find a lawyer.

I agreed to be my child's guarantor. They couldn't afford to pay off their debt and have left the country! Is there anything I can do to avoid paying?

Unless you have made an additional legal agreement with either the creditor (to whom the debt is owed) or the person for whom you are a guarantor (the debtor), you cannot avoid paying. If the guarantee you agreed to includes special conditions for this kind of situation, then you may have other options.

Getting the money back from your child could be very difficult if they have left the country. Review your agreement to see how you can get the money back, and seek legal advice as soon as you are asked to pay.
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