The perils of going guarantor

Guarantors

I met a bloke this week who is in an ongoing dispute with one of the big banks over guarantees against a series of property investments he did with a business partner.

Basically he and the business partner borrowed millions to build a property investment portfolio. The business partner then skipped out and the bank has been pursuing him for the whole debt. He claims the ex-business partner and the bank’s employee didn’t explain his responsibilities and didn’t ensure he got independent legal advice before signing the documents.

It’s a sobering warning for anyone considering going guarantor for a loan and covering another borrower.

If you have to go guarantor make sure you take steps to limit your risk. Only guarantee a part, not all, of a loan up to a level you can afford to lose.

Make sure as the guarantor you seek out independent legal advice. Don’t get emotional and be liable for a debt you can’t afford. Treat it as a financial transaction… if you can’t pay the debt don’t sign the paper. Remember there are no friends in business and family should also be treated with caution.

Do not entrust the document to anyone else for signing. You should be there to watch all is in order. As guarantor be there in case your signature miraculously appears on a document you have never seen.

Above all, understand what you are getting yourself in to. Even when you are sitting in the lender’s office, do not sign your life away without reading the documents carefully. 

Don’t be afraid of taking time, even if you think the creditor is pressuring you to hurry up. A few minutes before you sign may save a few years of regret afterwards.

Going guarantor is not just a signature on a piece of paper. It is you accepting the responsibility for a debt someone else can’t pay.

In the current economic conditions, the validity of personal guarantees on loans is being talked about a lot, due mainly to the number of guarantees which have been contested in court.

The lenders would have it that personal guarantees are rock solid and impenetrable. In most instances they are. But there are three main grounds for appeal for people unexpectedly called upon to fulfil their obligations as a guarantor, but they are not easy. 

  • The first is misrepresentation, and can take two forms. 

– misrepresentation by the bank or lender. If it can be proved the lender has misled the guarantor in any way, then the contract begins to look shaky. 

– If you can also prove a falsehood convinced you to enter into the contract, then there will probably be grounds for a cancellation of the contract.

  • The second form of untruth is if the borrower misleads the guarantor. This can also make the contract invalid. The problem here is the borrower is probably skint anyway so you will not have much joy recovering the debt. Certain circumstances could make the lender responsible for the loan if it did not do its homework on the borrower properly.
  • Another ground for challenge is if one party is deemed to have a special disability. In simple terms this means there is an inequality between those involved in the transaction. It could be a person is illiterate or drunk and only applies if they are in an unfit state to make a decision. 

So don’t try talking your friend into going guarantor over a bottle of scotch or six, it may not stand up in court. Even if they can read the signature.

This presumption can be thrown out if it can be proved the person would have entered the contract anyway.

Finally, there is a problem with the contract if one party has undue influence over the other. Some examples of this could be a parent over a child or conversely, and more likely, a child influencing elderly parents or grandparents.

But I have to say, it can all get so messy and so sad my general rule of thumb is to avoid being guarantor for anyone.

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