guaranteeing a debtDid You Guarantee a Debt?

Sometimes, when a borrower needs to secure a loan to fulfill a debt consolidation solution, a guarantor is required. Oftentimes a guarantor is a member of our family, a close friend, or trusted colleague.

When someone guarantees a loan for you, they’re more than just providing a signature for you to access the funds. They’re taking on a large responsibility and significant risk that can have a serious impact on their credit rating should you default on your debt obligation.

What is a Loan/Debt Guarantee?

When someone guarantees a loan, they are assuming responsibility for repayment should the borrower default on payment. This role is referred to as the guarantor.

Guarantors are usually required because the borrower has a poor or non-existing credit history. In the case of debt consolidation, a guarantor may be needed if the borrower has significant debt and there is some concern over their ability to fulfill the requirements under their loan agreement.

What Happens If I Default on my Loan?

If the borrower defaults on the loan, or if they declare bankruptcy, your licensed insolvency trustee will notify the guarantor of your filing. The lender then has the right to demand payment from the guarantor. Depending on the loan agreement, the guarantor may be responsible for only a portion of the debt or for the entire outstanding balance.

If the loan was also secured against a car, home, or other personal property, the lender may opt to seize the security. But if the sale of the assets secured does not pay off the entire balance of the loan, the guarantor may still be liable for the outstanding balance under the guarantee.

Becoming a Guarantor

If you’ve been asked to become a guarantor, you should investigate the borrower’s financial situation before considering whether you should proceed. You can get most of the necessary information by asking questions of both the borrower and the lender.

Ask the borrower:

  • What is the loan for, and is it really necessary at this time?
  • Why is the second signature needed?
  • Can you verify, with financial statements, that you can make the payments?

Ask the lender:

  • Why is a guarantor is required for the loan?
  • What are my responsibilities if the borrower defaults?
  • If I agree, can you keep me informed of all activity on the account?

You also need to ask yourself the biggest question of all: can you afford repayments in the event the borrower defaults?

Signing a guarantee carries the same weight as any other type of financial obligation or contract. If in doubt, obtain legal advice.

Can Becoming a Guarantor Affect my Credit Rating?

Absolutely it can!

If you cannot repay the debt guaranteed you may find yourself on the unfortunate end of debt collection or legal action. If you are forced into a situation of debt consolidation, consumer proposal, or even bankruptcy, your credit rating will be negatively affected for up to six years after being absolved of your debt. But because rebuilding your credit rating is an important step towards recovery, we can recommend ways to improve your credit rating during the bankruptcy period.

Further, if you become insolvent and the guarantee has not been called, it is not automatically included in a proposal or a bankruptcy. If you want to remove yourself as a guarantor, you will have to tell both the financial institution and the borrower as the removal of a guarantor may also impact the lender’s willingness to carry forward with the loan.

Debt Management Services in Toronto

As a licensed insolvency trustee, Robert Charles and his team can answer all of your questions about guaranteeing a debt, and help protect you in the event that the borrower or the guarantor default in repayment.

Since 2006, Charles Advisory Services has provided debt consolidation solutions, consumer proposals, and bankruptcy services in Toronto. Founder Robert Charles has helped hundreds of individuals, families, and businesses manage their debt situation with the personal service that only an independent licensed insolvency trustee can give. With Charles Advisory Services, trusted debt consolidation, consumer proposals, and bankruptcy solutions are just a phone call away.

If you have or are planning to guarantee a debt, you should talk to us about your rights and responsibilities, and how to manage in the event of loan default. Our personalized debt solutions keep you in control of your financial situation. Contact Charles Advisory Services today for a free consultation!