Obtaining credit has become more complicated than it used to be; this is because creditors have tightened their requirements for lending money. To improve the chances of acquiring a loan, many ask someone to be a guarantor. Alternatively, if you’re applying for a business loan, you may have to guarantee the business loan with your assets. If the borrower defaults on the debt, and the guarantor does not have the means to repay the debt, in some cases, the guarantee can be discharged in bankruptcy.
What Happens if a Borrower Defaults on a Guaranteed Loan?
If you default on your loan by missing a payment, the lender has the right to ask the guarantor (the person who guaranteed the loan) to make up the payments or to pay the entire loan off. If this happens, the guarantor will have the same collection activities the borrower would face under state law, such as phone calls, letters, lawsuits, and garnishments.
Remember that if the creditor looks to the guarantor for repayment, that doesn’t mean that you will not have to pay the debt. The creditor can pursue the borrower until the loan is paid in full or discharged. It is important to note that the guarantor may seek repayment from you if the guarantor repays the creditor. Filing for bankruptcy may be a way to prevent the guarantor from recover against you.
Who Can Be a Guarantor?
Anyone can agree to guaranty a loan that is taken out by someone else. In most instances, when the borrower is an individual, the money sought is for personal or educational purposes, and the guarantor is either a relative or a good friend.
Creditors often require someone to personally guarantee business loans because of the high rate in which small businesses fail. Typically, the creditor will check the guarantor’s credit just like the borrower’s, investigate the guarantor to ensure there is sufficient income to repay the loan if that becomes necessary.
In some institutional lending programs, like student loans and small business loans, banks and other financial institutions make the loans, but the guarantor is the federal or state government. If you default, the government agency pays off the bank and takes ownership of the loan. You will then have to deal with the government agency to rehabilitate the loan or pay it off.
Even with a government guaranty, the lender can still request that you supply a person to provide additional surety. When the borrower is a small business, the lender will routinely expect the business owners or principals to guarantee the business loan personally. Doing so offers the bank and the institutional guarantor added security in the event the company fails. When the Small Business Administration guarantees the loan, anyone with an ownership interest of 20% or more must personally guarantee it.
What is the effect of a Guaranteed Loan?
By having a guarantor on a loan, the borrower can save money with a reduced interest rate because banks sometimes view guaranteed loans as having a lowered risk of loss. However, some lenders often request guarantors when a borrower has credit issues. In contrast, other financial institutions may let you borrow more if you have a guarantor.
What is the Codebtor Stay in a Florida Bankruptcy?
A codebtor is obligated to pay off a debt owed by the debtor; this the person who files for bankruptcy if the debtor is unable to do so. Different chapters deal with codebtors differently. In a Chapter 7 bankruptcy, a codebtor’s responsibility to pay the debt will not discharge (wipe out). The codebtor will remain liable and subject to collection efforts after the bankruptcy. By contrast, in most cases, as long as the bankruptcy court does not lift the codebtor stay (this is similar to the automatic stay), a codebtor will not be responsible for paying the debt while the debtor is in a Chapter 13 bankruptcy. Section 1301 of the bankruptcy code prevents creditors from commencing or continuing any civil action against a codebtor.
Contact a Miami Bankruptcy Attorney to discuss personal guarantee issues
Personal guarantees in bankruptcy can become complicated when dealing with close family or friends. A Miami bankruptcy attorney can help you prepare and understand how personal guarantees may effect your family and friends that may have cosigned on your financial obligations. Call 305-515-5928 today for a free no obligation consultation.