What Do I Need to Know About Being a Guarantor?

I received a telephone call at work the other day from a very angry person. This person had received a copy of their sister-in-law's bankruptcy notice and wanted to know why she was receiving this mail. I calmly explained (as I have hundreds of times before) that she was listed as a co-signor on one of the credit cards and, therefore, she received notice as prescribed by the bankruptcy code. The questions then began to pour out, as they always do, when I have to give this speech to a caller. Unfortunately, I cannot respond to her questions even though I may know the answer because our office represents the debtor. All I can say is she should contact her own attorney to find out what she can do to try to protect herself. The problem is that there is probably nothing she can do if she willingly agreed to guarantee her sister-in-law's debt.

What is a guarantor?

Black's Law Dictionary defines a guarantor as "one who becomes secondarily liable for another's debt or performance." Basically put, if the sister-in-law does not pay, then you do. Unfortunately, there are many people who do not understand that being a cosigner obligates you to pay that person's debt if they default. Black's defines cosigner in part as a person who signs a document with another "often assuming obligations and providing credit support to be shared with other obligor(s)." By cosigning a credit card application or a loan application, you are agreeing to be liable for the debt with the primary applicant. Signing as a guarantor adds another layer of protection for the lender because now you have guaranteed the debt and are agreeing to pay the debt if the borrower (in my example the sister-in-law) defaults on the loan - - including if she files bankruptcy.

Is it wise to cosign a loan for someone?

Husbands and wives cosign debt on a regular basis and parents often help their children by cosigning for their first car loan or being a guarantor on their first apartment lease. However, you must remember that not everyone manages his or her money as wisely as you may manage your money. Furthermore, you need to be prepared to absorb the loan payments into your own budget should the primary applicant default on the loan agreement and stop paying the monthly payments. In my example, the sister-in-law filed a Chapter 7 bankruptcy, and stopped making the payments, so now the angry relative will have either to make the payments or have her credit ruined as well.

Bottom line

As a child growing up, I watched my father managing money and budgeting our household expenses and, as I got older, what I noticed the most was that bills came before any "fun" spending. My father drilled into my head that you never spend money you do not have and you always pay your bills on time even if you must give up something you want to do so. I wish I could have followed his example better as it would have saved me from some of the financial mistakes I have made as an adult. There are three bits of advice about managing money that my father gave me that I have always followed:

'¢ Never loan money you do not have - If you cannot pay all your bills and living expenses without that money, then do not loan it to anyone.

'¢ When you do loan money treat it as a gift - If the person pays you back then that is wonderful but if you never receive a dime of the money back then you will not be hurting for it or you should have never loaned it in the first place.

'¢ Never cosign or be a guarantor for someone unless you can afford to pay the loan payments yourself - If you can afford to pay the loan payments yourself without stressing your budget and want to take the chance then it is your decision. However, if you cannot afford to pay those loan payments yourself then do not cosign or guarantee the loan because if that person defaults you are stuck making the payments or ruining your credit.

NOTE: Nothing in this article is intended as legal advice. Questions about cosigners, guarantors or legal contracts should be answered by a qualified attorney.

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