When a business provides credit to its customers a credit contract is very important in recovering outstanding money.

A consumer credit contract is where the debtor is a natural person and the contract is for personal, domestic or household purposes.  Interest charges, credit fees or a security interest will apply.

If you provide credit, one way of protecting your money is to require a personal guarantee in your credit contract.  A personal guarantee can be a valuable tool in recovering outstanding money.

A guarantor could be any one of a number of people who are willing to guarantee the debtor’s obligations under the credit contract i.e. the debtor’s partner, spouse, friend etc.

In order to ensure your consumer credit contract guarantees are effective you must take the following steps:

Execution Requirements:

  • Make sure your guarantee provision is in writing and signed by all guarantors.
  • Make sure your guarantee provision is clear and unambiguous.  All guarantors signing guarantees must understand that in signing the guarantee they may be held personally liable for the performance of the debtor’s obligations under the credit contract.

Disclosure Requirements:

  • Make sure that you provide all guarantors with a copy of the terms of the guarantee.
  • Make sure that within 15 working days of the date of the guarantee being made you disclose to all guarantors the applicable initial disclosure information which is:
    • Your (the lender’s) full name and address;
    • Initial unpaid balance.
  • The unpaid balance as at the statement’s specified “effective date”.  This accounts for every payment the debtor made on or before that date.

The disclosure statement must separately specify the amount and a description of each advance, charge, or payment accounted for in the unpaid balance.

In most cases, you can do this by providing the guarantor with the same initial disclosure statement you gave the debtor, together with a copy of the terms of the guarantee.

Make sure that if you enter any later contract with the debtor (to which the guarantee applies) you disclose this to all guarantors within 15 working days of the date of the latter contract.

Make sure that if there are any changes to the contract (to which the guarantee applies) that increase the debtor’s obligation or decrease the time that is allowed for payment that you disclose this to the guarantor within 5 working days.

In addition to the requirements mentioned above there are also a number of other things you can do to protect yourself further:

  • Store your credit contracts and guarantees in a safe place so they are easily accessible.
  • At the time of execution get full details i.e. names, dates of birth, residential addresses and telephone numbers.  This will aid in contacting the guarantor when and if it becomes necessary.

Remember failure to adequately execute guarantees and disclose appropriately to guarantors can increase the costs associated with recovering outstanding money and decrease your chances of bringing a successful recovery claim.