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Beware … an “all obligations” guarantee means just what it says!
Helen needed a $15,000.00 bank loan to open a small seaside café. Part of the loan agreement required that someone act as the Guarantor. Helen’s mother Stella agreed to do so and promptly signed an “all obligations guarantee”. Essentially, this meant Stella promised to pay back the loan should Helen be unable to.
Unfortunately, Helen’s café struggled to attract customers and she quickly fell behind with the payment of her loan. Adding to her woes, the interest rate on her loan and bank fees soon kicked in, ballooning her debt with the bank out to $25,000. Helen made the decision to close up shop.
Soon after, Stella received a shock when a notice from the bank arrived informing her that as Helen’s guarantor she was now liable for all of Helen’s debts, not just debts incurred as a result of the loan she thought she was guaranteeing at the outset. The bank was requesting Stella pay $100,000.00. This would cripple her financially.
The difference between agreeing to guarantee a loan and guaranteeing the entire sum of a person’s debts to the lender can be very significant. In the first instance you are only agreeing to account for the sum of the loan and outstanding interest. In the second instance you are liable for the entire debt of another person to the lender.
For Stella, a pensioner of limited means, payment was impossible.
Be careful what you sign up to…
A guarantee means that the Guarantor assumes the same obligations as the borrower. This means the bank can bypass the borrower and request that the Guarantor pay the debt in full.
Typically, a bank will require an ‘all obligations guarantee’. An ‘all obligations guarantee’ places a significant burden on the Guarantor. The Guarantor becomes liable for not just the initial loan, but for the entire borrower’s past, present and future loans from the bank. Plainly, this is not a position many can afford to put themselves in.
The Guarantor’s obligations are generally discharged when the original debt has been repaid in its entirety. We suggest if you have been asked to act as a Guarantor then find out what the terms of the loan are and the consequences if the principal lender fails to pay back the loan.
Notify the bank once the initial loan has been repaid, and make sure you have it confirmed in writing that your guarantee has been discharged.