If you have guaranteed the debts of a person or entity that is in financial distress, you should take legal advice as soon as possible. Whatever you do, do not panic and make a rash decision such as declaring bankruptcy, winding up your business or selling your family home. The creditor seeking to enforce the guarantee may be more amenable to compromise than you think, particularly given the risks that creditors often face when they seek to enforce guarantees.
First, there is the legal principle that guarantees are to be interpreted strictly and any ambiguity or doubt is to be determined in favour of the guarantor. This means that if the guarantee is sought to be enforced, it may not result in you, as the guarantor, being ordered to pay the whole of the guaranteed debt unless that is the clear and unequivocal effect of the guarantee.
Then there are the costs to the creditor in obtaining judgment against the guarantor (which is by no means guaranteed) and then, if successful, enforcing the guarantee. These will vary from case to case but generally, may include:
- Legal costs and fees payable to the Court and to process servers in order to obtain the judgment that you will need before you can enforce the guarantee;
- If the creditor seeks to enforce the guarantee against the guarantor's land, the further cost of lodging a Property Seizure and Sale Order with Landgate, Sherriff's fees, valuer's fees, auctioneer's costs, together with the risk that the proceeds of sale of the property, often at substantial discount to market values, will be insufficient to pay out the debt, particularly if the guarantor has other secured creditors;
- If the creditor petitions for the guarantor's bankruptcy, the further cost of bringing that petition in the Federal or Federal Circuit Court together with the risk that little if anything will remain to cover the guaranteed amount once the trustee in bankruptcy and any priority secured creditors have been paid out.
Conversely, remember that lenders use interest in part to manage the risk of borrower default. Generally, the lower tier lenders, which lend on riskier terms, voluntarily assume the commercial risk of default and seek to manage it by adding a "risk premium" to their interest rates. In other words, the risk of bad debts is already built into the business model of most lenders.
In some circumstances, it may require little more than a general reminder of this fact, and of the cost and uncertainty of enforcement, to save your home and your solvency, if you are called upon to pay under a guarantee.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.