A surety on a bank loan is when an individual or company assumes personal liability for the repayment of another party’s debt should that party fail to repay as agreed. The guarantor assumes all personal liability for the entirety of the debt, or if there are numerous guarantors, each guarantor assumes personal liability for the full payment. This is called ‘full responsibility in solidum’ or joint liability. The issuer and endorsers of a bill provides a different kind of surety than guarantors of a bond, and for this reason there are special rules that apply to this kind of surety.
The most common form of surety for a short-term bank loan is a surety bond. A surety is one kind of security that the debt will be repaid. Other forms of debt securities include collateraæ pledges against real estate or automobiles or more liquid forms of collateral like commercial bonds. Bills of exchange often serve as debt security for revolving loans (overdrafts) and letters of credit.
To assume a surety for a bank loan the guarantor enters his or her name on a declaration on bond or other debt instruments attesting to his or her surety for the loan. In the case of bills of exchange no special declaration is needed, only the name written on the document. The surety can be transferred to someone else without their signature, e.g. if the guarantor dies. A spouse who shares in an undivided estate assumes the surety and the same applies to heirs who divide an estate privately among themselves.
How extensive is a surety?
According to the stipulations of most debt instruments, a surety covers the principal, interest, indexation, penalty charges, and costs, including collection costs. The guarantor may have to pay for failed attempts at collection from the original debtor or other guarantors. Changes that are made to the debt instrument after the guarantor has entered his signature are not binding for the guarantor unless he has explicitly accepted the changes.
It is a legal requirement that the guarantor’s signature be witnessed. The two witnesses must attest to the signatures of both the original debtor and the guarantor. There is no requirement for witnesses in cases of bills of exchange.
If debt falls into arrears the guarantor may be made to pay all the debt in arrears. In most cases debt collection from both the original debtor and guarantor is effected simultaneously. The surety is in solidum, meaning that such that all debt in arrears may be collected from only one of many guarantors. The order of signatures makes no difference. Most debt instruments provide for the right of forcible seizure without a court order, however before such measures are taken a requisition will be submitted with a 15-day notice. Forcible seizure may be imposed in cases of bills of exchange with the same notice.
Rights of the guarantor
A guarantor who pays the debt for which he or she is liable may demand reimbursement from the original debtor for all that has been paid in addition to penalty interest from the date of payment, according to those receipts produced to prove payment. The guarantor also has the option to do diligence against the other guarantors for relief in equal payments. For example, if the guarantor who paid is one of two guarantors, he can demand because of joint liability that the other guarantor reimburse him half of what he has paid.
This does not apply to bills of exchange. A guarantor (issuer or endorser) may only place a claim on those who are listed above him on the bill. Guarantors can keep the debt liability as a minimum by paying the debt in arrears immediately. It is not possible to designate a portion of debt to pay like the principal, interest, indexation, and costs in arrears unless the debt is paid in full.
Voidance of surety
A surety becomes null and void most often once the loan liability is paid off in its entirety. It is possible that the surety can be voided earlier, e.g. if the debtor declares that the guarantor is released from his or her liability, most often because another guarantor has taken on his or her liability. The surety can also expire, which happens four years after the due date, provided that there have been no attempts at collection.