Consequences of a guarantor going bankrupt

A

Alphashark

Registered User
Messages
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Hello all,

A mortgage is being repaid by the mortgagee as normal, and expects to continue as normal for the term of the mortgage.


The mortgage was guaranteed by somebody who now needs to go bankrupt.


1. Will the guarantors legal responsibilities to the lender and mortgagee be wiped.
2. Will the mortgagee be detrimentally effected?


Appreciate any thoughts.


A.
 
The mortgage won't be affected at all. If the borrower pays the money to the lender, the guarantor is irrelvant.

If the guarantor goes bankrupt, I assume his guarantee expires with the bankruptcy.

Brendan
 
Brendan,
The issue of the guarantee is interesting, and maybe complex. As its just a guarantee to pay if the mortgagee defaults, it's not a debt until that happens. Therefore, does it reckon in a bankrupcy?
Say if it was made null and void, and 10 years later, the mortgagee defaults, and crucially, the bankrupt is back well and truly on their financial feet, and would be in a position to pay had the gaurantee not been voided? Would the mortgagor not feel that the guarantor should pay as they were not bankrupt at the time the guarantee needs to be called in?
 
Luternau said:
. As its just a guarantee to pay if the mortgagee defaults, it's not a debt until that happens. Therefore, does it reckon in a bankrupcy?
Click to expand...

That seems a logical conclusion, but I guess the only people who would know this would be those dealing with bankruptcies.
 
The guarantee is a contingent liability for the individual who will be adjudged a bankrupt, bankrupcy deals only with actual liabilities not contingent liabilities, until the principal debtor defaults there is no direct liability of the guarantor so their guarantee stands.
 
Hi Palerider

That is very interesting.

If someone who has given a guarantee is applying for bankruptcy, is there anyway they can "crystallise" the guarantee? In other words, if they knew that it would be called upon after the bankruptcy , could they ask the borrower to bring the default forward?

Brendan
 
Yes, If the principal debtor defaults on their loan then the lender may call upon the guarantor which would make that amount a direct current liability of the guarantor.

There would be implications for the principal debtors credit rating etc but yes it can be done alright. There may be delays getting the Bank to call in the guarantee as they will first attempt to get the principal debtor back cooperating with the agreed repayment schedule.

You are talking about a strategic default that would impact on the credit of the principal debtor.
 
Hi Palerider

The type of situation I am talking about is where the principal debtor is in real trouble anyway. Maybe they have been offered a split mortgage which they consider unsustainable. If they are going to default anyway, they should be sure to do it before the bankruptcy.

Of course, if the bank does not call on it, then they won't crystallise it.

Brendan
 
Hello,

Lets assume a Borrower is paying to terms.

If a Bank were to become aware that the guarantor was preparing to go bankrupt, the Bank may be in a position to claim it's security is being deminished (or has been deminished, post bankruptcy) - depending on the Bank's paperwork, they could potentially consider this a breach in their terms and an event of default.
 
Nope!! bank can do nothing unless the borrower is in default. Any changes in the guarantors circumstances is irrelevant.
 
Yes I agree with Brendan, Bank cant do anything in advance of a default.

I think whats interesting though is the case where A has signed a PG in respect of the debts of B. A goes bankrupt in the UK and is discharged from his debts in one year.One week after A is discharged from Bankruptcy, B defaults on his debts and the bank makes a demand on A. So once again A is in trouble and may need to go bankrupt all over again
 
Dr.Debt said:
I think whats interesting though is the case where A has signed a PG in respect of the debts of B. A goes bankrupt in the UK and is discharged from his debts in one year.One week after A is discharged from Bankruptcy, B defaults on his debts and the bank makes a demand on A. So once again A is in trouble and may need to go bankrupt all over again
Click to expand...

A should cancel his bank guarantee before he applies for bankruptcy. He can do this, but the bank may well decide on foot of that cancellation to call in the original loan and the guarantee. i.e. the cancellation will crystalise the contingent nature of the guarantee and it will fall in as a creditor under his bankruptcy if the Bank call it in!
 
That's very interesting.
I hadn't realised that some personal guarantees are revocable. Can it be true ? Haven't come across that myself.

Surely in the example given A cant just withdraw the guarantee at a whim . My understanding is that the PG remains active until the loan is repaid.
If the person giving the guarantee was able to withdraw it easily, it wouldnt offer much protection for the bank. The guarantee is given in exchange for the loan in the 1st place. I cant understand how it might be revocable.
 
I have looked up some previous examples and in all cases, its very clear that the personal guarantees cannot be released without the consent of the bank. I'm pretty sure that the bank is not going to release the guarantee without getting something in exchange or unless the original debts have been discharged
 
Not true. You are perfectly entitled to obtain release from a guarantee after giving the required period of notice. However the bank can in turn call in the guarantee if such an event occurred. In the example you stated this would crystalise the contingent liabilility and avoid the guarantee being called in post bankruptcy.
Yes its true that the bank are not obliged to release the guarantee unless they are satisfied to do so or satisfactory alternative security is provided.
 
Following some of the logic here, if a personal guarantor were to die then a lender could call in the loan that had been guaranteed.

Seems to me to be an improbable scenario.
 
Loss of security becomes an event of default. An event of default allows the Bank to call in the loan at their discretion. the loan must be called before the guarantor can b called upon. In the event of the death of the guarantor the bank can legitimately treat that as an event of default. In reality they will approach the original borrower and negotiate terms with him/her.
 
Palerider said:
The guarantee is a contingent liability for the individual who will be adjudged a bankrupt, bankrupcy deals only with actual liabilities not contingent liabilities, until the principal debtor defaults there is no direct liability of the guarantor so their guarantee stands.
Click to expand...

I don't agree with that at all. I understand that when a person goes bankrupt, all debts whether actual or contingent will fall away on discharge. Where is your authority for the proposition that only actual debts will be written off?

Steve Thatcher
www.stevethatcher.ie
 
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