Understanding Personal Loan Guarantees & Consumer Proposals

Personal Loan Guarantees & Consumer Proposals

The world of finance is fraught with complexities. Two concepts that often cause confusion are personal loan guarantees and consumer proposals. This article will delve into the intricacies of these two financial constructs, shedding light on their implications and offering guidance to avoid potential pitfalls.



The Basics: Personal Loan Guarantees

Personal loan guarantees involve a third party, known as the guarantor, who agrees to pay a debt if the primary borrower defaults. This is a common practice in situations where the borrower might not meet the standard lending criteria due to a high-risk profile. In such cases, the lender may require a guarantee to mitigate the risk associated with the loan.



Guarantor Liability

The obligation of a guarantor is not to be taken lightly. If the borrower fails to meet their financial obligations, the guarantor becomes liable. The lender has the right to pursue the guarantor for the full debt repayment, regardless of the borrower’s financial situation. This can have serious implications on the guarantor’s financial health.



Consumer Proposals: An Overview

A consumer proposal is a legally binding agreement between a debtor and their creditors, formulated under the supervision of a licensed insolvency trustee. It allows the debtor to repay only a portion of their debt, while the remaining amount is forgiven. This option provides a viable alternative to bankruptcy for individuals facing financial difficulties.



Consumer Proposals and Guarantor Debt

When a consumer proposal is filed, it affects all unsecured creditors. However, it does not absolve a guarantor from their responsibility. If the primary debtor defaults on a loan that has been personally guaranteed, the guarantor remains liable for the debt, even if a consumer proposal has been accepted by the creditor.



Potential Outcomes for Guarantors

In a situation where a consumer proposal is in place, and the guarantor is required to repay the debt, there are several possible outcomes. The guarantor may consult a lawyer to challenge the enforceability of the guarantee. Alternatively, the guarantor might pay the creditor and assume the debt, becoming entitled to a portion of the debtor’s payments under the consumer proposal. This scenario effectively allows the guarantor to recoup some of the funds.



Key Considerations Before Becoming a Guarantor

Becoming a guarantor involves a significant level of risk and responsibility. Several factors should be considered before agreeing to guarantee a loan. These include understanding the borrower’s financial situation, the ability to service the debt, the potential loss of property if used as security, and the terms of the guarantee.



Understanding the Borrower’s Financial Position

Before agreeing to act as a guarantor, it’s crucial to understand the borrower’s financial condition. This includes their ability to repay the loan, their credit history, and other financial obligations. Moreover, it’s essential to keep track of the borrower’s financial behavior during the loan term.



Terminating Guarantees

Terminating or cancelling a guarantee is often challenging. In general, lenders do not permit the cancellation of personal guarantees. Even if a termination is possible, the guarantor may remain liable for the debt incurred up to the termination date.



A Case Study

Consider a scenario where a business owner files a consumer proposal due to accumulated debt from a failed business venture. He has a friend who guaranteed a credit union loan for his business. After filing the consumer proposal, the business owner realizes the implication for his friend. Despite the acceptance of the consumer proposal by the credit union, the friend is still liable for the debt. However, by paying the credit union and assuming the debt, the friend could potentially recoup some of the funds through the consumer proposal.




Understanding the implications of personal loan guarantees and consumer proposals is crucial when navigating the financial landscape. Guarantors must be aware of their potential liability, while borrowers should understand the impact of their financial decisions on their guarantors. Consulting a professional can provide the necessary guidance to ensure informed decision-making.

Remember that each situation is unique, and professional advice is invaluable. If you need help navigating the world of Personal Loan Guarantees & Consumer Proposals, please schedule a free consultation with us. We’re here to guide you through your financial journey.

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