Four Keys to a Strong Guarantee in a Loan Contract

 Posted on July 14,2020 in Creditor's Rights

A loan contract can have more than one party who is liable for the debt. For instance, a loan may have a guarantee, in which a third party called a guarantor promises to repay the debt in the event that the principal debtor defaults. A guarantor can be an individual, bank, or other financial institution and can agree to put up assets as collateral for the debt. For creditors, a guaranteed debt provides security if lending to someone who has a poor or unproven credit history. However, the guarantor could try to get out of their liability by finding a weakness in the contract. Here are four tips for creating a strong guarantee in your debt contract:

1. Get the Guarantee in Writing: It may seem obvious, but it is crucial that the guarantee is a written agreement. Courts typically do not recognize oral agreements for guarantees, and even if they did, an oral agreement is an unreliable way to set strict terms for the guarantee.
2. Use Clear Terms and Conditions in the Contract: The guarantee in the contract should state when the guarantor becomes responsible for the debt and how much they must pay. For instance, you could have an unconditional guarantee that requires the guarantor to pay regardless of the reason for the default or a guarantee that is conditional on actions such as attempting to collect from the principal debtor before collecting from the guarantor. 
3. Include Terms Giving Consent to Modify the Agreement: One argument the guarantors have used against creditors is that the guarantor was unaware of a modification to the loan agreement that significantly increased their burden if they became liable for the debt. You can protect yourself against this argument by including a section in the contract in which the guarantor consents to pay the debt regardless of modifications.
4. Check on the Guarantor: Having a guarantor for a debt does you little good if that person has a poor credit history. Do a background check on the guarantor just as you would with the principal debtor. Make sure they have the income or assets to pay if needed and a history of making payments on time.

Contact a Chicago Creditor’s Rights Attorney

When a debtor or guarantor balks at repaying a defaulted debt, you will rely on the strength of your contract and your legal team to protect your financial interests. An Illinois creditor’s rights lawyer at Dimand Walinski Law Offices, P.C., knows the tactics that debtors use to avoid payment and how to respond. To schedule a consultation, call 312-704-0771.

Source:

https://corporatefinanceinstitute.com/resources/knowledge/finance/guarantee/