# Consequences of a guarantor going bankrupt



## Alphashark

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.


----------



## Brendan Burgess

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


----------



## Luternau

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?


----------



## Bronte

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?


 
That seems a logical conclusion, but I guess the only people who would know this would be those dealing with bankruptcies.


----------



## Palerider

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.


----------



## Brendan Burgess

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


----------



## Palerider

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.


----------



## Brendan Burgess

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


----------



## MrEarl

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.


----------



## 44brendan

Nope!! bank can do nothing unless the borrower is in default. Any changes in the guarantors circumstances is irrelevant.


----------



## Dr.Debt

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


----------



## dub_nerd

Can you go bankrupt twice? I know PIA is limited to once only.


----------



## Dr.Debt

Yes its possible


----------



## 44brendan

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


 
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!


----------



## Dr.Debt

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.


----------



## Dr.Debt

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


----------



## 44brendan

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.


----------



## Padraigb

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.


----------



## 44brendan

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.


----------



## Steve Thatcher

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.



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


----------



## Steve Thatcher

Fact that a contingent debt such as a guarantee is written off in the bankruptcy

[broken link removed]

This is the Official Receivers own technical manual.

Please if you are not legally qualified and wish to make a point always point out your provenance for your advice, or stipulate if it is personal opinion.

So many people can get confused from statements made on a forum, which may seem like fact but are not

Steve Thatcher
www.stevethatcher.ie


----------



## Bronte

Steve Thatcher said:


> This is the Official Receivers own technical manual.


 
Aren't they brillant in the UK, they think of everything. Wonder does that apply to people going bankrupt in Ireland, or those doing PIA's etc.

Another very good reason for going UK bankrupt.  Should be added the key post on UK bankruptcies.  Guarantees were signed left right and center during the boom.


----------



## Bronte

44brendan said:


> Not true. You are perfectly entitled to obtain release from a guarantee after giving the required period of notice.
> 
> 
> 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.


 

Your last sentance contradicts the first sentance.  My understanding of guarantees, any that I've seen is that they are open ended, and will not be revoked unless the bank agrees.


----------



## Palerider

Fact that a contingent debt such as a guarantee is written off in the bankruptcy

http://www.insolvencydirect.bis.gov....art7/part7.htm

This remains ambiguous despite your assertion Steve., I have taken the following from the guide to bankrupcy published on the UK's ISI website, in italics. 

_*a. *Debts _

_Discharge releases you from most of the debts you owed at the date of the bankruptcy order. Exceptions include any claims which cannot be made in the bankruptcy itself. _

my personal view is if the guarantee is not called in at the date of the bankrupcy then the debt is not owing at that date and no claim can be made.    
_-------------------------------------------------------------------------------------------------------------------------_

In the link to the Official Receivers guide you provided it comments as follows on guarantees...again in italics and IMO says the same thing

_A personal guarantee may be a contingent liability but the rule against double proof means that the creditor cannot prove his/her claim until the amount guaranteed is paid in full by which time the amount of the debt will be known.

---------------------------------------------------------------------- 

I cannot comment on the Irish system as I'm not qualified to as I'm not  a PIP however based on my research this morning I think that this is not at all clear and would probably require the legal people to trash it out if ever this got to be an actual occurance. 



_


----------



## Steve Thatcher

Palerider said:


> Fact that a contingent debt such as a guarantee is written off in the bankruptcy
> 
> http://www.insolvencydirect.bis.gov....art7/part7.htm
> 
> This remains ambiguous despite your assertion Steve., I have taken the following from the guide to bankrupcy published on the UK's ISI website, in italics.
> 
> _*a. *Debts _
> 
> _Discharge releases you from most of the debts you owed at the date of the bankruptcy order. Exceptions include any claims which cannot be made in the bankruptcy itself. _
> 
> my personal view is if the guarantee is not called in at the date of the bankrupcy then the debt is not owing at that date and no claim can be made.
> _-------------------------------------------------------------------------------------------------------------------------_
> 
> In the link to the Official Receivers guide you provided it comments as follows on guarantees...again in italics and IMO says the same thing
> 
> _A personal guarantee may be a contingent liability but the rule against double proof means that the creditor cannot prove his/her claim until the amount guaranteed is paid in full by which time the amount of the debt will be known.
> 
> ----------------------------------------------------------------------
> 
> I cannot comment on the Irish system as I'm not qualified to as I'm not  a PIP however based on my research this morning I think that this is not at all clear and would probably require the legal people to trash it out if ever this got to be an actual occurance.
> 
> 
> 
> _



Pale Rider you are not legally qualified either in Ireland or the UK. I am a 20 year qualified  solicitor in the UK who has specialised in bankruptcy the whole of his life.
 The Personal Guarantee cannot be pursued after bankruptcy....end of story.
The rule against double proof, is claiming under the guarantee and then the bankruptcy itself. It is not ambiguous and you will confuse people and introduce an element of doubt when there is none.

Steve Thatcher


----------



## Bronte

Steve Thatcher said:


> The rule against double proof, is claiming under the guarantee and then the bankruptcy itself.


 
So that phrase in the guidebook about double proof, it's a double proof if one had to do both as in 

a) the guarantee and 
b) the bankruptcy? 

And therefore it's not allowed. I found that sentence confusing I must say.


_The relevant bit from your link:_

*40.125 Guarantees*
_A guarantee can give rise to contingent claims against the insolvent. _

_A personal guarantee may be a contingent liability but the rule against double proof means that the creditor cannot prove his/her claim until the amount guaranteed is paid in full by which time the amount of the debt will be known._


----------



## Alphashark

Many thanks for all the opinions and advice. Two related queries;

1. Does the jurisdiction where the guaranteed debt or related property is? It is in mainland europe.

2. Must the lender be advised?

Kind regards.

A.


----------

