Guarantors: It’s all in the fine print

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We are all advised to read the fine print before ticking a box or signing up to anything but do we all actually do it?

 Becoming a guarantor for a friend or relative is a kind act, which involves agreeing to take on the responsibility for repaying a loan should the friend   or relative default.

 But, not all guarantees are the same…

Some guarantees leave your estate, for instance after you have died, liable until the loan is repaid. This means that it is impossible for your executors to wind up your estate and they will have to retain enough money to make sure that the guarantee can be made good in the future if needed. That won’t be a question of a sum of money that represents the outstanding amount at death though. Extra should be reserved to take account of possible interest charged, any default charges or court costs. The relationship with the borrower may have died with the death of the guarantor and the executors of the estate may not know the borrower well or at all. As a result, they may not know when the person is in trouble or has stopped paying. The first that the executors may know is when a demand is made.

Read the contract carefully

Some guarantees allow notice to be given by the executors to terminate the contract but the contract needs to be read carefully. Simple confirmation of the fact that the guarantor has died will not be sufficient to be proper notice.

Notice of termination means that the borrower needs to repay the full amount or to find someone else to act as guarantor. This can cause upset and particularly where the arrangement is within the family may need careful handling. The executors have a duty to be neutral between beneficiaries when administering the estate and cannot favour anyone over anyone else. They may therefore need to take advice if they feel that there is a conflict between terminating the agreement and the effect it may have on the person who borrowed the monies in the first place.

The importance here is to ensure everything is read and understood thoroughly before signing the paperwork and this may indeed require seeking legal advice to ensure everyone involved knows what could happen if the guarantor dies.

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