Using guarantors is often the only way to get a loan. While founders can still rely on surety banks, many private individuals remain only a private guarantor. But what consequences can bonds have for the guarantor, the principal debtor and their relationship?
All facts about the guidebook “Credit with guarantors” at a glance:
- In the case of a guarantee, a third party guarantees that the obligations of the debtor will be met in the event of insolvency.
- The guarantor can lose all his fortune.
- Guarantors are used when there is no regular income and not enough collateral.
- The guarantor is protected by law in special cases.
1. What is a guarantee?
In the Civil Code (BGB) the guarantee is defined in § 765 paragraph 1 as follows:
“By means of the guarantee contract, the guarantor undertakes vis-à-vis the creditor of a third party to stand up for the fulfillment of the liability of the third party.”
Understandably, it means that the guarantor must pay off a loan if the actual debtor is insolvent. By means of a predefined guarantee, the creditor is guaranteed that the loan will in the worst case be reimbursed by the guarantor.
And that’s where the problem starts for many. First of all, someone must be found who, because of his creditworthiness, is even considered a guarantor. And then you have to think carefully about whether you want to build such a dependent relationship with this person.
If this option is not granted to the debtor, since he can not and will not find a guarantor in his environment, another alternative is available for start-ups in small and medium-sized enterprises. Especially for work-related loans is inadvisable a guarantee by individuals, because you can get into trouble through no fault here too. Companies in the middle class, which are yet to be founded or taken over, can be secured by so-called guarantee banks. Guarantee banks exist in every German federal state and are regarded as full security for banks and other credit institutions.
It is made up of the Chamber of Crafts, chambers of liberal professions, business associations and guilds, banks and savings banks and insurance companies. In addition, the state has great interest in strengthening the middle class and is therefore behind the Guarantee bank.
Especially for business founders, it is a way out even without collateral to get sufficient loans. As a rule reputable credit institutions should inform the borrower of this possibility. After all, it is also in their interest to win a customer and to ensure the security. Strong banks also benefit from strong SMEs.
2. What can happen to the guarantor in the worst case?
Guarantee banks are also in the default on the state back. As a result, creditors will in any case be reimbursed for their granted credit. The situation is different in the case of private guarantors. These are liable mostly with their private property. Not infrequently, they have their homeownership as collateral in this context (read also: What is an owner loan ). This must now be left to the bank in the event of insolvency.
Of course, the guarantor has not only duties, but also rights. These are regulated in the civil code in paragraphs 765 to 778. After this, the guarantor has the right to refuse the payment. However, this only applies as long as the principal debtor is still involved in a legal dispute with the creditor or if no enforcement has taken place with the principal debtor (§§770.771 BGB).
This right does not exist according to §773 paragraph 1 sentence 1-4 BGB, however, if the guarantor waives the objection (here called “objection”), the prosecution of the principal debtor by an escape or the like is made more difficult, the insolvency proceedings over the assets of the principal debtor has been opened or it can be foreseen that the insolvency estate will not suffice to satisfy the creditor.
This means that according to German jurisprudence, the guarantor is responsible for the debtor if he can no longer fulfill his written record. If the guarantor is not in a position to pay this loan from the petty cash, he is obliged to surrender his collateral.
Worst case that can arrive for the guarantor.
However, § 775 (1) sentences 1-4 still provides some possibilities for the guarantor to free himself from the guarantee. This possibility exists if the financial circumstances of the principal debtor have deteriorated significantly, if the debtor is unknown, as soon as he is in arrears with his principal liabilities or if the creditor wants to enforce the judgment and collect the debts.
How and when these laws apply exactly can be obtained from a professional lawyer. Since the conditions contradict on some points, it varies depending on the case and quality of the lawyers, which law can seize.
However, as a rule, lenders are now so cautious that they include all eventualities in their guarantee contracts. As a guarantor it is enormously important to read the fine print as well. It is best to have an impartial lawyer review the contracts before signing the contract.
In case of doubt, the facts of immorality or the statute of limitations must always be questioned. Although this will affect the creditor, the guarantor may be able to protect his belongings.
3. When are guarantees used?
Guarantees are always used when the credit standing of the principal debtor is insufficient to obtain a loan and there is not enough collateral to cover this deficiency. Credit institutions have an interest in lending only to debtors who are actually able to pay for the repayment installments. If the risk of insolvency is too high from the point of view of the banks, they will not grant credit despite the guarantor.
Conditions requiring a guarantee
The guarantee only applies in cases where, according to common sense, a loan repayment would be readily possible, but the repayment could be jeopardized by unforeseen disasters such as illness, death or economic crisis. In the case of business start-ups, there is anyway the possibility of a bank guarantee, which covers the largest uncertainty factor in the banking business – the independence of medium-sized companies. Small and medium-sized companies may already be in default of payment due to the lack of payment behavior of some customers.
4. Advantages and disadvantages of a guarantee
There are hardly any proverbs that have not been handed down for centuries because of their truth content. So too: “When money ends friendship”. Now, one or the other may be curling his head and shaking his head, but it is and remains a much-watched phenomenon.
When it comes to money, guarantor and borrower must be characteristically suited to it. This meant, first, that both perceive the surety as a business and not as a friendship service. Because then there would be the danger of the debtor’s humility or excessive expectations of the guarantor.
In addition, a guarantor, whose existence depends on the debtor’s good behavior, can begin to closely observe his environment and demand a say. He may begin to interfere in the buying behavior, is constantly saving tips and may ask monthly, if because even the installment has been made.
On the other hand, it is also possible that the guarantor no longer wasted any thought on it and the believer interprets such feelings and conjectures into him. The debtor withdraws and avoids contact because he only sees the guards as a sword of Damocles.
Of course, if both have not yet put themselves into such a situation, it is difficult to be sure that the characters are fit for it. A basic tendency is probably already recognizable without guarantee.
5. The conclusion: guarantees are a matter of trust
The bank also puts the guarantor through its paces and, above all, its creditworthiness. Finally, in an emergency, they are also liable for mortgages ( mortgage loans ) on their houses, leaving the responsibility to the principal debtor as collateral.
Using a guarantor carries a huge amount of responsibility towards the guarantor. Guarantors who are in close emotional relationship to the principal debtor are therefore excluded. Such guarantees are considered immoral, since it can be assumed that these persons rarely survey the entire situation.
In case of emergency, the guarantor, although with a good lawyer still some legal tips are available, but too high hopes should not be put here. By signing a surety bond, the guarantor enters into an obligation to the creditor. This is to be fulfilled in case of damage.