Liabilities Ladder Illustration Design Over A White Background
liabilities ladder illustration design over a white background

A guaranty is a promise to a lender to perform the obligations of another party. A guarantor can assume responsibility for the debt of a borrower in a number of transactions, including mortgages, leases, and business loans. A guarantor has a number of duties and liabilities upon guaranteeing the loan of a borrower.

Terms of the Guaranty

The guarantor’s responsibilities are largely governed by a guaranty agreement (“guaranty”). The guaranty is usually absolute and unconditional. Thus, the requirement to pay the lender is triggered instantly when the borrower defaults. The lender need not go after the borrower to satisfy the loan; the lender can pursue the guarantor to recover payment of the full amount of the debt. In addition, most guaranties in commercial contexts do not obligate the lender to foreclose on collateral before bringing an action against the guarantor for payment.

The guarantor generally agrees to all extensions and amendments to the debt of the borrower. The guaranty  does not need to be amended if there is a modification to the loan. In an absolute guaranty, the guarantor unconditionally promises the principal debtor’s performance of his contract obligations. . An absolute guaranty does not require notice of acceptance or even notice to the guarantor of the borrower’s nonpayment of the underlying loan if the borrower has defaulted.

Duration of Obligation

Many guaranties expressly release the guarantor from his obligations after a defined period of time during which the borrower has made timely payments. In other cases, the guaranty remains valid unless the guarantor notifies the parties of a revocation of the guaranty. However, a revocation only absolves the guarantor from the borrower’s future debt obligations. It does not release the guarantor from performing his obligations to guarantee the debt that remains outstanding at the time. In addition, the guarantor’s obligation to repay the borrower’s debt does not end with the death of the guarantor. Rather, the guaranty may become the legal responsibility of the guarantor’s estate after his death.

Because of the potentially lengthy and extensive exposure, one should only enter into guarantees after serious consideration. It is important to consult an attorney to review the risks and obligations associated with acting as a guarantor on a loan to ensure that you fully understand your liability exposure.

Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us by calling 480-719-7307 to discuss your legal matter.