No debt-free guarantee for guarantors

SAM and Ling were in a relationship. They met when they were both students at a local college.

After dating for a couple of years, Ling asked Sam to become the guarantor for her hire purchase (HP) loan.

Sam agreed immediately and signed the guarantee without hesitation.

As Sam decided to do this out of love and affection, he did not seek advice from anyone before signing the guarantee.

Moreover, Sam was confident Ling would repay the HP loan on schedule and they would be married soon.

Three months later, Ling started defaulting on her repayments.

Sam helped pay her arrears – until he found out Ling was engaged to be married to another man.

Shocked and broken-hearted, he broke off contact with her, changed his job and moved to another state.

Unknown to Sam, Ling continued to default on her HP loan repayments and changed jobs and addresses frequently.

As Ling did not service her loan, the financial institution repossessed and auctioned her car. After the sale, there was still a shortfall of RM45,000 owing to the financier.

As Ling could not pay up, the financial institution demanded the shortfall from Sam instead as he was the guarantor.

However, even for Sam, the shortfall was too big an amount to settle. And because of this, the financial institution initiated legal proceedings against Sam to recover the debt.

Worried about his financial predicament, Sam turned to the Credit Counselling and Dept Management Agency (AKPK) for help.

This case study on a guatantor was made by AKPK.

Now, how does the Agency help guarantors facing legal action as a result of borrowers’ failures to service their loans?

AKPK Sarawak region head Marlene Margaret Nichol said as long as the guarantor had not reached an advanced stage of litigation (creditor’s petition stage in a bankruptcy proceedings), the Agency could help negotiate with financial institutions  a repayment schedule that is within the guarantor’s capability to pay.

“This means the guarantor will be placed in our Debt Management Programme (DMP). The financial institutions will place a stay on legal action for borrowers who enrol in the DMP,” she explained.

Although statistics of guarantors, helped by AKPK in Sarawak, are not available, many of them have approached and received asistance from the Agency.

To those guarantors facing such a financial predicament but have no way out, Margaret advises them to approach AKPK for assistance.

“We can negotiate with the financial institutions on their behalf as long as they fulfill the eligibility criteria to be placed in the Debt Management Programme (DMP).

“AKPK wishes to remind individuals that becoming a guarantor is very risky. Think first before agreeing to become one. Ensure that you are guaranteeing a loan for a productive purpose and the borrower is capable of repaying the loan.”

Margaret said lenders would normally request for a guarantor if a borrower’s credit-worthiness was questionable.

She noted that although not the principal borrower, a guarantor is still responsible for the unpaid portion of the loan, including interest, if the principal borrower defaults.

The guarantee for the borrower’s obligation would last until the full settlement of the loan, she said, adding that a guarantor could not be discharged without the full settlement of the loan or prior to obtaining the lender’s consent.

Many people think a guarantor only provides a reference of good character of the borrower and is not legally bound to pay back the loan if the borrower cannot or will not pay.

Margaret said this is a wrong perception.

“Guarantors must be aware of their rights. There are certain rights accorded a person acting as a guarantor before and after the contract of guarantee is signed.”

She pointed out that one of the rights of a guarantor was to be indemnified by the borrower for any payment made to the financial institution.

This means a guarantor can sue the borrower for the amount the former has paid to the financial institution.

Margaret said Bank Negara Malaysia, in collaboration with the Association of Banks in Malaysia, had produced a “banking info” booklet on guarantors to provide information on the details and implications of guarantees given by individuals.

“It is aimed at increasing public understanding on guarantees,” she added.

According to her, the booklet gives consumers guidelines on legal requirements and rights and liabilities of a guarantor as well as highlights the important issues a person should know before agreeing to become a guarantor.

A guarantee, as defined in the booklet, is a legal contract that binds a person to pay the debt of the borrower if the borrower fails to do so.

The financial institution can sue the person acting as the guarantor when the borrower does not repay the debt.

Anyone can be a guarantor as long as he or she meets the legal requirements to be a guarantor.

However, since a guarantor is liable to pay the debts of a defaulting  borrower, one should consider becoming a guarantor only if one is sure one can pay the borrower’s debts in the unfortunate event the borrower fails to do so.

A person who becomes a guarantor straightaway has liabilities. The extent of a guarantor’s liabilities will be as specified in the guarantee document.

As stated in the booklet, a guarantor may be held liable for the liabilities of the borrower in accordance with the terms of the guarantee document.

Unfortunately, more often than not, guarantors willingly sign the contract of guarantee without fully realising the impact it may have in the future.

The booklet notes it is extremely important for a prospective guarantor to read and understand the contract of guarantee before signing.

“It’s also imperative for the prospective guarantors to obtain independent legal advice before affixing their signatures on the contract.

“This will ensure they are aware of the true nature of the document and its legal implications – for example the guarantors’ rights and liabilities under the guarantees, especially if the financial institution changes the terms and conditions during the tenure of the loan.”

The booklet also reminds consumers not to sign any guarantee if they:

• Do not have a financial, business or moral interest in the transaction and are uncertain as to the nature of the transaction.
• Have doubts as to the ability or integrity of the borrower.
• Feel they are under undue pressure or duress to do so
• Do not understand the terms of the guarantee and do not have an independent party explaining it to them.
• Believe they have no capacity to settle the debts of the borrowers if the latter fail to pay.

Potential guarantors also ought to know a loan can be guaranteed by one or more guarantors.

However, this does not mean the liabilities of the guarantors are shared equally among themselves. The financial institution has the right to recover the debt wholly or partially from any of the guarantors.

Under a joint guarantee, upon the death of one of the guarantors, the obligations under the guarantee pass to the surviving guarantors.

Also, under the joint and several guarantees, upon the death of one of the guarantors, the estate of the deceased guarantor will remain liable under the guarantee together with the other guarantors.

AKPK, a wholly owned subsidiary of Bank Negera Malaysia, offers free services not just to borrowers but also potential borrowers, including guarantors.

It offers financial education on the responsible use of credit and basic money management skills.

Its financial education programmes include ad-hoc tailor-made talks and briefings to various target groups, a personal financial management education programme (which normally targets university students) and the POWER1 programme, designed to equip individuals with essential financial knowledge and ability to make responsible financial decisions.

Its counselling and advice on financial management include financial budgeting to manage expenses.

AKPK also offers DMP to assist financial distressed consumers in regaining their financial control.

“Borrowers, potential borrowers and guarantors in Sarawak who require our services can come forward to AKPK Sarawak Region office at Bangunan Bank Negara Malaysia here anytime during week days,” Margaret said.

Individual borrowers can seek AKPK’s assistance in rescheduling their house loans, hire purchase loans and personal loans from, or outstanding credit-charge card balances due to, financial service providers under the purview of Bank Negara Malaysia.