Key Considerations before becoming a Guarantor

Your Calgary lawyer to advise on personal guarantees and Guarantees Acknowledgment Act Certificate.

Personal Guarantee & GAAC  |  Bank Loan  |  Financial Obligation  |  Commercial Lease  |  Car Loan  |  Student Loan

Contact Neufeld Legal PC at 403-400-4092 or Chris@NeufeldLegal.com

Becoming a guarantor means that you are legally responsible for another person's debt if that person cannot pay that debt (defaults). This is a significant commitment with serious risks, and it is essential to understand what you are getting into before you sign a personal guarantee (or other form of guarantee agreement or indemnification agreement).

A. Your Financial Risk

• The most critical thing to understand is that you are in most situations on the hook for the entire debt, including the principal, interest, and any associated fees. If the borrower defaults, the lender can come directly to you for payment. This could force you to use your savings, sell assets, or, in the case of a mortgage, even risk foreclosure on your own home if it was used as security for the loan.

B. Impact on Your Credit Score

• Your credit report can be negatively affected in two major ways:

  • The borrower defaults: If you have to step in and make payments, or if the loan goes into default, it will be reported on your credit file just as if it were your own debt. This can severely lower your credit score.

  • Future borrowing capacity: Even if the borrower makes all their payments on time, lenders will still see the guaranteed debt on your credit report. This liability could reduce the amount you can borrow for yourself in the future, making it harder to get a car loan, another mortgage, or even a credit card.

C. The Borrower's Reliability

• You must have a high level of trust in the person you are guaranteeing for. You should be asking yourself:

  • What is their financial situation? Do they have a stable income and a good track record of managing their money?

  • Why do they need a guarantor? Often, a person needs a guarantor because they have a poor credit history, a low income, or limited assets, all of which are red flags.

  • What is the state of your relationship? If the borrower defaults, it can put a significant strain on your relationship, especially if they're a family member or close friend.

D. The Legal Agreement

• A personal guarantee (as well as a guarantee agreement and an indemnification agreement) is a legally binding contract that is difficult, if not impossible, to get out of once signed. You should always read the entire agreement carefully and, ideally, seek independent legal advice. Pay close attention to:

  • The extent of your liability: Is it for a fixed amount or the entire loan plus interest?

  • Duration of the guarantee: Is your responsibility limited to a specific period (e.g., the first two years of a rental lease) or the entire life of the loan?

  • What you are guaranteeing: Are you only responsible for rent, or also for property damage or legal fees? The contract should be very specific.

Important Note for Guarantors: For anyone considering becoming a guarantor, it's crucial to understand the significant financial responsibility and risks involved. They are legally obligated to fulfill the terms if the primary party defaults, and this can have serious consequences for their own finances and credit history. Consulting with legal and financial professionals before signing a personal guarantee (as well as a guarantee agreement and an indemnification agreement) is highly recommended. 

When you are in need of legal representation with respect to the provision of a personal guarantee for another party's indebtedness (i.e., bank loan, debt financing, commercial lease, franchise, car loan, student loan), including the proper completion of a Guarantees Acknowledgment Act Certificate, contact Calgary lawyer Christopher Neufeld by email at Chris@NeufeldLegal.com or by telephone at 403-400-4092.