Co-debtor − guarantor− lien debtor

Published: 1/2/2015
As a guarantor payer, you are responsible for obligations due under a loan as the main debtor. As a co-debtor, you are responsible to the credit institution for all due obligations and the lien debtor is responsible to the credit institution with all voluntarily liened assets.

This means that should it happen that the main debtor cannot meet his/her obligations, you as a guarantor are responsible for the entire obligation and are obligated to repay all his/her due unpaid loan obligations. This puts you at the risk of losing your income (except the part of income exempt from enforcement and a major share of your assets. We would like to stress in particular the fact that, as a guarantor payer, you are responsible for due loan obligations as the main debtor and the credit institution may chose to collect the unpaid obligation either from the main debtor or from you or from both of you at the same time.  If you are a co-debtor, you are responsible to the credit institution for all due obligations and the credit institution may require the fulfilment of such obligations both by the main debtor and the co-debtor, until the obligation is fully met. By contrast, the lien debtor who is not a guarantor or co-debtor at the same time, risks the loss of voluntarily liened assets only.

You have been asked to be a co-debtor, guarantor or lien debtor

When considering such a decision, it is vital to take into account all the possible risks which may seriously affect you.

IMPORTANT: Being a co-debtor, guarantor or lien debtor is not only about putting a formal signature on an agreement out of favour to someone but more importantly about assuming certain obligations of the main debtor.

To mitigate the risks arising from the assumption of a third person's debt, when you actually depend on the behaviour of the main debtor, make sure that you, before deciding to be a co-debtor, guarantor or lien debtor for someone, do the following:

  • Get detailed information on the rights and obligations of co-debtors, guarantors or lien debtors under a contractual relationship bearing in mind the type and gravity of obligations you assume under an agreement (acquaint yourself with legislation [link na Civil Obligations Act] or request information directly from the credit institution).
  • Based on available and objective sources, check and assess if the main debtor will be able to meet his/her loan obligations in terms of the planned amount and maturity of the loan.
  • Agree contractually (not verbally!) adequate security with the main debtor which will enable you to cover all the costs should you need to settle his/her obligations under a loan as a guarantor or co-debtor (e.g. promissory note, creation of a lien on the main debtor's assets, etc.). Consult a professional (e.g. a lawyer) about the manner of negotiating such security.

The instruments of collateral most frequently required from guarantors and co-debtors by credit institutions include:

  1. Statement of approval for attachment of income is a private document certified by a notary public whereby a guarantor/co-debtor gives his/her approval for attachment on his/her salary or other regular monetary income, except that part thereof which is exempt from enforcement, for the purpose of collecting a credit institution's claim. Approval for attachment of the part of salary or other regular monetary income exempt from enforcement does not have effect.
  2. Promissory note is a private document certified by a notary public whereby a guarantor/co-debtor gives his/her approval for attachment of all his/her accounts with credit institutions and for the payment of money from these accounts to a credit institution, for the purpose of collecting a credit institution's claim. A promissory note can serve as a writ of enforcement on the basis of which enforcement may be sought on guarantor/co-debtor and other subjects of enforcement.
  3. Bill of exchange is a security to a certain sum which gives the holder the right to collect that sum from the person designated in it as the debtor.
  4. Mortgage is a voluntary lien on things, typically real estate, without surrender of things to the lien creditor (credit institution) which does not authorise the lien creditor to hold the lien in possession.
  5. Fiduciary ownership right is a court or notary public insurance of claims by a transfer of ownership rights on behalf of a credit institution.

Participation of several guarantors in a contractual relationship

If there are several guarantors in a contractual relationship, their liability towards the credit institution is joint, regardless of whether they have assumed the obligation jointly or separately, unless otherwise stipulated in the agreement. This means that a credit institution may require payment of obligations from a single guarantor or from all guarantors at the same time.

If there are several guarantors or co-debtors in a contractual relationship and one of them settles the main debtor's due obligation, he/she will have the right to demand from other guarantors and/or co-debtors to compensate him/her for their respective shares (right of recourse).

The main debtor defaults on his/her obligation

If the main debtor fails to meet his/her obligation on time, the credit institution is obligated to notify the guarantor thereof or else be held liable for the damage inflicted on the guarantor.

Where the main debtor and a credit institution fail to agree on further repayment scheme within the maximum of two months following the default on repayment, the credit institution is obligated to notify the co-debtor, lien debtor and guarantor on the debt balance outstanding and provide them with a period of 15 days of the date of the notification sent via registered mail to settle the obligation in cash. This provision does not preclude the credit institution from initiating enforcement collection proceedings at the moment of recording due but unpaid receivables.

Guarantors, co-debtors and lien debtors should keep their data updated to be able to receive these notifications.

It is in the interest of guarantors to provide to the credit institution timely information on the main debtor which may facilitate collection of due debt (e.g. information on a new employer).

Guarantor who has paid a part of the debt or the whole debt

If as a guarantor you have paid a part of the debt or the whole debt of the main debtor, ask the credit institution to supply you with the relevant documentation and take the necessary actions to secure your legal position and collection from the main debtor.

As a guarantor who has fully settled the claim of the credit institution against the main debtor, you are by law transferred that claim with all the auxiliary rights attached to it as well as instruments securing its settlement and the credit institution is obligated to surrender to you the instruments proving or securing the claim (legal subrogation).

A credit institution is obligated to surrender to you as the guarantor who has fully settled the claim against the main debtor, all security documents that you have personally submitted to the credit institution to secure your obligations to the credit institution under a guarantee agreement (e.g. promissory note issued by you).

As a guarantor who has settled a part of the main debtor's obligation, you will be transferred auxiliary rights ensuring the fulfilment of that obligation unless they are required to settle the remainder of the credit institution's claim.

IMPORTANT: As a guarantor who has fully or partly settled the main debtor's debt, the credit institution is obligated to issue to you on your request, free of charge, a document proving you have settled the debt and it is in your interest to inform the credit institution as soon as possible that you have settled the debt or part of the main debtor's debt.

If a claim that has been transferred to you as the guarantor (since you have settled it) was secured by a lien on real estate, you will also be transferred the lien securing that claim.

To realise your rights as a lien creditor, you first have to be registered in the land registry as the lien creditor. To register in the land registry you do not need approval from the lien debtor or real estate owner.

On your request as a guarantor who has settled the credit institution's claim against the main debtor, the credit institution is obligated to issue to you a publicly certified document containing an intabulandi clause, expressly permitting the guarantor to register as a lien creditor in the land registry and removal of the credit institution as a lien creditor from the land registry.

A credit institution may also issue such a document in the case of a partial settlement if it does not need the relevant security for the settlement of the remainder of the claim.

A proposal for the registration of your lien in the land registry is submitted to the competent land registry court (a municipal court in the jurisdiction of which the real estate in question is located).

Note: When securing a claim by lien on some other subject provided as security (not real estate), the registration of lien on behalf of the guarantor is made in the relevant public registry, depending on the subject provided as security (e.g. Financial agency, Central Depository & Clearing Company).

Debtors' instruments of collateral

Collateral is an instrument used to secure collection of claims. It stands ready for use to the credit institution in the case when a debtor ceases to pay his/her loan or defaults on his/her payments. Credit institutions may require consumers to provide one or more instruments of collateral. The most frequently used instruments of collateral are ear-marked deposits, bills of exchange, statements of approval for attachment of salary, promissory note or approval for attachment of funds in debtors' accounts, liens (mortgages) on movable or immovable property, fiduciary ownership rights, guarantor, life insurance policy, asset insurance policy, etc. Generally, fewer instruments of collateral will be required for smaller loans. If necessary, a credit institution has the right to decide on its own which instruments of collateral it will use and in what sequence.

Ear-marked deposit − time deposits with the same maturity as the loan, used exclusively for securing loan repayment. Unless used for loan repayment, ear-marked time deposits may be used only after expiry of the maturity period and final loan repayment.

Bill of exchange − a security to a certain sum which gives the holder the right to collect that sum from the person designated in it as the debtor.

Statement of approval of lien on income − a private document certified by the notary public whereby guarantor/debtor gives his/her approval for a lien on his/her salary or other regular monetary income, except that part thereof which is exempt from enforcement, for the purpose of collecting a claim. Approval for lien on the amount of salary or other regular monetary income exempt from enforcement does not have effect.

Promissory note − a private document certified by a notary public whereby a guarantor/debtor gives his/her approval for lien on all his/her accounts with credit institutions and for the payment of money from these accounts to a credit institution, for the purpose of collecting a credit institution's claim. A promissory note can serve as a writ of enforcement on the basis of which enforcement may be sought on debtor and other subjects of enforcement.

Lien (Mortgage) − a voluntary lien on things, most frequently real estate. It is created without surrender of things to the lien creditor (credit institution) and does not authorise the lien creditor to hold the liened assets in possession.

Fiduciary transfer of ownership right − an insurance based on a court decision or a document signed by a notary public transferring ownership rights to the credit institution.

Guarantor − by agreeing to a guarantee, the guarantor assumes an obligation in relation to the creditor to settle valid and due obligations of the debtor, should the latter fail to do so. Collection of debt can be requested from the guarantor after the main debtor has defaulted on his/her obligation, unless it is determined that debt cannot be collected from the main debtor. Guarantor payer is responsible to the creditor as the main debtor so debt may be collected from the debtor and from the guarantor payer or both of them at the same time.

Life insurance policy and/or asset insurance policy − if used as a loan collateral it has to be transferred (assigned) to the credit institution.

 

Responsibility for own debt management

One of the main preconditions for successful debt management is good cooperation between credit institutions and consumers. Credit institutions' good practices certainly provide a key to assisting  consumers in the use of products and services and to cost optimisation. It is vital in this context that consumers, i.e. debtors, play an active role in accepting the information provided by credit institutions. Unfortunately, despite a wide range of options for information exchange available to consumers and credit institutions, very often there are situations where co-debtors, guarantors, lien debtors and even debtors themselves become aware of the obligations assumed and possible consequences only after a contractual obligation is exercised and prompts undesired consequences.

In case you are unable to service a debt, think about the assets (movable and immovable) that you own and may sell to repay your debt or think about the possibility of increasing your income (e.g. various forms of material rights which you may be entitled to in accordance with applicable regulations). It might also be a good idea to inform the credit institution about all your other financial obligations and costs that you may have currently to determine your total expenses.  You might be referred to a specialist team in your credit institution which will help you make your future repayment plan for your obligations. It is possible that they will suggest you to stop using some of the products and services you have been using so far to cut your expenses as much as possible.

Note: Credit institutions have individual approach to each client in financial distress and will not encourage you to agree to a repayment plan which they estimate you will not be in a position to follow. However, even if you fail to reach an agreement with the credit institution about further repayment plan for your debts, it is important that you stay in contact with it so that you can respond on time should the circumstances change.