Guarantor loans are becoming increasingly popular as a way for people with poor credit history, or no credit history at all, to obtain credit. As the name suggests, the loan is ‘guaranteed’ by a third party, usually a relative or friend, who commits to repay the loan if you become unable to do so.
Whilst guarantor loans have their uses if approached responsibly, there are a number of risks which your guarantor will need to consider carefully before going ahead. One of these is what might happen is you end up declaring bankruptcy whilst there is still an outstanding balance on the loan.
If this happens, you’ll normally be obliged to include the guarantor loan in your bankruptcy along with your other unsecured debts. This is great news for you, as once your Bankruptcy Order has been discharged, the loan will be written off and you’ll no longer be liable for it. However, this is bad news for your guarantor, as they’ll become responsible for repaying the loan in full and possibly upfront, depending on the terms of your loan agreement.
Of course, if your guarantor can afford to repay the loan, then there shouldn’t be any problems – especially if they were fully aware of the risks when the loan was taken out. And if you have a good relationship with your guarantor, you can always make a private arrangement to repay them once you’ve overcome your debt problems and got back on your feet.
However, if your guarantor can’t afford to repay the loan, then it’s a different story. Your lender can pursue them through the courts, or take other forms of debt recovery action such as sending bailiffs to their home. At worst case scenario and if the loan exceeds £5,000, the lender could even petition for your guarantor’s bankruptcy. Not surprisingly, this can cause big problems in your personal life if the guarantor is a relative or close friend.
So what can you do to avoid this happening once bankruptcy proceedings are underway? Unfortunately, the answer is ‘not much,’ beyond steering clear of guarantor loans in the first place. There are a couple of options you could consider, but both are fraught with pitfalls.
- Omitting your guarantor loan from your bankruptcy
You could simply not mention the loan on your bankruptcy paperwork, in the hope that the Official Receiver (OR) won’t find out about it and that you can repay it out of the element of your disposable income that you’re allowed to keep. This isn’t a realistic option because the budget you’ll be expected to live on will be extremely tight, and it’s unlikely that you’d be able to afford the loan repayments from your surplus income.
Similarly, admitting to the loan but trying to keep it separate from your bankruptcy won’t work either. The rules of bankruptcy dictate that you can’t pick and choose which of your creditors will receive preferential payments from your estate, so the OR won’t allow you to include your guarantor loan repayments in your ‘essential living expenses.’
- Paying off the loan before declaring bankruptcy
If you have any savings or assets you can sell to raise funds, you could use these to pay off your guarantor loan before your Bankruptcy Order is made. However, if the OR finds out about this, the transaction may be disallowed under the preferential payments rule. If this happens, the money you used to repay the loan would be put back into your estate for distribution between all your creditors. Your loan balance would be reinstated – leaving your guarantor to pick up the pieces.
On top of this, your conduct could be viewed as dishonest by the court, potentially landing you with a Bankruptcy Restrictions Order that extends the terms of your bankruptcy beyond the usual 12 months.
What about if the guarantor goes bankrupt?
Turning to the other side of the coin, let’s consider what would happen if your guarantor runs into financial trouble during the loan’s term (assuming you’re keeping up with the repayments at this time). If this happens and they become bankrupt, their liability to repay the debt will come to an end and you’ll be expected to keep making payments as usual.
If you later find that you can no longer afford these payments, your guarantor still won’t be liable for the loan as they’ll be protected by their bankruptcy – even if they’ve already been discharged. If their Bankruptcy Order is still in place, the OR will simply contact the lender who’ll deal with the situation on their behalf.