Aware of the fact that individuals guaranteeing a loan often come in unenviable positions, we have prepared this copyright article for those who consider a decision of entering into such a contractual relationship.
1. Guarantor and codebtor – definition of terms
Banks, as institutions that lend their funds in form of loans, require the borrower to present certain security as a guarantee that the loan will be repaid. Security may include pledging of movable or immovable assets. In the latter case (i.e., pledge of immovable assets), we talk about mortgage. However, in addition to securing the loan against an asset, the bank may also require that guarantors or codebtors, i.e. third persons to guarantee that the debt will be repaid.
A basic pre-condition for approval of a loan by the bank is the client’s financial reliability. However, even if the client is not fully financially reliable on his/her own, the bank may still approve a loan, providing a codebtor or a guarantor is introduced into the contractual relationship, whose role is to guarantee that the debt will be regularly repaid. To put it simply – should it happen that the main debtor fails to meet his/her obligations on a regular basis, irrespective of the reason, the guarantor or codebtor is responsible for the total obligation and shall be asked to pay total debtor’s due obligations under the loan.
In practice, codebtor and guarantor give approval, resp. sign a loan contract. Besides, codebtor and guarantor are also asked to present an instrument of security against the payment (for instance, a promissory note or bill of exchange) from which the bank may collect due obligations under the loan.
2. Guarantor and codebtor – who is who?
A guarantor is a legal person or a private individual who guarantees a loan and commit to the lender to pay its receivables when the lender may not collect the due debt from other instruments of security, meaning that the lender may request from the guarantor to meet the obligations only after having undertaken/exhausted all other measures against the debtor and having failed to collect the due receivables.
A codebtor is a legal person or a private individual who is responsible for collection of all lender’s receivables equally as the main debtor. The lender may use all instruments of debt enforcement against the codebtor equally as against the main debtor, including the attachment of salary.
Note: It is clear from the above that the codebtor’s position in contractual relationship is more serious and bring more responsibility than the position of the guarantor.
3. When are guarantor and codebtor usually involved?
Involving a guarantor and codebtor into the contractual relationship guarantees loan repayment to the bank and increases the main debtor’s financial reliability, that is to say – the bank has interest and security that the placed funds will be repaid. As an additional security, the bank often requests the main debtor’s spouse or a family member to be introduced as a codebtor.
4. As opposed to codebtor, guarantor does not increase the main debtor’s financial reliability
A guarantor acts as additional security of loan repayment and does not increase the main debtor’s financial reliability. As a rule, banks request a guarantor to be involved in cases when the main debtor’s financial reliability is not sufficient, but is close to the set threshold value for the requested loan or when another condition is not met (for instance, the borrower does not receive regular income). Any financially reliable person, who earns a regular monthly income, may act as a guarantor.
5. How can guarantors and codebtors withdraw from their obligation?
You may withdraw from the guarantor’s/codebtor’s role only if the borrower-debtor offers to the bank-lender a different person for the guarantor’s/codebtor’s position or a different security instrument. However, such replacement must be pre-approved by the bank-lender and an annex to the loan contract must be signed.
Understandably, this option is realistically not to be expected when the debtor starts facing financial troubles, because in that case, the bank channels its requests to codebtor and guarantor in order to protect its financial interests and collect its receivables.
6. What can the guarantor do after someone else’s loan is paid ?
In case the guarantor pays full or partial amount of the debt under the loan, the guarantor is entitled to request a refund from the borrower. Actually, all rights of the lender are in that case transferred onto the guarantor (subrogation). Guarantor shall initiate a special lawsuit by bringing charges against the borrower to request compensation of the paid funds.
7. How can the guarantor get the paid funds refunded in case of the main debtor’s death?
Guarantor is in any case entitled to initiate a lawsuit with the purpose of getting the paid funds refunded, even if the debtor deceases after the guarantor has paid the debtor’s obligations to the bank, but in this case by bringing charges against the borrower’s heirs who inherited the borrower’s property after his/her death. In addition to the amount of funds paid to the bank on behalf of the debtor, the guarantor is also entitled to request collection of default interest from the day of payment. It is very important for the guarantor to obtain a certificate of debt payment from the bank. If the claim that after the payment was transferred onto the guarantor was additionally secured with a real estate lien (mortgage), that lien is transferred onto the guarantor as well. This undoubtfully represents a stronger security for the guarantor that he/she will eventually be able to collect the funds paid on someone else’s behalf. However, it is very important for the guarantor to register as a lien holder with the Land Books.
8. Protection of guarantors in the Federation of Bosnia and Herzegovina
Rights of guarantors in the Federation of Bosnia and Herzegovina are protected by a special piece of legislation – Law on Guarantor Protection in FBiH, which inter alia prescribes in more detail obligations of the lenders before conclusion of the contract.
Prior to concluding the loan contract, the lender shall assess the financial reliability of the borrower, guarantor or other individual who personally guarantees repayment of the borrower’s obligations on the basis of documentation and information received from the borrower and verify it by checking the loan registers, publicly available registers, databases etc. Besides, prior to concluding the loan contract, the lender is obliged to inform the borrower, guarantor or codebtor about the documentation and other information collected in the process of their financial reliability assessment. Guarantor may file a written complaint to the lender, if the lender fails to apply the provisions of the Law, obligations stipulated by the contract, General terms and conditions and good business practice. The lender is on its part obligated to undertake necessary measures of resolving the received complaint and send a written reply to the complaining part at the latest within 30 days from the day of the complaint having been filed. In addition, the lender is obliged also to inform the Banking Agency of FBiH on the undertaken measures.
If the guarantor happens to be dissatisfied with the reply received from the lender or if the lender fails to send a reply within the 30-day deadline, the guarantor may file a complaint to the Ombudsman at the Banking Agency of FBiH and the Agency shall in that case request the subject lender to declare itself on the guarantor’s complaint within eight days from the request having been received.
If the Agency establishes any violation on the part of the lender, the Agency may punish the lender in accordance with the Law and other regulations on the operations of banks and microcredit organisations.
9. Releasing the guarantor from the obligation
Provisions of Article 30 of the Law on Guarantor Protection in FBiH speak in favour of the fact that this Law protects guarantors stronger than the previous regulations. Namely, Article 30 envisages more opportunities of releasing the guarantor from the obligation. According to this Article of the Law, the guarantor shall be released from the obligation in case the lender has failed to exhaust all security instruments, as envisaged by the loan contract, with the purpose of collecting the claim from the main debtor or if the lender has failed to deliver the loan contract to the guarantor immediately after its being signed or in case it has been established that the loan was approved to a financially unreliable client or on the basis of forged documents of the main debtor or guarantor, in which case the guarantor may bring charges for the criminal activity of fraud.
If any of the reasons listed above apply, the guarantor is released from the obligation upon issuance of a decision by the Banking Agency of FBiH or by the competent court.
10. Imposing penalties on banks and microcredit organisations for offences
The Law on Guarantor Protection in FBiH envisages fines for banks or microcredit organisations in rage from KM 10,000.00 to KM 15,000.00 in the following cases: if they do not advertise financial services in a clear and understandable manner, i.e. if the advertising contains incorrect information or information that may mislead the guarantor; if the contract is not prepared in written form; if every party does not receive a copy of the contract and if the contract does not include all mandatory provisions prescribed by the Law.
> LJUBIĆ LAW FIRM provides protection and legal representation to clients in obligatory relations. If you are encountering problems in your role of a guarantor, or you just suspect you may come into such a situation, contact us and book your consulting appointment.