Borrowing money is an everyday reality for almost all of us. As a result, credit is an important part of our personal finances. So naturally, debts have a measure of risk for both lenders and borrowers. However, a third party often bears the risk that is no less than the lender or borrower – the guarantor.

Who is a guarantor?

• The guarantor is an individual who assumes the liability of repaying the loan if the borrower is unable to do so for whatever reason. In other words, it is a person who was considerate enough to co-sign another’s debt. 
• Small Claims Court is a popular venue to claim unpaid loans from guarantors. Here are several tips that are often salient to Small Claims Court litigants in a creditor-debtor-guarantor lawsuit.

When must a guarantor pay?

Written promise

• First of all, a guarantor may be liable to repay someone else’s debt only if he or she promised to do so in writing and properly signed it.
• The Small Claims Court will not accept an oral guarantee as a basis for the guarantor’s liability.
• We have also encountered cases where the guarantor denies his or her signature on the written guarantee. In this case, the court may need a forensic analysis of the guarantor’s signature. Such an analysis can confirm the signature or prove that it does not belong to the alleged guarantor.

Valuable consideration to the guarantor

• Second, a guarantor must be somehow personally interested in signing the loan document.
• The law calls it “valuable consideration.” In practice, this may, for example, be some financial remuneration to compensate the guarantor for the risk he or she assumes.
• Another common form of “valuable consideration” is when one spouse becomes the guarantor so another spouse can obtain financing for some common household needs, such as a renovation.
• In the absence of some form of valuable consideration, whether material or otherwise, the Small Claims Court is likely to dismiss the claim against the guarantor.

Guarantor’s defences.

• A guarantor can put forward any defence which is available to the main debtor in the Small Claims Court.
• This may be, for example, a defence under the Limitation Act. This Act prohibits the plaintiff to file a Small Claims Court claim for loan if it had been more than 2 years after the plaintiff realized that the debtor would not pay it back. 

To avoid a Small Claims Court claim for an unpaid debt, both guarantors and creditors need to take precautions. First, guarantors must exercise due diligence when signing. Creditors must ensure that the guarantor has signed the loan document in person and received some “valuable consideration” for doing so.