Borrowing money is an everyday reality for almost all of us. Whether it’s in an emergency or for spending big ticket items like a home renovation, credit is an important part of how personal finances. Naturally, debts have a measure of risk for both lenders and borrowers.
What doesn’t come to mind right away, however, is that there is often a third party which bears a risk that is no less, and sometimes greater, than the lender or borrower – the 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. Small Claims Court is a popular venue to claim unpaid loans from guarantors, who were considerate enough to co-sign another’s debt. Here are several tips, that are often salient to Small Claims Court litigants involved in a creditor-debtor-guarantor lawsuit.
First of all, a guarantor may be liable to repay someone else’s debt only if his or her promise to do so was put in writing and properly signed. An oral guarantee will not be accepted by the Small Claims Court 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 matter can be resolved through a forensic analysis of the guarantor’s signature, which must definitively confirm that the signature on the loan document does not belong to the alleged guarantor.
Second, a guarantor must be somehow personally interested in signing the loan document. In law, this is called “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.
Third, 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. Under this Act, if the plaintiff did not make a Small Claims Court claim for loan repayment within 2 years after he or she realised that the loan is due but will not be voluntarily repaid.
To avoid a Small Claims Court claim for an unpaid debt, both guarantors and creditors need to take precautions. Guarantors must exercise due diligence when signing, and creditors must ensure that the guarantor has signed the loan document in person and received some “valuable consideration” for doing so.