by Obiter07
When it comes to loans, you’ll soon come across friends, colleagues and sometimes even strangers who will ask for your assistance for you to act as a co-maker or guarantor. Maybe it’s for a small business they are setting up, or just to tide them over a passing domestic shortfall. It would do you well to understand what you are signing up for when you do.
It’s hard to say no in such instances because the implied premise is instead of borrowing from you, a friend is just asking you to vouch for his or her credit to the lender, which is not such a big deal. But you may just discover that you signed up for more than you bargained for when the creditor decides to collect from you directly.
How does this come about? This happens when you are asked to act as a guarantor or surety for a loan. This is covered by one provision in the New Civil Code:
“ARTICLE 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a)”
Guaranty
In a guaranty, you are typically made to pay once the principal borrower fails to fulfill his obligations to pay. And generally, the guarantor may be proceeded against only after all the properties of the debtor has been exhausted which is called the right of excussion.[1] However, excussion is not available in the following instances:
“ARTICLE 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation. (1831a)”
Some lenders require that this right be waived by the guarantor just so as to make you go up the creek at almost the same time as the deadbeat borrower. So always read the fine print to make sure what rights you have and what rights you have waived unknowingly.
Surety
In a surety, you bind yourself “solidarily” with the principal debtor. This means that the creditor can choose against whom to collect, either you or the original borrower. For example, you would be asked to sign as a co-maker in a promissory note. It is as if you took out the loan yourself. Your only distinction being is that you may not have gotten a single centavo from the loan, your only benefit being your friend’s gratitude for sticking out your neck. This can be too small a consolation when paying up time comes. Be careful of the language used. If you are “jointly and severally” liable, this is just another way of saying “solidary.”
It should be noted, however, that a “guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a surety, although solidarily liable with the principal debtor, is different from the debtor. It does not mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship (see PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24). PACIFIC BANKING CORPORATION, vs. INTERMEDIATE APPELLATE COURT [G.R. No. 72275. November 13, 1991.]“
This means that in case of a suit or demand, the principal debtor has to be included and his liability determined. You can only be made to pay for the whole thing if the debtor will not pay -
“While a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the principal debtor’s failure or refusal to pay. A contract of surety is an accessory promise by which a person binds himself to another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not. A surety is an insurer of debt; he promises to pay the principal’s debt if the principal will not pay.”[2]
Consenting to be a surety or a guarantor is an occasion where you will be made to answer for the sins and omissions of someone else. And absolution comes only if you pay for something you did not originally owe, may not have even benefited from and may seriously damage you financially. Be forewarned.
[1] The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. (1830a)
[2] BABST vs. COURT OF APPEALS, et al. [G.R. No. 99398. January 26, 2001.]
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