It is not an uncommon scenario. You have a friend or relative who is in need of money, so they get a loan. They come to you and ask if you can sign as the “Guarantor” of their loan. They assure you that you will not get into trouble for it. But should you sign as someone’s Guarantor?
Before becoming a guarantor for someone, you should first know what a “Guarantor” is, and why many creditors ask for one. Art. 2047 of the New Civil Code of the Philippines states that “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”. In other words, a guarantor is someone who will give assurance to the creditor that the borrower will return what they borrow. They also give assurance that if the borrower cannot pay their debt, they will pay it for them.
So if you are going to be a guarantor for your friend, you should first ask yourself, will your friend be able to pay their debt back? Are you willing and able to pay for your friend’s debt, if they are unable to? If you pay for your friend’s debt, will that friend be able to pay you back?
Let’s say you already signed as someone’s guarantor. If the debtor is able to pay their debt, then all is well. But what if they don’t pay their debt. What happens then?
Generally, the creditor will be allowed to ask for payment from you. This though must be in accordance with the provisions of the agreement you signed, as “a guaranty is not presumed, it must be express and cannot extend to more than what is stipulated therein” (Art. 2055, NCC). How legal this claim is would depend on the contract you signed. The creditor can also only charge as much as what is written in your contract. To check how legal a claim in a contract is, be sure to have your lawyer check it for you.
What should a guarantor do if they are being asked to pay the loan?
Pay the amount
The first option is to pay the loan. This is what you had promised to do when you signed as guarantor. But paying the loan does not mean that you are also just going to give your money up. After paying for someone else’s loan, you should immediately notify the original debtor and ask to be reimbursed. Under Art. 2066, NCC, the debtor must indemnify the Guarantor and pay for the loaned amount, expenses incurred, legal interest and damages (if any). This is because the rights of the Creditor will be transferred to the Guarantor, but the Guarantor will not be allowed to ask for more that what they have paid to the original Creditor (Art. 2067, NCC). Before deciding on this option though, you need to be sure that you are willing and able to pay for your friend’s debt, and that your friend will be able to pay you back if you do.
Make use of the Benefit of Exhaustion or Excussion
A Guarantor cannot be immediately forced to pay for the loan. Instead the Guarantor can make use of the Benefit if Exhaustion or Excussion. This means that the Creditor must first exhaust all legal remedies possible against the Debtor, before asking the Guarantor to pay. But the Guarantor must also be able to point out the properties of the Debtor which can be used to cover the debt (Art. 2060, NCC). However, there are some instances when this cannot be used.
Seek Legal Advice
Unfortunately, there are times when the Benefit of Excussion cant be used, and paying the debtor’s loan wont cut it. There are also times when you just aren’t able to pay the loan of someone else. It’s at times like this that you should go to a lawyer and ask for help. Bring a copy of the contract, and all other documents, with you and ask your lawyer to look over it. Your lawyer will be able to assess the situation you are in, and give you opinions on what you can and should do, based on the law. The options and suggestions available to you will differ based on the facts and circumstances of your case, which is why it is important to have a lawyer know and assess those facts.
We hope that this article has been helpful. This article is but a mere and brief summary of the law, and is based on the minimal facts and information above. Cases and inquiries, which are sometimes used as the basis of some articles, are posted only with the express consent of our clients. Each case is unique and dependent on every individual’s circumstances. If you have a similar case, the remedies available to you may change based on the information you present us with. For more information, you may visit our office located at No. 41 Morning Glory Street, Saint Joseph Village, Baguio City Philippines.