What if your life partner, business partner, family member or friends comes to you one day saying they want to take out a loan, but the bank says their monthly income and net asset value does not make them financially viable. The bank also said they can get a loan if someone signs surety on it. They tell you that they know they are good for the repayments every month, but they ask you to please sign surety. There are some important things to know before you make a yay or nay decision.
What is surety
Suretyship is a contract entered into on behalf of the principal debtor in favour of a creditor. In laymen’s terms, you sign the contract as a third party confirming that if the debtor cannot pay the creditor, you will do so in his stead. It is not a contract that should be entered into lightly. You should read every detail before even contemplating signing it as the wording of the surety can bind you in different ways.
You could be surety for a particular debt (like a home loan) or for a specific amount only. When this debt is paid off by the debtor, you are no longer surety to any form of debt owed by the principal debtor, though you should always confirm that your suretyship has been cancelled.
An alternative type of suretyship is being surety to the person. In this case, you are not released from the contract when a particular debt is paid, and you might be held liable for that person’s debt years later. If the contract does bind you to the person, you should make sure there is a clause in the contract providing you with an avenue to cancel your suretyship. When a particular debt is paid, you can then request to be relieved of this obligation.
What happens to the surety when you divorce?
If you are married in community of property, you and your spouse should both sign the suretyship agreement to make it enforceable. Both spouses are ultimately liable for the debt as they have a joint estate. If the signing of suretyship is done in the ordinary course of a spouse’s profession, trade or business, this is not necessary.
If you are married out of community of property, only the spouse that wants to act as surety needs to sign the contract as his/her estate and finances are legally seen as separate from the spouse.
Should the spouses get a divorce, it does not mean the suretyship agreement is null and void. If they were married in community of property, it is best to see if the suretyship can be renegotiated so only one person is surety. If this does not happen, both individuals could still be held liable even after divorce. If they were married out of community of property, the suretyship agreement is still relevant and enforceable. If the one spouse was surety for the other and they then get divorced, it does not change the suretyship agreement.
What happens to the surety in the case of death?
If the principal debtor should pass away, his/her creditor can claim against the deceased estate for the money owed them. If the debtor’s deceased estate does not cover the repayment of the debt, the creditors can claim the debt from the surety (person that signed the suretyship agreement).
If the surety passes away, a number of things could happen. If the loan is much smaller by that point or the principal debtor’s financial situation has improved, it could be that the loan agreement is changed to not included a suretyship agreement. Alternatively, if this is not the case, the principal debtor could ask someone else to be surety and have the suretyship assigned to that individual for the remaining amount of the loan. Should neither of these be feasible, it could be that the creditor claims the outstanding amount of the loan from the principal debtor and upon his/her possible inability to pay it, the debt can be claimed from the deceased estate of surety.
Think before you sign
Signing a suretyship agreement should be done with caution. Ensure that you have read and understood the contract wholly and completely. If you are married in community of property, ensure that your spouse also signs for it and understands the agreement completely. Be sure that the terms are clear and that you know exactly when the agreement will come to an end and when you will no longer be liable for the principal debtor’s debt.
If you need assistance in setting up a suretyship agreement, or in fully understanding such a legally binding contract, get in touch with AED.
AED Attorneys understands that every situation is unique, and although they strive to ensure that the information contained herein is accurate at the time of publishing, it cannot be guaranteed to be without errors or omissions. As a result, AED Attorneys, its employees, independent contractors, associates or third parties will under no circumstances accept liability or be held liable for any innocent or negligent actions or omissions in this article, which may result in any harm or liability flowing from the use of or the inability to use the information provided.