Circumstances Leading to the Discharge of a Guarantor
Upon the conclusion of a guarantee contract, the guarantor becomes liable to the creditor, and this liability serves as security for the creditor. However, the guarantor may be released from this responsibility for various reasons. Any circumstances that result in the extinction of the principal debtor’s obligation also affect the guarantor’s obligation. Moreover, due to the ancillary nature of the guarantor’s undertaking, there are situations in which the debt remains on the principal debtor’s account while the guarantor’s liability is extinguished.
Challenges in Proving the Discharge of a Guarantor Before Judicial Authorities
In light of these characteristics, the principal situations that lead to the discharge of a guarantor are examined below.
- Discharge of the Principal Debtor Through Performance of the Obligation: When the debt is paid by the debtor to the creditor, the debtor’s obligation is extinguished and the purpose of the contract of guarantee comes to an end. Accordingly, payment of the debt, as well as any act deemed equivalent to payment or performance of the obligation, results in the discharge of the guarantor.
- Release of the Principal Debtor by the Creditor: When the creditor releases the principal debtor from liability, the guarantor, whose obligation is ancillary in nature, is also discharged. Likewise, where the creditor and the debtor replace the original obligation with a new one, the former obligation is extinguished. In such cases, the guarantor is also released unless the contract expressly stipulates that the guarantor shall not be discharged, as provided under Article 293 of the Civil Code.
- Discharge of the Guarantor Due to Breach of Contract by the Creditor: If the creditor breaches the underlying contract that forms the basis of the guarantee, the principal debtor, as a party to that contract, is released from liability. Consequently, the guarantor should no longer bear responsibility toward the creditor under a contract that has been breached by the creditor.
- Refusal of the Creditor to Accept Payment From the Guarantor: Pursuant to Article 409 of the Commercial Code, upon the debt becoming due, the guarantor may compel the creditor to accept payment, even if the guarantee was originally subject to a deferred term. Article 410 of the Commercial Code further provides that the creditor’s refusal to accept payment constitutes immediate and automatic grounds for the discharge of the guarantor.
- Refusal of the Creditor to Deliver the Securities of the Debt: Although the guarantor’s undertaking may be intended as assistance to the principal debtor, it is not gratuitous. The contract of guarantee is a commutative contract. Upon payment of the debt, the guarantor becomes subrogated to the rights of the creditor and must be able to effectively recover the amount paid from the principal debtor. Delivery of the securities securing the debt to the guarantor is an essential condition for enabling such subrogation. If the creditor refuses to deliver the security to the guarantor, the guarantor’s right of subrogation is jeopardized. For this reason, Article 410 of the Commercial Code provides that, where the debt is secured, the creditor’s refusal to deliver the security to the guarantor results in the immediate discharge of the guarantor.
- The Guarantor’s Rights in Respect of the Securities of the Debt: Upon payment of the debt, the guarantor benefits from the right of subrogation to the creditor. This subrogation includes the right to make use of the securities securing the debt that belong to the principal debtor. Accordingly, after payment, the guarantor is entitled to take possession of such securities in order to preserve priority in recovering the claim over other creditors of the principal debtor. Article 411 of the Commercial Code fully recognizes the guarantor’s rights with respect to the securities of the debt.
Frequently Asked Questions About the Discharge of a Guarantor
A guarantor is discharged in several situations, including when the principal debtor pays the debt, when the creditor releases the debtor, or when the creditor breaches the underlying contract. The guarantor is also discharged if the creditor refuses to accept payment or refuses to deliver the securities securing the debt.
When the principal debtor pays the debt, the debtor’s obligation is extinguished, and the guarantor’s ancillary obligation is discharged accordingly.
If the creditor releases the principal debtor, the guarantor’s ancillary obligation is also extinguished, unless the guarantee contract expressly provides that the guarantor shall not be discharged.
If the creditor breaches the contract underlying the guarantee, the principal debtor is released from liability, and the guarantor is likewise discharged from responsibility toward the creditor.
Under Articles 409 and 410 of the Commercial Code, if the creditor refuses to accept payment, even where the debt has not yet matured, the guarantor may be discharged from liability.
After paying the debt, the guarantor is subrogated to the creditor’s rights and is entitled to make use of the securities securing the debt in order to recover the amount paid from the principal debtor. Article 411 of the Commercial Code recognizes this right. When is a guarantor discharged from liability?
What effect does payment of the debt by the principal debtor have on the guarantor?
How does the release of the principal debtor by the creditor affect the guarantor?
What is the effect of the creditor’s breach of contract on the guarantor?
How does the creditor's refusal to accept payment lead to the discharge of the guarantor?
What rights does the guarantor have in relation to the securities of the debt?
If the lender changes the repayment schedule after I signed as a guarantor but never tells me, does that make any difference?
Whether that affects your liability depends on the terms of the guarantee and the nature of the changes. In some situations, material changes made without a guarantor’s consent may have legal consequences, while in others the guarantee may already allow for certain modifications. The specific wording of the agreement is very important. If you’re dealing with this situation, I’d recommend having the guarantee and the loan documents reviewed before drawing any conclusions.
What if I only guaranteed part of the loan, not the full amount?
A guarantee can sometimes be limited to a specific amount or obligation rather than the entire debt. If that’s the case, your potential liability may be restricted by the terms you agreed to. The exact language of the guarantee will determine the scope of your responsibility, so it’s worth reviewing the document carefully.
If I signed years ago and the loan kept getting renewed, am I still on the hook?
That depends on whether the guarantee was intended to cover only the original loan or to continue for future renewals or extensions. Some guarantees are drafted as continuing guarantees, while others are more limited. The wording and any later agreements can make a significant difference, so an individual review is often necessary.
Can a bank come after me first without suing the borrower?
In many cases, a lender may have the right to pursue a guarantor after the borrower’s default, depending on the guarantee and the applicable law. They are not always required to exhaust their remedies against the borrower first. However, every case depends on the governing documents and jurisdiction, so it’s best to evaluate the specific facts before reaching a conclusion.
Does bankruptcy by the borrower automatically end my guarantee?
Not necessarily. A borrower’s bankruptcy does not automatically release a guarantor from liability. The effect depends on the applicable insolvency laws and the terms of the guarantee. If bankruptcy is involved, it’s especially important to have the documents reviewed because these cases can become quite complex.
If I already paid the lender, can I recover that money from the borrower later?
In many legal systems, a guarantor who pays the debt may have certain rights against the borrower. How those rights can be enforced depends on the circumstances and the applicable law. If you’ve already made payment, it’s a good idea to seek legal advice promptly so your available options can be assessed.
I signed because I was pressured by my family. Does that matter legally?
It can matter in some situations, but simply feeling pressured is not always enough on its own. Courts generally look at the surrounding circumstances and the available evidence when evaluating claims involving undue influence or similar issues. If you believe your signature was not given freely, your situation deserves an individual legal assessment.
If there are two guarantors and one of us pays everything, what happens next?
That situation may give rise to rights between the guarantors themselves, depending on the agreement and the applicable law. The person who paid more than their fair share may have legal options to seek contribution from the other guarantor. The outcome will depend on the facts and the documents involved.
Does it make any difference if the lender released some of the collateral without asking me?
It potentially can. In some circumstances, the handling of collateral may affect a guarantor’s rights or defenses, but the result depends on the terms of the guarantee and the relevant law. These issues are often document specific, so it’s best to review the full file before reaching any legal conclusion.
Is there any deadline for challenging a guarantee if I think it shouldn’t be enforced?
Possible deadlines vary depending on the jurisdiction, the legal issue involved, and the type of claim being raised. Because time limits can affect your rights, it’s important not to delay if you believe there may be grounds to challenge a guarantee. A review of the facts and documents can help determine what options may still be available.