The guarantor is the person who has agreed to pay the lender (a bank, for example) if the actual borrower fails to pay.

The guarantor can only be obliged to pay instead of the borrower if the borrower fails to repay the loan by the repayment due date (also called the "maturity date"). In these cases, the lender can sue both the borrower and the guarantor, subject to certain exceptions. To learn more about those exceptions, see the question “Who does the lender have to sue first—the borrower or the guarantor?”

It is important to know that if the lender agrees to change the due date to a later date, the lender cannot sue the guarantor before the new due date.

On the other hand, the loan agreement between the financial institution and the borrower may state that the borrower must keep at least $2,000 in his bank account or the financial institution can demand immediate repayment of the whole loan from the borrower, even if the due date has not yet arrived. This is called a "forfeiture of the term".

It is important to remember that forfeiture of the term also applies to the guarantor. In other words, the guarantor could be required to repay the whole loan before the due date.

Therefore, the guarantor should find out if the loan agreement states that certain situations will give rise to forfeiture of the term. One such situation is the borrower's bankruptcy, which automatically results in forfeiture of the term. In other words, the whole loan will have to be repaid immediately.

If the lender has not been repaid by the loan repayment due date, it can sue the borrower or the guarantor.

However, if the lender sues the guarantor before the borrower, the guarantor can ask the court to order the lender to seize and sell the borrower’s assets (property, equipment, etc.) before it continues the lawsuit against the guarantor. Only if the proceeds from the sale of the borrower’s assets are insufficient to repay the whole loan can the lender sue the guarantor for the part of the loan still owing. This is called the guarantor's right to the "benefit of discussion", or the right to insist that the lender attempt to recover from the borrower before suing the guarantor.

Example: A bank could seize three works of art belonging to a company that failed to repay a $150,000 loan. If the bank managed to recover $150,000 from the sale of those works, the guarantor would not have to pay anything because the loan would be repaid in full. However, if the bank could only sell them for $100,000, the guarantor would be responsible for paying the $50,000 still not paid.

The request to the court for "benefit of discussion" must list any property of the borrower that could be seized by the financial institution. The guarantor would also have to deposit into court sufficient funds to cover the amount of the loan.

Careful! Remember that in practice, lenders usually ask guarantors to waive their right to the benefit of discussion in the contract of guarantee. Also, lenders generally require an undertaking from the guarantor and the borrower that they will repay the loan solidarily, which means that either one can be sued for the full amount owing. In that case, the guarantor cannot ask for the benefit of discussion.

In theory, the lender can sue any of the guarantors for the full amount of the loan. However, the guarantor who is sued can ask the judge to order the lender to split repayment of the loan among all the guarantors. This is known as the "benefit of division" among guarantors.

Example: a company borrows $150,000. Jerôme guarantees $30,000 of the total, Lucie guarantees $20,000 and Brian guarantees the remaining $100,000. If the company sues Jerôme for the entire $150,000, he can ask for the benefit of division and would only have to pay $30,000.

However, if the lender can prove that one of the guarantors is insolvent (he does not have sufficient funds or assets to pay his share), then that guarantor's share will be divided among the other guarantors. For example, if Lucie can't pay the $20,000 that she guaranteed, Jerôme would have to pay $40,000 (instead of $30,000) and Brian would have to pay $110,000 (instead of $100,000).

Be careful! In practice, lenders almost always insist that guarantors give up their right to the benefit of division. Lenders also generally require that guarantors undertake to repay the loan solidarily, which means that either one can be sued for the full amount of the loan. In that case, if Jerôme is sued for the full amount, he could not ask for the benefit of division, but could turn around and sue Lucie for the $20,000 she guaranteed and Brian for the $100,000 he guaranteed.

Normally yes, but the guarantor could be out of luck if, for example, the borrower goes bankrupt. That is one of the risks that any guarantor runs by signing a contract of guarantee.

By simply demanding repayment or by suing the borrower.

If the guarantor repays the borrower’s loan, he benefits from all the same rights the lender originally had against the borrower. For example, if the lender held a mortgage on the borrower's house as a guarantee for the loan, the guarantor can enforce that mortgage to collect from the borrower. This is a significant advantage since it gives the guarantor a better chance of being repaid!

The guarantor can also demand that the borrower reimburse anything he paid in connection with the loan. This includes the actual amount of the loan, interest on the loan and all other expenses the lender incurred in connection with the lender’s demand for repayment.

As a general rule, the guarantor can also be reimbursed for any damages he suffered. For example, if the guarantor had to borrow money to repay the loan, he will have to pay interest on that loan. The borrower would be responsible for reimbursing that interest.

The guarantor can ask the borrower for certain kinds of protection, such as a mortgage or the deposit of a sum of money equal to the amount of the loan. However, the guarantor can only ask for this kind of protection if:

• The borrower suffered major financial losses that increase the guarantor's risks (for example, the stock exchange crashes and the borrower suddenly loses a lot of money).
  
  
• The borrower has become insolvent (he does not have enough money or other assets to repay the loan).
  
  
• The lender sues the guarantor.
  
  
• The due date for repaying the loan has arrived and the borrower has still not made any repayments.
  
  
• The lender has granted the borrower an extension of the due date for repaying the loan without the guarantor's consent.

Keep in mind that the borrower may try to terminate the guarantee and repay the entire amount of the loan rather than give this kind of protection to the guarantor.

Generally, a guarantee ends in the following situations:

• The loan that was guaranteed comes to an end (for example, because the borrower repaid the full amount of the loan). For more information on this subject, see the question “If the loan no longer exists, what happens to the guarantee?”
  
  
• The guarantee termination date in the contract of guarantee has arrived. For more information, see the question “Can a guarantor terminate the contract of guarantee?”
  
  
• The guarantor has repaid the full amount of the borrower’s loan.
  
  
• The guarantor dies.

But a guarantee can also end in the following situations:

• The lender agrees to terminate the guarantee and let the guarantor off the hook.
  
  
• The lender and the guarantor become the same person. (For example, the company making the loan and the company guaranteeing the loan merge and become the same company. The guarantee ends because a person cannot be lender and guarantor at the same time.)

However, it is important to remember that the borrower’s bankruptcy does not put an end to a guarantee!

Yes, if the contract of guarantee allows for this. This is called the right to terminate or "resiliate" the contract.

This right allows the guarantor to put an end to the guarantee after giving the lender clear written notice of his intentions. The guarantor should be straightforward regarding that intention by using words like "the guarantor hereby terminates the guarantee" rather than "the guarantor wishes to end the guarantee".

It is also possible to negotiate a more limited right of termination. Here are some examples of how that right should be worded:

• "This guarantee may be terminated by sending notice to that effect. Termination shall take effect one month after the lender receives such notice ".
  
  
• "This contract may be cancelled only if the guarantor becomes insolvent".
  
  
• "This contract may be terminated after three years, for any reason."

Yes. If the due date for repayment of the loan has not yet arrived, the law allows the guarantor to put an end to (or “terminate”) this kind of guarantee after 3 years. How does the guarantor do this? By giving notice of termination in writing to the borrower, the lender and every other guarantor (if there is more than one).

However, the guarantor must still repay the money already borrowed against the line of credit before the date of termination and not repaid by that date. In other words, the guarantee ends only for the future, namely after the date of termination. This rule applies unless the contract of guarantee says otherwise.

In all other cases, it is always a good idea for the guarantor to negotiate a right of termination allowing for termination of the guarantee before the end of the 3-year period. For more information on termination, see the question “Can the guarantor put an end to the contract of guarantee?”

Basically, the guarantee no longer exists.

As a general rule, the loan ceases to exist in the following situations:

• the borrower repays the full amount of the loan
  
  
• the lender agrees to cancel the loan when the lender accepts the borrower's property instead of actual repayment of the loan (For example, the lender accepts a work of art valued at $150,000, rather than cash, in repayment of a $150,000 loan.)
  
  
• when the lender missed the legal deadline for suing the borrower (This is called "prescription".)