Business Law

A friend of mine which I will hide in the name of Mr. Smith came to me to ask for some legal advice about a case which he was involved in. He was facing a civil action for nonpayment of debt. He was teary eyed in informing me that he was not the one who personally secured the loan and that he merely acted as a guarantor for the principal debtor. The principal is now in hiding leaving Mr. Smith indebted to the creditor for the $150,000 plus interest. What is aggravating to this case is that he does not have sufficient money to pay off the debt since he is only engaged in operating a small grocery store and is not earning that much. He asked me whether or not there is any way he cannot be held liable for the debt being merely a guarantor. If not, is there any way or someone, or any agency that can help get out of debt.

I told Mr. Smith the bad news. Under the law on credit transactions, once a person posed as a guarantor for the principal debtor in securing the debt, the former shall be solidarily liable with the principal debtor in case the latter failed to comply with the stipulation of the debt agreement. In such case, the law does not require the creditor to give notice to the guarantor when the obligation falls due and demandable. The law only requires that it is the principal who should receive the demand in order for the debt be considered due and demandable and may be finally pursued through court action. The reason is that the law presumes that the guarantor is so much interested in the satisfaction of the debt. Hence, it is his duty to inquire and make sure that the obligation is fulfilled or else, he will be the one liable to pay off the debt by virtue of the contract entered into by him with the principal debtor and creditor.

However, although he may be required to face the consequences of the failure of the principal debtor to comply with the agreement, he is not without recourse. He can still file a case to recover from the principal debtor, the amount he paid to the creditor once the former surfaces. Moreover, he may also demand damages. For the meantime, since he is in financial constraint, he can avail the remedy provided in Chapter 13 bankruptcy just so that he can lessen the burden of paying which he assumed as a guarantor in the absence of the principal debtor provided of course, that he should be able to comply with the eligibility requirement and the formalities required by law in pursuing the said remedy. I recommended to him that he consult a credit agency in order for him to come up with his payment plan which would be approved by the court once it is proved that the said plan is feasible. I reminded him that one should be cautious in being a guarantor. The personality of the principal debtor must be examined closely before agreeing to such a thing.