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Amar Patnaik (name changed) held the position of a director in a company. He stood guarantor for his company loan. He got one of his colleagues to back up his guarantee with a personal guarantee of Rs 2 crore (Rs 20 million).
Unfortunately the company suffered a major loss in due course and went bankrupt. Patnaik, for fear of his personal assets being attached, immediately transferred his financial assets to another individual. As a result the bank attached the bank balance, residential property worth Rs 1 crore (Rs 10 million) of his colleague who stood guarantee.
Did you ever think, before signing on that dotted line as a guarantor, that this could happen to you? When you sign your name as guarantor to use your good credit to help someone else obtain credit, you are taking a risk that a lender has refused.
The lender is asking for a guarantee because his assessment tells him that the borrower may not pay up. And here's what you could lose as a guarantor.
1. Banks could be gunning for you if they are not able to recover all dues from the borrower.
2. Your personal assets such as bank accounts, cash as well as property could be attached (except for provident fund and agricultural land which cannot be attached under any court decree) and you could turn bankrupt. If your house is already mortgaged with another bank, thanks to a home loan you've taken, it is your housing finance company that would have lien on your house first followed by your borrower's bank.
3. Your credit standing could get affected. Which means if you need any credit in future, your chances of getting the same could be dim.
Warns Nirupama Kar, lawyer, Interjuris, Advocates and Consultants: "As far as possible do not stand guarantor to another's liabilities. In case of any default by the borrower, the bank in due course can hold you the guarantor responsible for payment of the balance amount. And that could mean attaching all assets you've declared at the time of signing as guarantor if need be to recover the dues."
Say Dena Bank officials: "In case of default of payment we periodically send letters to the borrower to pay up and also make personal visits to ascertain the reasons. If it's a genuine case of a financial crunch the bank manager sanctions a rescheduling of the loan. The borrower is given a time of three to six months to pay up depending on the relationship he has with the bank."
"Despite all this if payment default persists, a legal notice is served on the borrower as well as the guarantor asking them to make good the loss. The notice period is for 60 days. Now if the borrower is still unable to pay up another notice of taking possession of the property is issued to both and the property is attached. If the dues fall short the guarantor's property is also attached."
Banks opine that in cases where the entire amount is not recoverable from the borrower and the guarantor, an out-of-court settlement is usually preferred instead of taking the legal route.
According to Kar, if you are the guarantor and have received a legal notice you need to take the following steps at the earliest:
1. Discuss the matter immediately with the borrower.
2. Regularly also follow up with the bank to ensure that the bank does not get an ex-parte order. An ex-parte order from the court of law under the Securitisation Act allows banks to proceed against the borrower and the guarantor even in their absence to attach the property in question. The advantage for banks when they invoke this law is that they are able to recover their debts within a minimum period of six months.
3. Once the bank gets the order it would send a legal notice to the borrower for symbolic possession of the property. A symbolic possession means a legal notice stating the actual date when the physical possession of the property will be taken is pasted on the premises of the property.
Financial planner Amar Pandit opines: "It is not advisable to stand guarantor for another's liabilities considering the consequences. But then if there's no way you can prevent it, consider limiting your liability to a maximum of 35 per cent of your income. Going beyond that would endanger your financial security."
Now if you're having second thoughts having already signed as guarantor for your friend's property there's no way you can get your neck out. "The solution lies only with the individual who can get a substitute in your place and release you from the liability. But then that too is possible only if the terms and conditions in the agreement permit such an arrangement," says Kar.