You are protected from your guarantor loan if you go bankrupt. However the person who guaranteed it will have to pay.
Included in this article:
- What happens to the guarantor loan?
- Can you continue paying it?
- Can you pay off the loan beforehand?
- What of you are a Guarantor for someone else?
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What happens to a guarantor loan if you go bankrupt?
A guarantor loan is an unsecured debt. As such it must be included if you go Bankrupt. As far as you are concerned it will be written off with all your other unsecured debts.
The problem however is that the person who guaranteed the loan is not protected by your bankruptcy. They will become liable to maintain the ongoing payments or settle the debt in full.
Where your guarantor can afford to make the repayments there will be no problem. However if they cannot the loan company can take legal action against them to force them to pay.
If you go bankrupt and your guarantor can’t afford to pay your guarantor loan their only option may be to consider starting a debt management solution themselves.
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Can you continue paying a guarantor loan while you are bankrupt?
To protect your guarantor you might consider trying to keep up the payments towards the loan after you go bankrupt. However it is very unlikely that you will be able to do this.
Any surplus income you have will have to be paid to the Official Receiver (OR) in the form of an IPA (Income Payment Agreement). You will not be allowed you to keep any of this to maintain an unsecured debt payment.
You could try to save money from your agreed budget so that you can pay the loan. However this is likely to be very difficult especially if the payments are large.
It is unlikely you will be able to protect your guarantor by maintaining payments towards a guarantor loan from your agreed living expenses once you are bankrupt.
Can you pay off a guarantor loan before going bankrupt?
Instead of leaving your guarantor with the debt after you go bankrupt you might consider paying it off before you apply. However this strategy can be risky.
The problem is that other than making your normal monthly payments you are not allowed to pay off any of your creditors in preference to any others within 2 years of going bankrupt.
If you do and the OR decides you have made a preferential payment they will force the return of the money you paid. This will be taken by the OR. The creditor will then treat the debt as outstanding and can still go to your guarantor for payment.
What if you are a Guarantor for someone else?
You might decide to go Bankrupt yourself because you are unable to pay your own debt. In this situation if you are a guarantor for someone else your responsibility for their debt will also come to an end.
Of course the person who you guaranteed the loan for can continue to repay their debt as normal. As long as they do so there will be no need for the debt to be involved in your bankruptcy at all.
However if they subsequently get into difficulty and cannot pay you are protected by your bankruptcy. If you are contacted by the guarantor loan company demanding payment you simply need to inform your OR. They will contact the creditor and deal with it on your behalf.
If the person you guaranteed a loan for does not pay you are not liable for the debt after you go bankrupt. This is the case even if your bankruptcy is already finished.
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Hi
I was issued a Debt Relief Order on 30/3/20 and informed all my creditors. The loan I had with Bamboo loans was a guarantor loan, I did not think anything of this when I applied to StepChange for a DRO and they never mentioned the fact it was a guarantor loan or there would be any problem. However, today my guarantor received an email demanding payment of the balance – she is now on universal credit, having had to leave her job because of mental health problems and cannot afford to repay the loan.
When I informed Bamboo loans by email that I was applying for a Debt Relief Order and again when I informed them by email that I had been issued with a Debt Relief Order they did not mention in either of their email replies that the Guarantor would be affected by this order. Surely it was their responsibilty to advise me of the impact this action would have on my Guarantor. Please advise if there is anything I can do. More importantly what can my Guarantor do?
Hi June
I am surprised that Step Change did not warn you of the risk of what would happen to your guarantor loan when you started your Debt Relief Order. If you do not pay a guarantor loan (for what ever reason) the loan company will always demand payment from the guarantor. Unfortunately this is the reality of a guarantor loan.
Ultimately you are now protected by your DRO. In regards to your guarantor, if they were on universal credit at the time they gave their guarantee, I would say they could strongly argue that the loan company should not have accepted them as a guarantor because they were clearly not in a position to repay the loan if it fell to them. As such they could argue that they should not be held liable for this debt. The financial ombudsman is upholding many claims like this against guarantor loan companies at this time.
However if at the time they gave their guarantee they were working and were in a position to repay the loan, then to try and state that they should not have been accepted as a guarantor would be a much harder argument to win. In this case I think the best they could do would be to start their own debt management solution to protect themselves from this debt.
Bamboo Loans had been informed twice , firstly, about the proposed application for a Debt Relief Order and secondly, when they were told the Debt Relief Order had been issued. Surely they should have advised about the adverse effect this would have on the loan Guarantor If they had told me I may have taken another course of action. After contacting Bamboo today it is apparent they do not see it as their duty to mention the Guarantor.
The Guarantor was in full time employment when the loan was taken out but recently had to give up work due to health issues and is now Universal Credit is her sole income. As she is unable to pay a lump sum or a large monthly payment, what are her options other than taking out her own debt solution, which she does not and should not have to do because of something that is not her fault. She has a good credit rating at present and does not want this to be affected. Can you please advise the best course of action.
Hi June
I am mostly surprised about StepChange. They really should have told you about the risks of starting a DRO if you have a guarantor loan…..
I am afraid I can’t advise on whether Bamboo had a right to advise you regarding the implications of your DRO on your guarantor or not. I am not a solicitor. However it would seem that they would have a duty of care under the FCA (Financial Conduct Authority) principles of business that all regulated firms must follow in particular to treat customers fairly.
In terms of what you can do next, unfortunately all you and your guarantor can do is raise complaints against bamboo. Given you have had to start a Debt Relief Order you may have an argument to say that Bamboo should never have lent you money in the first place because you were not in a position to be able to pay it back and they they should have done better affordability checks to establish that. As such you could raise an affordability complaint against them. If this is upheld then bamboo will be forced to remove all interest from the loan and your guarantor will be released from the loan. Your guarantor could also raise a complaint.
I you don’t want to do that then the only option for your guarantor would be to agree a sensible repayment plan with Bamboo. They would need to get confirmation from Bamboo that this would not affect their credit rating.
I stood as a guarantor for a friend, and she is no where to be found. Am been threatened by the financial institution.
Hi Ajumuka
If you have acted as a guarantor for a friend and the friend does not pay the debt, you become 100% liable for the outstanding balance. This is what acting as a guarantor means.
The financial institution is perfectly within their rights to claim the balance from you and threaten you with enforcement action if you don’t pay.
Your options now are to either pay the debt. Or, if you can’t afford to, you can set up a payment plan with the financial institution concerned. If you have other debts of your own and this extra debt means you are now struggling, you should consider a debt management solution to cover them all. Going bankrupt is one option.