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 asked by an ex partner to get out a guarantor loan with him being the guarantor and he would pay it back as the money was for him not for me. If I stop paying I know he will be liable for the debt but he is refusing to pay. If it goes to court will it also effect me or just him as a guarantor
Hi Georgia
If you stop paying this debt the creditor will first come to you to enforce it. This is because the debt is in your name. They are therefore completely within their rights to take court action against you to enforce it (even though you did not spend the money).
If this happens your credit rating will be negatively affected and you may need to consider some kind of debt management solution to protect yourself.
At the same time because your ex is the guarantor for the loan the lender will also go to him to enforce the payment. They can also take court action against him if necessary.
Hello James,
My husband is considering filing for bankruptcy. I am the sole owner of the home we live in, however my husband is guarantor on the mortgage. How will this be handled if he files for bankruptcy?
Hi Anne
There are a couple of important points to consider here. Firstly you need to speak to your mortgage lender and ask them if there would be any implications for your mortgage if the guarantor goes bankrupt. I would hope that it would not be an issue. However you should check.
If your lender confirms there is no issue from their point of view you still need to tread carefully. The problem is that you are married. As such even if your husband is not named on the mortgage or title deeds he may still have an interest in the property. If this is the case it would be at risk if he goes bankrupt.
For this reason before he makes any decision to go bankrupt I would strongly suggest you / he get advice from a family lawyer. Find out what claim he would have on the property if you were to get divorced (hypothetically speaking of course). If he does have a claim in divorce then the house is also likely to be implicated in a similar way to a jointly owned property if he goes bankrupt.
I would advise strongly that he takes further advice from a debt adviser before making the decision to go bankrupt.
Hi I have got myself into a mess with credit. I have a guarantor loan but the person who was my guaranter has died. What happens if I can’t afford to pay this loan back?
Hi Gillian
If you are unable to pay your guarantor loan and use a debt solution such as an IVA or bankruptcy the loan company will normally go to the guarantor for the money. However if the guarantor is no longer alive then they will be unable to do that and they will have to leave it at that.
It is possible that the creditor might contact the solicitor who was dealing with the guarantor’s estate and register themselves as a creditor. If the estate has any funds then they might be able to collect that way. However this would be unusual.