Beware! Think twice before becoming a guarantor

True friendship is worth more than all the riches in the world.

Noble, indeed. But what happens when friendship is the reason you find yourself out on the street without a penny to your name?

Amar Patnaik, a company director, agreed to stand guarantor for his company's loan. He got a friend to back his guarantee, with a personal guarantee to the tune of Rs 1 crore.

The company suffered heavy losses and went belly up.

Afraid his assets would be attached, Patnaik transferred his financial assets to another individual's name quickly. His less fortunate friend lost his bank balance and residential property without even knowing what he did wrong.

The friend's mistake was becoming a guarantor for an enterprise he had no idea about. He compounded it by attaching everything he owned to it.

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Nirupama Kar, Lawyer, Interjuris Advocates and Consultants warns, "As far as possible, do not stand guarantor to another's liabilities. If the borrower defaults, the bank could hold you responsible to pay the balance amount. That could mean attaching all the assets you had declared when you signed on as guarantor to recover the dues, if need be."

Think twice before you sign the dotted line. It won't hurt.

What you are doing, essentially, if you stand guarantor and let someone use your reputation to obtain credit is: you are taking a risk a lender has refused.

After all, the lender is asking for a guarantee because his assessment tells him the borrower may not pay up.

Let us go over what you could lose as a guarantor.

• Banks could gun for you if they cannot recover all dues from the borrower.
• All your personal assets (except Provident Fund and agricultural land), such as bank accounts, cash and property, could be attached and you could turn bankrupt.

How do banks go about the process? How much time do you have before you get served a legal notice?

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Dena Bank officials say, "For default in payment, the borrower is given three to six months to pay up, depending on the relationship he has with the bank. If payment is not forthcoming, a legal notice is served to the borrower and guarantor, for 60 days. If this fails, the bank will send a legal notice to the borrower and guarantor for symbolic possession of the property. If the dues fall short, the guarantor's property gets added."

If you are the guarantor and have received a legal notice, Nirupama Kar asks you to do two things at the earliest.

• Discuss the matter immediately with the borrower.
• Follow up regularly with the bank to ensure the bank does not get an ex parte order (this 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).

How do banks go about the process? How much time do you have before you get served a legal notice?

Financial planner Amar Pandit thinks there is a way out if you are ever approached to stand in as guarantor, "Limit your liability to a maximum of 35 per cent of your income. Going beyond that would endanger your financial security."

But if you have already gone ahead and done the deed, you can only sit back and wish your friend all the best for his business. Alternatively, try speaking to him to get released from the liability by getting a substitute in your place, if the agreement permits.

If he is truly your friend, he will do it.

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