In this lesson, we're going to talk about sureties and guarantors. These are people who agree to be liable for a debt in the event that the primary debtor refuses to pay or is unable to pay. So, we're going to learn about what sureties and guarantors are and some of their rights and liabilities. This lesson is the first in a module where we're going to be discussing debtor-creditor relationships. Now, there's a lot of ways for a business to raise money when it needs to expand or invest in capital, but in this module we care about instances in which a business borrows money, that's the essence of a debtor-creditor relationship, the borrowing of money. So, we're not going to be talking about selling stock or things like that, that's for another module. In this lesson, we're going to talk about sureties and guarantors. Now, before we get into the definition of sureties and guarantors, let's take a step back and talk about, when you want to borrow money from a bank, what do you have to do to convince them to lend you money? Well, there's really two big things that you can do if you don't have money yourself or you're not independently wealthy, you can either gather up some collateral and pledge it as security for your loan, that's not what we're going to talk about in this lesson, that's in a future lesson. The other thing you can do if you don't have the money yourself, you're not credit worthy, is you can bring in a surety or a guarantor. Now, a surety and a guarantor are very, very similar concepts with one key difference. Both of these are people who agree to be liable for your debt if you don't pay. Now, the big difference is that a surety has what we call primary liability, which means that if you don't pay the debt or even if you haven't yet paid the debt, the surety is always liable. Meaning the lender, the bank usually, can choose whether to try and collect the debt from you, the original debtor, or from the surety, they're primarily liable. Now, the difference is between a surety and a guarantor is that the guarantor is only secondarily liable. Secondary liability means that the bank, the lender, must first pursue the original debtor and only if the original debtor is unable to pay, then can the bank pursue the guarantor, that's how secondary liability works. So surety's, primary liability, guarantors, secondary liability. But for the remainder of this lesson, we'll use the terms interchangeably, I'll probably just say surety because their rights and their duties are very, very similar, the only real difference is primary versus secondary liability. So, what rights do sureties and guarantors have? Well, there are three main rights that if you are a surety, you need to be aware of. First is called the right of reimbursement. If you are a surety and you have to pay money, whether it's the principle of the loan or things like attorney's fees, court cost, other expenses, additional interest, that kind of stuff, sureties have the right of reimbursement, meaning the original primary debtor has the obligation to reimburse the surety for these expenses. Next right the sureties and guarantors enjoy is called the right of subrogation. Now, this right of subrogation means that if a surety or a guarantor is made to pay the original debt because the primary borrower was unable to do so or refused to, then the surety acquires all of the rights that the lender had with respect to the original borrower. So, if I'm a surety and I agree to be liable for someone else's debt, they don't pay and I am forced to pay instead, whatever rights the bank had with respect to that debt, I now have those rights, which means that I can go after the original borrower and try and recover, because really we want the original borrower to pay, and only if they're really, really unable to do we want to have to collect from the surety or the guarantor. Third right that sureties have is the right of contribution. Now, this only arises if you have more than one surety with respect to a transaction. So, if you have multiple sureties or multiple guarantors and one of them is made to pay more than their fair share, the right of contribution gives them the power to collect from their core sureties so that everyone pays their fair share amount. Now, with respect to sureties and guarantors, from their perspective the big question is, when am I discharged from this obligation? When can I be sure that I'm not on the hook for this money anymore? Now obviously, if the original debt is repaid in full, sureties are discharged. But aside from that, really discharge most commonly comes when the debtor and the lender make a change in their relationship without the consent of the surety or the guarantor. Now, this can come in usually one or two ways, they modify their agreement without consent, so maybe they'll change the interest rate or change the payment or do something like that. If you don't get the consent of the surety, then that will actually serve to discharge a surety from liability. And the second related way is if the lender agrees to release any collateral that had been pledged to secure the loan. If they agree to release the collateral without the consent of the surety, then that will also discharge the surety. Now, we're going to talk a lot more about collateral in the future lesson and how secure lending works, but just know that if you have pledged some collateral to secure a loan and the lender releases that collateral, that's not fair to the surety because they were counting on that collateral being there to satisfy the obligations, so they don't have to. So, in that case, a surety or guarantor will be discharged from liability.
