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Home loan – guarantee – limited as to amount – applied to unsecured debt
Mr and Mrs C wanted to help their son and daughter-in-law financially by agreeing to legally guarantee a loan of about $175,000. Their liability would be limited to $63,000, with their own home as security. Although they took legal advice before signing the bank guarantee, it subsequently became clear that they lacked an understanding of the full legal and financial implications of what they had done.
About a year later the son and daughter-in-law separated, and their home was sold. After all costs of the house sale had been deducted, less than $150,000 were available to meet their debts.
At this point Mr and Mrs C found that both the son and daughter-in-law, and in some cases the daughter-in-law alone, had taken out other loans from the bank, and had an overdraft of about $7,500, in addition to credit card debts amounting to about $4,500. The bank wanted to use the proceeds from the house sale to settle these additional debts as a first priority, and to use any remaining money to pay off the housing loan. This left a debt of about $55,000, which their son undertook to pay. Mr and Mrs C were surprised and disturbed to discover that, if their son defaulted, they were legally liable for unpaid debts unrelated to the housing loan.
Mr and Mrs C erroneously believed that their guarantee related only to the housing loan, and that they would consequently be liable only for any difference between the amount realised by the sale of the house and the amount outstanding on that loan, in this case about $27,000. They also felt that that the bank had been remiss in not telling them about either the loans already in existence when they gave their guarantee or about the loans taken out later.
As the law states that a bank may not disclose to an intending guarantor any information relating to the financial position of a loan applicant, Mr and Mrs C were labouring under a misapprehension when they assumed that the bank was legally obliged to disclose information about other loans or debts accruing to the applicants – in this case their son and daughter-in-law.
Although the bank guarantee was in this case limited to an amount of $63,000 (plus some costs and interest), it did not impose any other restrictions on their liability. In particular, there was nothing in the guarantee that would require the bank to use funds realised from the sale of the house or any other source to pay off the guaranteed housing loan before it paid other debts. I had no option other than to find that the bank was legally empowered to require Mr and Mrs C to pay the full outstanding amount of $55,000. I might add that Mr and Mrs C can count themselves lucky that, unusually enough, the guarantee which they signed contained a restriction on their liability.
I am concerned that parents who guarantee loans for their children often do not appreciate that they are accepting legal liability for other debts incurred in their name, irrespective of whether those debts were incurred before or after they provided this guarantee. Although, in this case, the bank loan application was in the name of both the son and the daughter-in-law of the guarantors, it never occurred to them that they would subsequently be liable for any credit card debt in their name also owed to the bank providing the housing loan.
The bank noted that this was not currently an issue, as Mr and Mrs C’s son was repaying the debt, and there was no need to call on them under the guarantee for the time being. The bank undertook to reassess the position if it should need to call upon Mr and Mrs C in this way. On this basis I concluded my investigation.