Guarantor Loan and Bankruptcy
- 26 Oct 2021
A guarantor loan must be included if you go bankrupt. However the guarantor will then become liable for the debt.
Included om this article:
- What is a guarantor loan?
- Is the debt written off if you go Bankrupt?
- Can the loan be kept out?
- Could you repay it before going Bankrupt?
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What is a Guarantor Loan?
A guarantor loan is where a finance company agrees to lend you money on condition that a third party will pay the debt if you do not. This type of loan is often available if you have a poor credit rating.
The lender is happy because the loan is guaranteed. As such it has a higher chance of being repaid. You are happy because you have been able to get the credit you need.
However if you stop paying for any reason the guarantor becomes liable for 100% of the outstanding balance including interest. This can be a big problem if they are a friend or family member.
If you fail to pay a guarantor loan the person who guaranteed it on your behalf is legally liable to pay the outstanding balance.
Is a Guarantor Loan Written Off if you go Bankrupt?
A guarantor loan is an unsecured debt. As such if you go Bankrupt it has to be included in the procedure. Once you are bankrupt you must stop making the repayments to the loan company.
As far as you are concerned the debt is treated the same as all of your other unsecured debts. You are legally protected from any further enforcement action by the company and the loan is written off.
However the person who guaranteed the loan is not protected by your bankruptcy. Because you are no longer repaying it they become responsible and will have to start maintaining the payments.
If after you have gone bankrupt your guarantor cannot or will not pay the loan company can start collection actions against them.
Can you keep your Guarantor loan out of Bankruptcy?
You may be thinking about going bankrupt to resolve a wider debt problem. However you do not want to leave the person who guaranteed your loan in the lurch. As such what about leaving it out and continuing to pay it?
This would be very difficult. You would not allowed to include a specific amount for maintaining the repayments in your living expenses budget. As such you would have to do so by making savings elsewhere.
Unfortuantely this plan will normally fail. Your budget will be restricted as it is. It is therefore very unlikely that you will be able to put aside enough to keep up the loan payments.
Trying to continue paying a guarantor loan while you are bankrupt will be very difficult. You will not have sufficient money available in your budget to do so.
Could you repay a Guarantor Loan before going Bankrupt?
One way of dealing with a guarantor loan might be to pay it off before you apply for bankruptcy. If the loan is not too large you might be able to do this perhaps by selling some of your belongings.
You could then go bankrupt and write off your other debts without worrying about leaving the guarantor in a position where they have to pay the loan. However you need to be mindful about the rules on preferential payments.
If you pay off a creditor within 2 years of going bankrupt to ensure they are not included in the process the transaction could be overturned. The guarantor would then still be liable for the debt and you might get a BRU.
Want more advice about your guarantor loan and bankruptcy? Give us a call (0800 044 3194) or complete the form below.
I really unsure what to do. I have 2 guarantor loans which my brother secured but I am struggling with all my other debt including car finance. Is it true going bankrupt I can keep paying these guarantor loans? My brother is younger and saving for a mortgage. I would be mortified if I ruined his chances.
Hi Laura
You are not allowed to keep paying for the guarantor loans if you go bankrupt. They would be contacted and your brother would become liable. Given this, if you need to keep paying them, I would recommend that you do NOT go bankrupt.
Really, the only viable option for you is likely to be starting either a debt management plan or token payment plan to manage your other creditors until the guarantor loans are paid. Once they are out of the way, you can reconsider your options. It may be that you will simply be able to pay off the other debts with the money you were using for the guarantor loans.
Im a guarantor on an amigo loan but the person is keeping payments up fine. Would I need to include this into my bankruptcy? And what happens to mobile phone contracts? Do they get cut off? Thank you again!
Hi Josie
If you go bankrupt I recommend that you do list this Amigo loan as one of your creditors. The person who took the loan has no need to worry. They can continue paying it as normal and will not be affected in any way. However if they do happen to stop paying you bankruptcy will protect you even if this happens after you are discharged.
You don’t need to worry about your mobile phone contract. It will not be cut off. You can continue making the monthly payments as normal.