Beware the Pitfalls of Signing Personal Surety
When it comes to personal surety, the biggest danger to your finances can be your wealth.
If you have valuable assets, banks and other lenders will be eager to
ask you to sign personal surety for family members, business partners
and friends who borrow money.
In the event of the family member, business partner or friend being unable to pay their debts, you will be held liable.
A surety is an innocuous-looking agreement. However, if not treated with caution, it can be deadly.
Personal sureties come in various guises, with some carrying more
onerous liabilities than others. Essentially they all do one
thing: give the lender the right to make you pay for
someone elses's debt. This is why you should read the
agreement thoroughly before signing.
Consumers who sign banking contracts (includes personal surety-ship
agreements) without first reading and understanding them cannot expect
the Ombudsman to come to their rescue.
The general rule in contract law is when you sign a contract you are
presumed to know and understand the contents and so are bound by the
contract.
An important point to remember about personal surety is that one size does not fit all.
Avoid people putting pressure on you by saying things like "This is our standard contract". or "Everybody signs it". You can and should negotiate the terms of the personal surety. Causing a delay now is better than repenting at leisure later.
Signing a surety is often not merely limited to agreeing to pay for a
loan of another person should that person not be able to pay it
off. Personal surety agreements often leave the amount unlimited
and do not specify a date or time frame for the surety to be terminated.
The intended purpose of the surety is also more often than not left unspecified.
The results can be devastating. For example, parents often sign
surety for their children's student loans. Their son completes
his degree and then wants to start his own business.
In all likelihood, the son will receive a loan from the same financial
institution. A couple of years later, the new business goes
bankrupt. At this stage, the parents (who are approaching
retirement) get a call from the financial institution requiring them to
make good their sons's business debts. This will be catastrophic
on their retirement planning.
In the event of death or disability of a key individual within a
business, creditors may become nervous about the ability of the
business to repay its debts.
The creditors may then call in the debts. This could have a devastating effect on the business.
In addition, the executor of the individuals' estate may be forced to
sell of assets to meet hte surety commitment. This means your
family may be left high and dry, even if you took precautionary
measures for their financial security after your death.
Surety cover can be taken out on the life of the key individual to prevent this scenario. These costs are tax deductible.
In the event of death or disability, the proceeds will be paid to the
company's bank account. The company will then, in terms of a
contract, repay the debt and the individuals' estate will be
released from any claims.
The business pays premiums and an agreement into between the business
and the owner, which obliges the business to apply the proceeds to
repaying the debt, releasing the surety.
Your best protection agains surety agreements is to avoid signing them
altogether. However, this is not always an option. Few
people can buy their homes cash, and directors or partners will be
required to sign sureties for business overdrafts and loans.
If you are asked to sign surety, I recommend to contact a certified
financial planner or your attorney to help you avoid the
pitfalls. They can also advise you on ways to limit losses by
limiting the surety.
meContact Us: E-mail cobans@mweb.co.za Tel: +2712653 4153 | fax: 086 684 3231
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