People who guarantee debts for family and friends may end up losing a lot more than they bargained for, according to an issues paper released today by the New South Wales Law Reform Commission (LRC).
If the borrower can't or won't repay the debt, the lender (usually a bank or financial institution) can demand that the guarantor pay the amount owing as well as the costs of recovery. This means that if a guarantor uses their house as security - they could lose their home.
The LRC is now reviewing the laws and practices that affect people who sign guarantees for someone else's debts.
Commissioner Reg Graycar said that it is common for spouses and parents to guarantee business loans for family members. "This is why the problem is often called 'sexually transmitted debt' or 'relationship debt'," she said.
The LRC will also consider whether the law has a more severe impact on particular groups within the community - such as people from non English speaking backgrounds and those from rural areas.
The law generally distinguishes between consumer and business loans. There are some legal safeguards for people who guarantee consumer loans but people who guarantee business loans - including loans for small business - don't have the same protection.
Banks, finance companies and other lenders claim to have changed their practices to ensure that people are fully informed of the consequences of guaranteeing someone else's debts. They claim that further restricting the ability of lenders to rely on guarantors will increase the cost of loans for all borrowers. The Commission is examining whether the changes made so far have been effective and whether more needs to be done to protect guarantors.
The LRC is calling on legal and community groups - as well as those who have had personal experience of this type of 'relationship debt', to make submissions: by email firstname.lastname@example.org or by sending them to GPO Box 5199 Sydney 1044.
The Issues Paper is available on the LRC web page at
www.lawlink.nsw.gov.au/lrc. Copies may also be obtained from the Commission on 02 9228 8230.
For further information, contact Professor Reg Graycar, Commissioner, or Peter Hennessy, Executive Director, (02) 92288230.
The following case studies have been supplied by solicitors at the NSW Legal Aid Commission. Ben Slade, Manager, General Law, says:
Mr and Mrs A's son ran a small pizza business. He applied to a bank for a two year term loan of $13,600.00. The stated purpose of the loan was to refurbish the pizza shop. The loan was to be guaranteed by a mortgage over Mr and Mrs A's home. Mr and Mrs A saw a local solicitor for independent legal advice before signing the mortgage. However they never received independent financial advice and never saw a copy of their son's loan application or any other document that would have indicated their son's ability to repay the loan. Throughout the process Mr and Mrs A were treated as one legal entity, even though there was a history of overbearing behaviour by Mr A towards Mrs A. Although their son made repayments towards the loan he never succeeded in reducing the loan below the initial amount. The loan fell into arrears. When an amount of approximately $20,000.00 was outstanding the bank commenced court action seeking possession of Mr and Mrs A's house.
Mrs B was approached by her son and daughter-in-law to assist in financing the purchase of their home. She was told that they could only borrow the extra $20,000 they needed if she agreed to mortgage her home. Mrs B saw a bank officer at the bank in the presence of her son and daughter-in-law. She expressed concern about the risk involved and was told "your son and daughter-in-law are both young and they both have good jobs." She was also (falsely) told by the bank officer that she would be given her deeds back after the first $20,000 was repaid. Mrs B received no independent legal advice before signing the mortgage and was given no forms to take with her. Mrs B's son and daughter-in-law later separated and their house was sold. Her son is now struggling to repay the loan to avoid the bank taking action under his mother's mortgage.
For further information, contact Ben Slade, Legal Aid Commission (02) 9219 5915.