When a personal guarantee is called in

A demand under a personal guarantee is the lender enforcing a separate contract you signed, not a court order, and the first thing to find is the limit on it — under the Banking Code of Practice a guarantee is capped at a specific amount or at the value of specified property, and that cap is often well below the borrower's total debt. Before a subscribing bank enforces against a guarantor's mortgage it says it will first enforce the borrower's own security.

What you actually promised, and what it is capped at

A guarantee is its own contract. It sits beside the loan rather than inside it, and the liability it creates is yours personally, separate from the company's. That is why a demand can arrive addressed to you at home when the borrower is a company that has stopped trading, and why winding the company up does not make the demand go away.

The first thing to find is the limit. Under the Banking Code of Practice a guarantee is limited either to a specific amount, or category of amounts such as everything owing under a named loan, or to the value of specified property under a specified mortgage. That cap is the real size of the problem, and it is very often less than the borrower's total debt. People have paid out a company's whole balance believing they had to, when the document they signed capped them at a fraction of it.

Read the demand alongside the guarantee and the mortgage, if there is one, and write down three things: the amount demanded, the cap in the document, and the date by which the lender says it wants payment. Everything else follows from those.

You are not the first one this week

Almost everybody rings the lender that sent the demand, and then their own bank. Neither is likely to help. The lender is the party enforcing; the bank sees a guarantee called in on the file and declines, not because the loan would not be repaid but because the last financials look wrong, or a lodgement is late, or there is a mark on the credit file. Those are the things a bank exists to care about. None of them says anything about whether there is equity in the property.

That gap is where HomeSec has been since 2004. We are not here to judge how a guarantee came to be called in, and we have seen enough of them that they do not surprise us. What we look at is whether there is enough unused equity in Australian real property and whether the purpose is a genuine business one — from $20,000 to $5,000,000 against that equity. No financial statements, no credit score threshold, no interrogation. From a clean, complete scenario funds can be available in as little as 24 hours, and interest can be capitalised for up to six months so nothing is payable while the position is sorted out.

Back to the guarantee, because the demand runs whatever anybody decides about funding.

What a subscribing bank has to do before it reaches your home

The Banking Code of Practice is a set of commitments made by the banks that subscribe to it, and ASIC has approved it. It is not legislation and it does not bind a non-bank or private lender, so the first question is always who is enforcing. Where it does apply, two of its rules matter more than the rest.

1. 1
   The borrower's security goes first.A subscribing bank will not enforce a guarantor's mortgage — and the Code singles out a mortgage over a principal place of residence — unless it has first enforced any mortgage or other security the borrower provided.
2. 2
   A judgment against you is not enough on its own.Before enforcing a judgment against a guarantor, the bank must have enforced the borrower's security and then one of three things must be true: it holds a judgment against the borrower that has been unpaid for more than 30 days, it has made reasonable efforts to locate the borrower without success, or the borrower has become insolvent.
3. 3
   You should have been told the borrower was in trouble.The Code requires copies of formal demands and default notices sent to the borrower to reach the guarantor within 14 days, and written notice where the borrower stays in default for more than two months. If none of that ever arrived, say so in writing and keep the reply.

Now the honest part, because it applies to most people reading this. Several of those protections are expressly switched off where the guarantor is the sole director of the borrowing company — the package of the borrower's financial information, the rule that the documents come to you rather than through the borrower, the three-day wait before the guarantee can be accepted, and the notice about a borrower in default for more than two months. The paragraphs about enforcing the borrower's security first are not in that excluded list. Which of them survives in your case turns on the drafting and on what you signed, which is an hour with a solicitor rather than an afternoon with a search engine.

What can still be limited, and what can be ended

A guarantor is not only a defendant in waiting. Under the Code a guarantor can write to the bank asking to limit, or further limit, the liabilities guaranteed — the bank does not have to agree, but the request is free and the answer is informative. A guarantor can withdraw altogether before the credit is actually provided, and can withdraw after it is provided where the loan as signed differs materially from the one disclosed beforehand.

And a guarantor can end the liability by paying the lower of the outstanding liability and the guaranteed amount, or by making another arrangement the bank accepts. That sentence is the whole reason funding is ever the answer here: it converts an open-ended personal exposure into a single number that can be paid once and closed.

Where the demand goes if nobody answers it

The sequence is unglamorous and fairly predictable. A demand, then proceedings on the guarantee, then judgment. Where the guarantor is an individual, an unpaid judgment can be followed by a bankruptcy notice. AFSA's guidance is that you generally have 21 days from its issue to pay, though the notice itself may specify something different, and that not meeting the demand may be an act of bankruptcy — which a creditor can use to ask the court for a sequestration order. There is also an option, before that point, of applying to the court to set aside the judgment or the notice, which is a legal step with its own timetable.

None of that is a reason to panic on day one. It is a reason to know that each step is harder and more expensive to reverse than the one before it, and that the cheapest day to deal with this is the day the demand arrived.

The first 48 hours

1. 1
   Find the guarantee itself, not just the demand.The cap lives in the guarantee. Until you have read it you do not know the size of the problem, and the amount in the demand is not automatically the amount you owe.
2. 2
   Work out who is enforcing.A bank that subscribes to the Banking Code of Practice has made commitments a private lender has not. It changes what you can reasonably ask for.
3. 3
   Check whether the borrower's security has been enforced.Where the Code applies, that usually comes first. If it has not happened, it is a question worth putting to the lender in writing.
4. 4
   Ask the lender, in writing, for a payout figure on the guarantee.A figure, with a date, and what it will be in a fortnight. Nothing can be arranged against a number nobody will confirm.
5. 5
   Get an hour of legal advice this week.Not next month. A solicitor reading the guarantee, the mortgage and the demand together will tell you in that hour whether the cap is what you think it is and whether the Code helps you.
6. 6
   Work out what the property could release, in parallel.If a payout is the answer, the questions are whether there is equity and how quickly it can be reached. That can be answered the same day and commits you to nothing.

When paying it out is the right answer, and when it is not

Paying out a guarantee makes sense when the capped number is real, affordable against the equity, and closing it protects something worth protecting — a home, a business that still trades, a refinance that will proceed once the demand is gone. Ending the liability for the lower of the outstanding amount and the cap is a clean outcome, and it is one of the few places in this campaign where money genuinely solves the problem rather than postponing it.

It does not make sense before the cap has been read, because the number in the demand may not be the number you owe. It does not make sense where the same property secures the borrower's debt as well and there is no equity left behind it — borrowing against a property that is already fully committed is paying costs to discover bad news. And it does not make sense where the guarantor's own position is already beyond this one debt; that is a conversation with an insolvency lawyer, a registered liquidator if a company is involved, or a free financial counsellor through the National Debt Helpline on 1800 007 007. If there is no meaningful equity, this is not our answer and we will say so on the first call.

This page explains what a guarantee is and what the options are. It is general information, not legal or insolvency advice: what applies to your guarantee is a question for a lawyer, and for a company in difficulty a registered liquidator is the person to ask. The Banking Code of Practice published by the Australian Banking Association and AFSA's own guidance on bankruptcy notices are the primary sources behind everything above.

Reviewed by Jason Brockmuller, Joint Chief Executive