Help Family Members Secure a Loan
Your granddaughter wants to borrow money to start a business, but she is not able to qualify for the loan on her own. Ever the loving grandfather, you agree to sign a loan guarantee. She makes 3 loan payments and then stops.
The lending company contacts you and demands payment. You refuse, telling them to pursue your granddaughter first on her default. They laugh in your face and then sue you.
Can They Do That?
Glad you asked. The law of guaranty agreements can be confusing.
Your liability is found in your written guaranty agreement. That is the contract where you agreed to be responsible for your granddaughter paying her loan. In the legal world, your granddaughter is the “obligor,” the lender (or holder of the note) is the “creditor,” and you are the “guarantor.”
Understanding the Types of Loan Guarantees
Guaranty of Payment
A guaranty of payment means you guarantee that the loan will be paid. The creditor does not have to pursue your granddaughter for payment first; it can proceed directly against you. Under your guaranty agreement, you are primarily responsible for the loan.
Guaranty of Collection
A guaranty of collection means you agree the debt will be paid only if it cannot be collected from your granddaughter. The creditor must use reasonable diligence to pursue her first.
Texas Exceptions
In Texas, there are exceptions. The creditor does not have to include your granddaughter in its suit against you if:
- She is a nonresident
- Her residence cannot be found
- She is dead
- She is actually or notoriously insolvent
Continuing vs. Specific Guarantees
Continuing Guarantee
A continuing guarantee means you anticipate your granddaughter may take out more loans in the future, and you’re guaranteeing all of them.
Specific Guarantee
A specific guarantee covers only the liability specified in the guaranty contract—nothing more.
What Must a Creditor Prove to Sue a Guarantor?
To sue you, the creditor must show several things:
- Written Guaranty: Your guaranty must be in writing. It must be signed by you–an electronic signature is valid.
- Ownership: The creditor must own both the guaranty and your granddaughter’s debt.
- Default: Your granddaughter must be in default.
- Nonperformance: You must fail or refuse to perform your obligations under your guaranty agreement.
What Happens If You Signed an Absolute Guaranty?
After looking at the documents, you realize that you signed an absolute guaranty where you agreed to be primarily, jointly, severally, and unconditionally liable on the loan. Thus, the creditor can sue you directly without having to pursue your granddaughter first.
Things look bleak. You may have to pay the creditor for the unpaid balance of the loan, plus interest, attorneys’ fees, and costs.
Common Guarantor Defenses (That Don’t Work)
“I Didn’t Get Any Consideration”
You say, “I never received any consideration for signing the guaranty. My granddaughter got the money, not me.”
Nice try—but not a winning argument. The consideration for the loan also supports the guaranty.
“Her Signature Was Forged”
You think your granddaughter’s signature on the loan was forged.
Sorry—your broad guaranty makes you primarily liable, regardless.
“This Is Usury!”
You argue that the creditor is charging too much interest.
Another loser: a usury defense is personal to the obligor (your granddaughter), and it’s not available to you.
What Can You Do Now?
The creditor is likely going to get a judgment against you. After all, you signed an absolute guaranty that makes you jointly and unconditionally liable for the debt. Your sole recourse at that point may be to sue your granddaughter to recover your money—a difficult and often costly process.
Final Takeaway: Think Before You Sign a Guaranty Agreement
The lesson? Do not guarantee someone else’s debt—at least not without fully understanding what you’re agreeing to. That signature could leave you legally and financially responsible, even when someone else defaults.
How a Loan Guarantee Could Affect You—and How Hammerle Morris Can Help
At Hammerle Morris Law Firm, we understand that co-signing or guaranteeing a loan for a loved one often comes from a place of trust and goodwill. But when things go wrong, the legal and financial consequences can be significant. Whether you’ve already signed a loan guaranty agreement or are considering one, our team is here to help you understand your rights, assess your risks, and protect your interests.
Don’t wait until it’s too late—schedule a consultation today and take the first step toward protecting your financial future.
Virginia Hammerle is an accredited estate planner and represents clients in estate planning, probate, guardianship, and contested litigation. She may be reached at legaltalktexas@hammerle.com. This blog contains general information only and does not constitute legal advice.
