A suretyship is created by a contract. If you are a surety, you have made an express promise to be responsible for a debtor’s debts. Creditors can directly collect from the surety. For example, a bank might only give you a loan if your father co-signs it. By doing so, your father becomes a surety to your loan and the bank can seek payment directly from your father.
As a surety, you have rights beyond that of the debtor. Such rights include:
- Right of Subrogation – This right allows the surety to stand in the place of the creditor and recover from the debtor if the surety has paid the debtor’s debts. For example, the surety has creditor rights if the debtor claims bankruptcy.
- Right of Reimbursement – This right will depend on the contract formed between the debtor, creditor, and surety. For example, most suretyship contracts allow a surety to recover out-of-pocket expenses in paying the debt of the debtor. Some contracts even allow the surety to recover the full amount of the debt paid.
- Right of Contribution – This right only comes into play when there is more than one surety. A contract with co-sureties should specify exactly what percentage each surety is responsible for. If one surety pays more than his/her share, the right of contribution allows that surety to recover from the other co-sureties.
Even though you are contractually obligated to pay the debt along with the debtor, there are instances where you can be released from the debt (or parts of it). This requires you to have a legally recognized defense. Such defenses include:
- Debtor’s defenses – Any defense used by a debtor can be used by the surety.
- Contract modification – If the contract you signed as a surety is modified without your consent, it is not binding.
- Possession of collateral – A debtor often provides collateral to a creditor. If the creditor takes possession of the collateral without the surety’s consent, the surety can deduct the value of the collateral from what he/she owes as the surety.
- Other defenses – The surety can also claim defenses separate from the debtor. For example, the surety can claim fraud, duress, bankruptcy, etc., that may have no relation to the debtor’s ability to pay.
Surety agreements are quite common in creditor-debtor transactions. However, the rights and defenses of a surety can be complex and confusing. For example, a guarantor is like a surety but they have completely different obligations. Consult an experienced estate attorney to learn more about your surety agreement or to seek advice about whether to become a surety.