Getting the right advice is essential if you're about to default on a loan

Rose Lawyers on 2 August 2016

A loan is a large and important financial commitment. When you are unable to continue meeting that commitment, there can be significant ramifications.

If you have needed a guarantor to get your loan approved, then defaulting will become even more difficult and stressful. Guarantors are often trusted family or friends, so you need to consider the best course of action for both yourself and your guarantor.

Here is our advice for dealing with a default with a guarantor.

What do you need to do first?

If you think you are going to default on a loan that has been guaranteed, you need to contact your lender immediately.

By contacting them, you may be able to make some kind of arrangement so that the guarantee is not utilised and protect your guarantor from the financial ramifications of your default.

The arrangement that you come to with the lender will depend on your circumstances and the type of lender. For example, banks commonly have hardship applications that allow you to change the amount, or the frequency of payments when you fall into times of hardship.

What are your options when you default with a guarantor?

Depending on your circumstances you may have a few options for how to proceed that will help you to protect your finances and those of your guarantor.

Hardship applications

If you are experiencing financial or other hardship, you can apply for a hardship variation to have your loan repayments reduced or deferred. Hardship circumstances include:

  • Illness
  • Unemployment
  • Changed financial circumstances

If you meet your bank's requirements for a hardship variation, they can change your payments so that you are able to keep paying for your loan. The hardship variation could be that the loan is extended over a longer period so that the repayments are smaller, the payments could be postponed for an agreed upon period, or some other arrangement can be made.

If your application is rejected, the bank must give you a reason why. If you are unhappy with the reason, you can speak to their internal complaints department. You can also refer the matter to the bank's external dispute resolution scheme or the Financial Services Ombudsman, if necessary.

Sell the property

If you are in such hardship that you are not able to recover and will not be able to repay the loan, then the best course of action is usually to initiate proceedings to sell your property.

The bank may be amicable to waiting for the property to sell instead of foreclosing on it, provided that you keep them informed of what is happening and do not unnecessarily delay the sale or settlement. However, the bank is usually under no obligation to do so, in accordance with the Guarantee that you have signed.

Another advantage of this is that you will likely be able to put more effort into selling the property than the bank will, so you may be able to get a better price that way.

Advice for guarantors

If you have guaranteed a loan for someone and it looks like they are going to default on it, you need to seek expert legal advice so that you can protect your interests.

It is likely that the bank will bankrupt the borrower if they are unable to repay the loan, and they will need to sell the property to pay off the bank. If there are insufficient funds from the sale of the property, then the house or property that you used to secure the loan may also need to be sold.

Because of the seriousness of a default with a guarantor, it is essential that you get expert legal advice before agreeing to guarantee a loan so that you fully understand the risks.

Getting help from a lawyer

Whether you are the borrower or the guarantor, it is essential that you get expert legal advice in the event of a default on a loan.

If you are the borrower, a Lawyer can assist in communicating with the lender. They will have a clear understanding of your options and will be able to guide you through the process. A lawyer will also be calm and rational in what is likely a time of great emotional distress for you.

At Rose Lawyers, we will handle your case with the expertise that comes with our decades of experience in property law matters. We will guide you through every step of the process and ensure that your interests are protected.

For expert advice for your situation, call Rose Lawyers on 03 9878 5222