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What happens to me if my nephew defaults on his loan that I am the guarantor for?

When you become a guarantor, you legally agree or promise to take responsibility for another person’s payment obligations to a third party, in the event that person fails to pay off his debt.

This means that the guarantor will usually be called upon to repay the entire loan sum plus outstanding interest and penalties in the event of the borrower’s failure to make repayment of the loan instalments. The lender will be legally entitled to seek complete repayment directly from the guarantor, even to the exclusion of the borrower. In other words, the guarantor will be on the hook
while the borrower may not.

Where the guarantor is unable to pay, the lender can commence legal proceedings against the guarantor to recover the debt. Judgment is easily obtained against the guarantor because the terms of the guarantee usually do not afford the guarantor a defence. After judgment, if the guarantor still refuses or cannot make payment, the lender can proceed to enforce the judgment, which may involve seizure and sale of the guarantor’s property or bankruptcy proceedings if the outstanding amount is above $10,000.

To protect yourself, never agree to become a guarantor for anyone without first understanding the extent of the guarantor’s obligations and the amount of the loan. Ensure that the borrower has sufficient funds to pay off loan instalments regularly to prevent defaults.