Based on a surety or a guaranty agreement, the surety or the guarantor undertakes to assume the debt of the original debtor, called the principal, if they fail to pay back the loan. However, the creditor has different rights under a surety agreement and a guaranty agreement.
In the case of a surety agreement, the creditor may seek satisfaction from both the principal and the surety at the same time, since their liability for the default is joint and several. In the case of a guaranty agreement, the guarantor’s liability is ancillary and derivative, i.e. the creditor first has to attempt to collect the debt from the principal before turning to the guarantor for payment.
A surety or guaranty agreement, like any contract, requires mutual conent, adequate consideration, definiteness of performance, and a consensus ad idem (meeting of the minds). Since they cannot exist without a primary debt obligation, if the primary debt obligation has been fully satisfied, is void or is illegal, the surety or guaranty of the debt obligation can also be deemed unenforceable. A surety or guaranty agreement must be in writing, signed by the guarantor(s) and delivered to the creditor.
KEY VOCABULARY
ancillary
to assume the debt
to collect the debt from
be deemed
derivative
guarantor
guaranty agreement
joint and several
mutual consent
primary debt obligation
principal
seek satisfaction from
surety
surety agreement
unenforceable