Today’s question came from a mortgage broker whose client has guaranteed his daughter’s mortgage loan, but he is now considering personal bankruptcy. Will his guarantee survive the bankruptcy, or will it be removed? If it is removed, the debtor is worried the mortgage company might wish to re-approve his daughter on her own and her sole covenant may not be enough to satisfy the lender.
I consulted two respected Toronto based trustees to get their thoughts. Ron Klein, of Klein and Company said:
- The debt is merely a contingent debt since he has not been called on it
- There is a possibility that should his daughter default, after he files a bankruptcy, and the bank calls on his guarantee (after the bankruptcy), the bank may have an argument that the debt arose after bankruptcy and is therefore not a provable claim (ie., his bankruptcy will not relieve him of this debt)
- A counter argument would be that he included the debt as a contingent debt in his bankruptcy and it should therefore be extinguished upon his discharge
- The bank may or may not remove him as guarantor – each bank has their own policy on this matter – so there is a possibility that she may not be re-approved
According to Bankruptcy Law, when the debtor declares bankruptcy, his guarantee should be removed from the mortgage. Sometimes this is overlooked. If the debtor wants to be certain this has been done, we would write to the institution to remind them.
That said, we cannot predict others’ behavior or the changing mortgage lending landscape. Will the lender accept the adult daughter as a sole applicant without any guarantor? If the answer is no, then she should begin looking now for another guarantor.
So their overall opinion is the guarantee should not survive the debtor’s bankruptcy. And if that is the case, his daughter may have to qualify for her mortgage all over again.