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A surety, surety bond or guaranty, in finance, is a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. The person or company that provides this promise, is also known as a surety or guarantor.
The third person is directly liable to the creditor for the debt, and the creditor can sue the surety without even going to the debtor for payment.
When is the guarantor liable in a suretyship?
Only liable if the creditor first goes to the debtor and that person does not pay.
When is the guarantor of collectability liable?
Only after the creditor sues the debtor and fails to collect.
What is the difference between a compensated surety and a gratuitous surety?
- A compensated surety is bound whether the promise to pay comes before or after the debt is entered into
- A gratuitious surety is not obund when the debt comes before the promise of the surety
Statute of Frauds
Surety contracts of all types must be in writing signed by the surety.
EXCEPTION: The surety has some financial beneficial interest to be gained by entering into the suretyship agreement.
When do surety contracts not have to be in writing under the statute of frauds?
When the surety has some financial beneficial interest to be gained by entering into the suretyship agreement.
What are the rights of the surety against the creditor?
- Can compel the creditor to sue the debtor
- Can compel the creditor to apply the value of any security the creditor holds to the debt
- Can compel the creditor to apply any funds paid by the debtor to the creditor to the debt, provided that the payment was specifically marked for the debt
What are the rights of the surety against the debtor?
- Right of exoneration
- Right of subrogation
- Right of reimbursement or indemnification
What is the right o the surety against all other sureties?
- All sureties are jointly and severally liable
- Can compel contribution
- Can sue to force the others to pay
What happens to the surety if the creditor releases the debtor from debt?
The surety is discharged.
EXCEPTION: Creditor gives convenat not to sue, the surety is not discharged.
When it the surety not dischraged when the creditor releases the debtor from debt?
When the creditor gives covenant not to use.
Is the surety released if holding security that covers the debt?
No, even if the creditor releases the debtor.
What is the effect of alterations in the contract between creditor and debtor on a gratuitous surety?
What is the effect of alterations in the contract between creditor and debtor on a compensated surety?
- Common law - discharge ONLY if the extension is legally binding
- UCC - any extension of time discharged the surety
Loss of security by creditor will discharge:
- Release of the security by creditor
- Physical loss of the security
- Failure of creditor to perfect the security under the law