SURETY: An Important Ancient Principle
The concept of being a “surety” goes back nearly as far as recorded history.
Perhaps the first recorded instance of “surety” occurs in connection with the experience of Joseph as recorded in the Book of Genesis in the Bible.
As recorded in the Bible, Joseph had been sold as a slave by his brothers for 20 pieces of silver. His new owners took him into Egypt, where he was sold to Potiphar, Captain of the Guard for the Egyptian Pharaoh. Joseph was wrongfully accused by Potiphar’s wife, and he was sent to prison. While still a prisoner, and by divine assistance, Joseph was elevated to a position of responsibility in the prison.
The Egyptian Pharaoh had a series of remarkable and vivid dreams. He heard that Joseph could interpret dreams, and Pharaoh sent for him. When Joseph arrived, Pharoah described the dreams to Joseph, and Joseph interpreted them. Joseph also warned Pharaoh about an upcoming famine that would be 7 years long, and Joseph recommended a food storage program be followed. Pharaoh was impressed, and he made Joseph the ruler over all of Egypt, second only to Pharaoh.
After the famine started, Joseph’s family back in the land of Canaan was suffering from the famine. Joseph’s brothers came to Egypt to buy some of the food that Joseph had recommended be stored. They met with Joseph, but they did not recognize him. Joseph sold them food, but then asked them if they had yet another brother. They said that they did, and Joseph told them that they were not to return to Egypt unless their last brother came with them. Joseph’s brothers then returned to their home in Canaan.
After a period of time, the brothers and their families needed more food. The brothers told their father, Jacob, that they could not return to Egypt unless they took their last brother with them. Their father resisted – he didn’t want to put his last son at risk. As recorded in Genesis chapter 43, Judah made the following statement to his father: “Send the lad with me, and we will arise and go; that we may live, and not die, both we, and thou, and also our little ones. I will be surety for him; of my hand shalt thou require him: if I bring him not unto thee, and set him before thee, then let me bear the blame for ever.”
Jacob relented, and let Benjamin, the youngest brother, go to Egypt with Judah and his brothers. After several dramatic events, it looked like Benjamin was going to become a slave in Egypt and would not be allowed to return to his father Jacob. In a very moving plea, as found in Genesis chapter 44, Judah explains to Joseph that Jacob’s life is “bound up in the lad’s life” and that it would literally kill Jacob if Benjamin did not return. Judah then says to Joseph “For thy servant became surety for the lad unto my father, saying, If I bring him not unto thee, then I shall bear the blame to my father for ever. Now therefore, I pray thee, let thy servant abide instead of the lad a bondman to my lord; and let the lad go up with his brethren.” Because of his surety pledge to his father, Judah offered himself to become a slave or servant, in lieu of his brother Benjamin becoming a slave.
As shown in the story of Joseph, a surety is one who is responsible for another. For Judah, being a “surety” meant that Judah agreed to be responsible for his youngest brother’s personal well-being, and if necessary he would offer his own self, his own life, or his own freedom instead of his brother’s life or freedom being lost.
In modern legal usage, a surety is usually a person or a company who agrees to answer, or be liable, for the debt of another.
It may seem odd that one person would agree to be responsible for the debts of someone else. But this arrangement can be seen all the time in financial transactions where one family member agrees to be responsible for another family member. The person who serves as surety is usually better positioned financially than the person being helped. The surety often has an interest in the financial well being of the borrower – perhaps the surety wants to see that the borrower receives credit for some type of a purchase. This type of surety is sometimes known as a “Voluntary Surety.”
Some commercial bonding companies will even write bonds where these companies agree to serve as a surety for someone else. These companies agree to serve as surety in exchange for a price or a fee – in other words, it is part of their business. This type of surety is sometimes known as a “Compensated Surety.” Surety Companies, or Bonding Companies, write bonds and thereby become a surety in certain legal matters, when one person is required to provide a bond for the benefit of another.
For example, if a plaintiff wins a lawsuit and receives a money judgment, and if the defendant wants to appeal the judgment, then in many cases the plaintiff can go ahead and collect on the judgment while the appeal is being decided. However, it may be impossible for the defendant to get its money back if the case is reverse on appeal. If the defendant files an appeal bond, then the plaintiff may be stopped, or stayed, from collecting on the case until the appeal is concluded. There are other legal proceedings where bonds are either required or preferred.
Bonds are common in contractor law, where the law generally requires a contractor to have a bond before the contractor can sign contracts and work as a contractor. The concept is that if the contractor should become liable on a construction based claim, then the surety will be liable to pay the claim up to the limit of the bond amount if the contractor can’t or doesn’t pay.
Getting a bond from a bonding company can be expensive. The law allows for private individuals to also serve as sureties in some situations. However, such private individuals have to meet certain requirements. For example, a court officers can’t serve as a surety – and a member of the State Bar of California can’t serve as a surety. Also, a private surety must be a California resident, and must either own real property or be a householder. Such a private surety must also have a net worth more than the amount of the bond, and this net worth must consist of real property or personal property located in California, minus the debts and obligations of the person.
A Surety is a person or a company who agrees to be responsible for the debt of another person. A person can act as a “Surety” either on a voluntary basis, or in exchange for a fee. Most bonding companies act as “Surety” in exchange for a fee.
Some homeowners may have questions about the consequences of a foreclosure. Some homeowners are concerned that following foreclosure, a lender may be able to subtract deposits out of a depositor’s account without further notice. Other homeowners are concerned about their credit and their ability to buy a new home in the future. Others are concerned about whether or not they may be taxed on the forgiven amount of their loan.
These are all valid questions, a deserve careful evaluation in connection with planning a course of action. For some borrowers, a short sale is the best approach to take. Others may benefit more from a foreclosure. Others may want to attempt to obtain a release of liability from their lender in exchange for a deed in lieu of foreclosure. And still other may be better off in Bankruptcy.
The considerations involved in planning an optimal strategy involve complex issues, and the best strategy for any given individual often hinges on issues of lender liability, foreclosure law, lending law, tax law, bankruptcy law, and the likely credit effect of any given course of action.
In addition to all of these considerations, there is another area of great concern to some borrowers. These considerations involve the use of a surety, or guarantor.
Borrowers sometimes have parents, friends, family members or others “co-sign” on a loan. When these borrowers go into default on their loan, they are often very concerned about the effect of such a default on these “co-signers.” Many times both the borrower and the co-signer want to know what will happen to the co-signer’s assets in the event of a foreclosure, short sale, or a deed in lieu of foreclosure. In addition, some co-signers want to know the likely effect on them if the borrower were to file a petition in bankruptcy.
The concept of Surety is an ancient one. In addition, Shakespeare based one of his plays on the concept of a Surety. In the Merchant of Venice, Shylock is a moneylender. Bassanio obtains a loan from Shylock, and Antonio agrees to serve as surety, which means he will be personally liable for the debt if Bassanio should not repay the money which was loaned. Bassanio fails to repay the debt on time, and Antonio doesn’t have enough money to pay the debt. As a result, Shylock lays a claim to the collateral – which is a pound of Antonio’s flesh. In a dramatic turn of events, Shylock is told that he can have his pound of flesh – but not a drop of blood.
In present-day United States, the contract between Shylock and Antonio allowing Shylock to take a pound of Antonio’s flesh would never be enforced. Antonio might remain liable for money, but he would not be required by a U.S. Court of law to give up his life or a portion of his body as provided by the contract. However, even though the precise terms of the agreement between Shylock and Antonio would not be enforced, the concept of a surety is valid under U.S. law.
Some borrowers have used a surety to help them buy a home. These sureties are often parents or other family members who have agreed to help another family member buy a their property. In these situations, the buyer is often unable to qualify for the kind of loan that would be needed in order to buy a home. The surety either has the good credit or the income that the borrower lacks. As a result, parents or others often “co-sign” on a loan to other family members.
In most purchases of residential real estate, this “co-signing” occurs by having the surety act as a “co-borrower.” This is different from a situation where the parents or other family members act as a “surety.” California law has specific rules, protections, and defenses that apply to sureties. When a family member acts as a “surety,” then these specific protections, rules and defenses would apply. However, most residential home loans are set up so that the “surety” actually signs as a “co-borrower.” In these situations, the family member actually goes on title as an owner, and signs the promissory note and deed of trust as a borrower, or “co-borrower.” This means that the family member isn’t just guaranteeing payment by the borrower; instead, the family member is actually a borrower in the primary sense. It means the family member has borrowed money at the same time as the buyer, and the borrowed money has been used to buy a property (or to refinance a loan secured against such a property). This means that for liability purposes, the buyer and his or her family member will in most cases be treated the same, and the “co-signing” family member will not receive any special treatment nor any special protections or defenses.
If borrowers have “sureties,” “guarantors” or “co-signers”, then such borrowers often want to “look out” for their sureties, and they are often concerned about the consequences to the surety if the borrower cannot repay the loan as agreed.
The term “co-signer” is actually an informal term that is commonly used to refer either to a “Surety,” a “Guarantor” or a co-borrower. California law has for the most part eliminated differences between a “Surety” and a “Guarantor.” But the consequences for a “surety” and a “Co-borrower” may be different.
The California Civil Code provides a number of protections and defenses for sureties. But these protections may not apply to a situation where a family member or friend acts as a “co-borrower” instead of as a guarantor or surety. When a friend or family signs as a “co-borrower”, then that person is actually a borrower of the money. In such situations, the “co-borrower” will generally sign the promissory note or other loan document, along with the deed of trust. Many times the lender will require that the “co-borrower” actually become an owner of the property and that they go on title, even when the “co-borrower” is primarily acting as a surety or guarantor. In such situations, it is very likely that if the buyer/borrower defaults, that the “co-borrower” will be treated as a borrower for many, most, or all purposes.
For example, a default in loan payments can negatively affect a borrower’s credit rating. Such a default may not negatively affect a surety’s or a guarantor’s credit rating, but such a default would almost certainly affect the credit rating of a “co-borrower.” Some foreclosures and short sales can produce a negative tax consequence for a borrower. Professional tax advice would need to be obtained as to whether a “co-borrower” would also experience negative tax consequences. However, any potential negative consequences following a default may be different for a surety than for a co-borrower. In some situations, a surety may be relieved of liability if a creditor changes the obligation of the borrower – but a “co-borrower” may not receive this benefit.
Suretyship, guarantor and co-borrower situations can be complex, and the legal principles, statutes, and cases that apply to such situations can also be complex. Persons involved in suretyship, guarantor or co-borrower situations should consult competent legal counsel and should obtain professional tax advice.