Surety Vs. Guarantor

by Lisa Bigelow; Updated September 26, 2017
...

In modern business practice, the distinction between a surety and a guarantor is assumed as slim or even nonexistent. This isn't always the case, however, and the differences between a surety versus a guarantor may depend on the business's location. In some instances, a creditor may be forced to sue a bankrupt company before the owner if the owner is a surety and not a guarantor.

The Guarantor

When a company takes on debt, it may require the company's owner or owners to sign a guaranty. The guaranty states that the owners personally guarantee the company's debt. If the company defaults on the debt, then the creditor can expect payment for the debt from the guarantor. Since a company that defaults may not have any assets worth pursuing, creditors often skip suing the company for the debt and instead approach the guarantor first, according to attorney Anthony Valiulis.

The Surety

A surety also promises to make good on the debts of a company, but there is a significant difference between the rights of the guarantor and the rights of the surety. A surety may insist that the creditor first sue the company instead of approaching the surety directly, even if the surety knows that the company doesn't have any assets. If the creditor doesn't sue the company — called the "principal obligor" — first, then the creditor loses its right to sue the surety.

The Illinois Sureties Act

The difference between the two terms is subtle but distinct enough to cause creditors and business owners problems, especially in Illinois. In JPMorgan Chase Bank N.A. v. Earth Foods Inc., the Illinois Supreme Court ruled that the surety and the principal obligor are both "primarily and directly liable" for the company's debt, according to Valiulis. Guarantors don't become liable for the debt until the principal obligor defaults, but the guarantor doesn't have the right to force the creditor to approach the company first.

Language Matters

Agreements that use the words "guarantor" or "guaranty" may be ambiguous or not strong enough, according to Valiulis. Instead, guaranty agreements should explicitly mention the creditor's right to pursue the guarantor only in the event that the company defaults. If the language is ambiguous, then the guarantor may actually be a surety, and the creditor may have to spend time and money suing a possibly bankrupt company.

About the Author

Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.

Photo Credits

  • Jupiterimages/Goodshoot/Getty Images