A True Case
Mr. Doe, an immigrant from the US had some very good years in Israel. After a short period he opened his own business and quickly became very successful.
Eventually Mr. Doe decided he could afford his own piece of property in Israel, and because he was doing so well he was able to receive a large mortgage from a local bank. The property he bought was very expensive and the monthly payments were high but affordable under his circumstances. Mr. Doe had his property, the bank made a nice profit and the two guarantors he gave felt safe because Mr. Doe was not only a friend but a successful business man as well.
After a year, Mr. Doe became sick and could not work on daily basis. He hired a manager to deal with all the bureaucracy for almost six months. This was enough to turn the business into shambles. The business was still too new and unstable to have someone else managing it.
The debts grew every day, but the income was not growing at the same rate. Mr. Doe returned full time to the business but soon realized that the interest payments for the loans he took to uphold the business in his absence plus the mortgage were way over the potential earnings of the business.
Mr. Doe decided it was time to make a “big escape” back to the US. He had no court proceeding against him yet and therefore no restriction on his leaving the country (“Tsav Ikuv Ietsia Min Haretz”), so he was still free to leave.
Friends were worried when they began to receive warning letters from the different banks. The guarantors were especially worried and decided to talk to Mr. Doe. He promptly calmed them claiming that if anything happened the guarantee was the property itself; he had put 20% down on the property, only mortgaging 80% which, in theory, would have covered any potential losses.
After a few more months Mr. Doe was gone. He left a huge amount of debts behind and the first to take action was the mortgage bank. The bank sued the guarantors for the full amount of the remaining loan.
To their dismay the guarantors found out, after hiring a lawyer, that the 20% Mr. Doe had indeed paid in cash was not enough to cover all the expenses the bank was claiming and suing for.
The bank tried to collect the debt from Mr. Doe but this was impossible for a variety of reasons. Therefore the bank could now legally collect from the guarantors.
The property was sold in a public tender (auction) and after all the deductions (such as lawyers’ fees and court procedures), the guarantors, through their lawyer, ended up each paying an equivalent of 2% of the property value, which came to approximately $12,000 ($24,000 in total).
Why did the guarantors still have to pay if Mr. Doe had made a 20% cash down payment?
The reason is simple: Mr. Doe took a loan with a grace period of one year (no monthly payments for the first year). After the grace period ended, Mr. Doe fell behind in his payments for at least six months during his illness. When the case was finally settled, it had been two years since a payment had been made. In addition, when a bank receives permission from the court to sell a property in a public tender, the sale price is never the real market value.
When a property is sold in this manner, the price goes down at least between 10% and 15%. When adding the interest paid to the bank, the court and lawyer’s fees, the loss could be more than 20%.
This is true when market values are stable and housing prices have not gone down. But in this case, the housing prices did devalue a few percentage points.
What could the guarantors have done to minimize their damages?
From our experience, we have learned that the faster one acts, the less his damages will be. As soon as a guarantor notices the first sign of trouble (this could be a letter from the bank or personal knowledge about the debtor’s situation), he should not hesitate to communicate directly with the debtor and speak to his family if necessary. But the first step should be to contact a lawyer who specializes in this field.
In the end, there is always the risk that a guarantor may end up paying part of the debtor’s debt. If an early agreement is reached with the bank, preferably before any court procedures have occurred, the chances are the monetary damage will be much less.
We all may become guarantors or need a guarantor someday. The key to minimizing the potential of suffering losses in these situations is to be aware when any impending problem begins and contact a qualified lawyer promptly.
