Issue
The issue at hand is the possible courses of action for Helpful bank against Jo-Jo who has defaulted on her loan. The issue is complicated by the existence of several other people who co-signed the loan. Often, banks offer loans with option of securities that can be acquired and used to pay for the loan in case of default. Given there are three parties involved in this case, there are issues regarding the action that the bank can take on the defaulter as well as on the co-signees. Another issue is the defense available for each of the parties involved.
Rule
An arrangement between a debtor and a creditor is known as a guaranty. A guarantor is a third party that agrees to take on the responsibility of paying the loan should the debtor default. The creditor may only seek to collect the amount owed from a guarantor after failing to collect from the debtor. Guarantors have several rights. The first is the right of contribution. If there is more than one guarantor, the contract needs to specify the portion of the loan that each guarantor should be responsible for. Should one guarantor pay more than their portion in the contract, they have the right to recover this amount from the other guarantors. The second right pertains to subrogation. This allows the guarantor to recover from the debtor what the guarantor has paid for the debtor. The right of reimbursement allows the guarantor to recover out-of-pocket expenses in paying the debtors debt. The terms of the guarantee document determine other relationships that exist between the parties that enter into a guaranty contract.
Application
In this case, the bank offered Jo-jo an unsecured loan. The bank does not have collateral from the borrower. The guaranty agreement was necessary to allow the bank a possible recourse in case Jo-Jo defaulted on her loan. Since this came to pass, the bank now has the option of seeking to recover from the guarantors. The bank is, therefore, pursuing the correct course of action by seeking recovery from the guarantors. Tommy is currently unemployed and does not own assets that can be used in repaying the loan. Therefore, he is not an appropriate party for recovery. Jo-Jo’s parents now have to step in and commit resources towards the recovery of the loan. There are several possible defenses that Jo-Jo can mount. One includes contract modification which does not seem applicable in this case. This defense is mounted if the creditor altered the contract without the consent of the debtor. Guarantors, on the other hand, can claim fraud, duress, and bankruptcy as possible defenses. If the guarantors were interred into the contract fraudulently, they can opt-out of the engagement. Further, if the guarantors can prove they entered into the contract under duress, the contract may be termed as null and void. Further, if guarantors file for bankruptcy, the creditor may not be able to pursue them for payment.
Conclusion
Of the possible guarantor defenses, none seem to hold weight. The guarantors are close family members Therefore, the probability of fraud and duress is quite low. Further, although Tommy is not in a sound financial position, there is no evidence to suggest his parents are in the same condition. Therefore, the bank should collect the amount owed from Jo-Jo’s parents. The Joneses have a right to claim the portion of the recovery that was supposed to be paid by Tommy from him later on. Further, should Jo-Jo file for bankruptcy, both her guarantors are entitled to lay claim of the business’s assets as creditors. They should, therefore, get compensated first on liquidation of the assets.