Suretyship & Guarantor. CPA Exam REG

In this video, I explain suretyship and guarantor as it is covered on the CPA exam.
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0:00 Introduction
This video explains the concepts of suretyship and guarantor in the context of financial agreements, often when someone needs a co-signer for a loan (0:46).

Here's a summary:

Purpose: Both roles exist to manage financial risk for lenders (creditors) and enhance the borrower's (debtor's) creditworthiness (3:00). They provide added security that a loan will be repaid, especially if the primary borrower has limited or poor credit history (3:24).
Three Parties Involved: A typical arrangement involves the creditor (lender), the debtor (borrower), and either a surety or a guarantor (the co-signer) (4:29).
Surety vs. Guarantor:
A surety is directly and immediately responsible for the debt if the debtor defaults. The creditor can demand payment from the surety without first trying to collect from the debtor (5:12, 6:08).
A guarantor's responsibility is conditional. The creditor must first attempt to collect the debt from the debtor before demanding payment from the guarantor (6:32, 7:01).
A special type, guarantor of collectibility, is only liable after all legal methods to collect from the debtor have been exhausted (7:55).
Surety's Rights: If a surety pays the debt, they gain certain rights against the original debtor:
Exoneration: The right to ask a court to compel the debtor to pay the debt, relieving the surety of their obligation (11:07).
Subrogation: The right to step into the shoes of the creditor and enforce any rights the creditor had against the debtor, including claiming collateral (11:57).
Indemnification/Reimbursement: The right to be repaid by the debtor for the amount the surety paid (13:11).
All suretyship agreements must be in writing due to the Statute of Frauds (8:36).

Suretyship and guarantee are two distinct concepts in financial transactions, involving three parties: the creditor, the principal debtor, and either a surety or a guarantor.

Surety: A surety is someone who agrees to fulfill the debt or obligation of the principal debtor directly to the creditor. The key aspect of a suretyship is that the surety is immediately responsible for the debt if the principal debtor fails to pay. This means the creditor can directly demand payment from the surety without first having to seek payment from the debtor.

Illustrative Example: Consider a scenario where David borrows $15,000 from Emily with a repayment deadline of July 1st. Frank acts as a surety for this loan. On July 1st, if David fails to repay, Emily can directly approach Frank for the repayment. Frank is liable for the debt, irrespective of whether Emily has tried to get the payment from David first.

Guarantor: In contrast, a guarantor's responsibility is conditional upon the debtor's default. The guarantor promises to fulfill the debtor's obligations only if the debtor fails to do so. The creditor must first attempt to collect the debt from the principal debtor before they can demand payment from the guarantor.

Illustrative Example: In a different scenario, David borrows $15,000 from Emily with the same repayment deadline. This time, Frank guarantees the loan. Here, if David doesn't pay by July 1st, Emily must first exhaust efforts to collect from David before she can ask Frank to pay. Frank's obligation to pay only arises if David defaults and Emily is unable to collect the debt from him after reasonable attempts.

Additionally, there's a special type of guarantor known as a "guarantor of collectibility." This person is only liable if the creditor cannot collect the debt from the debtor after all legal methods (like demand, lawsuit, judgment, and all other legal proceedings) have been exhausted. This adds an extra layer of security for the guarantor, as their liability is only triggered after extensive efforts to recover the debt from the principal debtor have failed.



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