By: Rabbi Max Sutton, Rosh Bet Din Aram Soba

Extending a loan is recognized by the Torah as a great act of kindness. Sometimes, however, a lender will require some sort of guarantee to ensure return of the loan. This is commonly achieved by involving a guarantor. When a third person agrees to pay a debt owed by another in the event the debtor does not pay, a guaranty relationship is created. Although the concept seems simple, complex situations can arise making it quite difficult to determine the rights, obligations, and liabilities of a guarantor. The following cases illustrate the brilliance of Hashem’s Torah, by presenting logical solutions based on Torah Law. The information in this article is based on true stories with only the names and slight details changed.

Case #1   Three Loans and a Guarantee

Irving had borrowed a total of $350,000 from Rich. The loans were given in three installments. The first loan was for $150,000 to which David signed as a guarantor. The two subsequent loans were each for $100,000 and transferred from Rich to Irving without any guarantee. Irving who was honest and conscientious, paid Rich back the sum of $200,000 before his real estate firm came to a complete standstill. With a balance of $150,000 outstanding, Rich turned to David the guarantor for immediate payment. David refused to pay, explaining that since he guaranteed the first loan of $150,000, the first payment rendered by Irving for $200,000 covered the loan he guaranteed. Therefore, the balance of $150,000, while happening to be the same sum as the loan he guaranteed, was not the loan to which he had committed. Richard counterclaimed that the details David presented to the Bet Din were unimportant, since the bottom line was that Irving owed him $150,000 and David had guaranteed that sum. How should the Bet Din rule; in favor of Richard or David?

Case #2   The Favored Guarantor

Abe was in desperate need of funds to help his business stay afloat. He reached out to his dear friend Harvey to advance him a loan of $200,000. Harvey was quite reluctant at first, but eventually agreed to forward the sum if Abe could provide two guarantors for the loan. Simon and Jerry were designated as the guarantors, and they signed their names to the guarantee. Three years passed and the time came for Abe to repay Harvey the $200,000. Abe was unable to come up with the funds so Harvey attempted to collect from Simon and Jerry, each of whom was individually responsible for 100,000. However, in the interim three years since the loan, Jerry’s business suffered numerous financial setbacks and he pleaded with Abe, the borrower, to participate in his $100,000 portion of the guarantee. Abe managed to raise $50,000 and Jerry supplied the other $50,000, enabling Jerry to render payment to Harvey, thereby satisfying his $100,000 obligation. Harvey then attempted to collect from Simon, the other guarantor, but he refused to pay the full sum of $100,000. Simon explained that the $50,000 which Abe raised to help Jerry pay his guarantee should have been applied directly towards payment of the loan rather than as partial satisfaction of Jerry’s guaranty commitment. Therefore, the balance of Abe’s loan is $150,000 for half of which he is liable. He was therefore only willing to pay $75,000 to satisfy his share of the obligation. Is Harvey entitled to collect $100,000 from Simon or only $75,000? Does Jerry have to come up with another $25,000?

Case #3   An Oral Agreement

Alan, owner of a chain of retail stores in the Tri-State area, ordered $175,000 worth of merchandise from Victor. The terms of payment agreed upon were the standard 60 days, yet Victor was concerned due to Alan’s recent record of late payment. Hence, a day or two after he shipped the goods, Victor approached Alan’s brother-in-law Joseph who verbally guaranteed payment if Alan should by chance default. Unfortunately, Alan paid only $125,000 before his business filed for bankruptcy, and Victor summoned Joseph to Bet Din for the balance. Joseph claimed that it was unreasonable to hold him liable for $50,000 based on a mere conversation. Victor was convinced he was owed the money and argued empathetically for his $50,000. Does Joseph owe Victor the $50,000?

Torah Law

There are two basic types of guarantee arrangements. The first is known as an ordinary guarantor (arev). An ordinary guarantor is a third party that agrees to be responsible for a debt only if the principal debtor defaults. Hence, the creditor is required to attempt to collect from the debtor, and only after he fails to pay is the guarantor held responsible[1]. The second type of a guarantee relationship is known as a surety-ship(arev kablan). This arrangement enables the creditor to demand payment from either the debtor or the surety, whichever he chooses. The creditor need not exhaust any legal remedies against the principal debtor before holding the surety responsible for payment. Even if the debtor can make payment, the creditor has the right to collect from a surety the moment the debt is due[2]. Once the debt is paid by either a guarantor or a surety, they may then pursue all legal remedies to collect from the debtor the money they laid out to the creditor on his behalf[3].

According to the ruling of the Shulhan Aruch, when a lender extends more than one loan to a borrower, the borrower must specify at the time he pays the lender which loan he intends to pay off. Then, if the lender expresses consent, the specified loan is rendered as paid. If, however, the lender does not agree, or if no specification is made, the lender reserves the right to use the payment towards the loan of his choice. Hence, while the borrower may have intended to pay off the secured loan releasing his guarantor from liability, the lender may direct the payment to an alternate loan for which he has no security[4]. He may then proceed to collect from the guarantor, even though the borrower intended to release him from responsibility. The rationale behind this ruling[5]is that since both loans are due to the lender, he rightfully has the advantage of deciding toward which loan the money should be credited. Hence, both a surety and a guarantor are still liable to make payment to the lender, for in essence, the loan they had guaranteed was never paid.

As aforementioned, the primary difference between a guarantor and a surety is that while a guarantor is only secondarily responsible for the debt, a surety acts as a primary debtor. Since he agreed to be responsible for the debt even if the borrower does not default, his legal status is no different than that of a borrower. Hence, when a lender demands payment from a surety, from a legal standpoint, it is irrelevant where he draws the funds from in order to satisfy his obligation. Therefore he may even collect the amount due from the borrower he guaranteed. As a result, if two sureties guaranteed a loan, even if one of them collected from the borrower in order to pay the lender, the other surety is still liable for the full amount he guaranteed. On the other hand, a guarantor who is only secondarily responsible for the debt is liable to pay only if the borrower fails to come up with the funds. As a result, if two guarantors signed on a loan and one of them collected from the borrower to pay the lender, the funds received from the borrower are to be applied towards payment of the original loan, rather than towards the fulfillment of the guarantor’s obligation. The balance outstanding to the lender is then paid by the two guarantors equally[6].

According to the ruling of the Shulchan Aruch, a guarantor or surety agreement need not be in writing to be enforceable. Although it is always advisable that an agreement be made in writing, an oral commitment from a guarantor suffices to make him responsible for the loan[7]. The only qualification regarding an oral guarantee is that it must be verbalized before, or at the time the funds are transferred from the lender to the borrower[8]. If, however, the money was already transferred and thereafter a verbal guarantee was attempted, the guarantee is not enforceable. The reason for this requirement is that a guarantor does not resolve and obligate himself orally unless the loan is made on his trust. When a guarantee is verbalized prior to or at the time of the transfer of funds, the guarantor enjoys the satisfaction of being trusted by the lender. The satisfaction the guarantor derives from knowing he is being trusted elicits his full acceptance of responsibility and formalizes the agreement even though no contract was signed[9]. If, however, a loan or merchandise is transferred before the verbal commitment is attempted; the subsequent oral guarantee is unenforceable.

Verdict #1   The Upper Hand

Since Irving, the borrower, failed to specify that the payment was to be applied towards the loan that David guaranteed [and Rich did not agree to this specification], Rich may collect the $150,000 balance from David. As the lender, Rich has the upper hand, and can rightfully apply Irving’s payment towards the unsecured loan. As per the decision of the Bet Din, David paid the $150,000 to Rich and is presently attempting to collect from Irving the money he had laid out on his behalf.

Verdict #2   Ordinary Guarantors and Equal Obligations

After clarifying that Simon and Jerry were only ordinary guarantors, the Bet Din ruled in Simon’s favor by reducing his payment obligation to $75,000. Since Abe was the primary debtor, he had no right to assist one guarantor over the other. Hence Jerry, who collected from Abe $50,000, may not apply the full sum towards his $100,000 guarantor obligation. Rather the $50,000 is to be applied towards the initial loan of $200,000 leaving a balance of $150,000. As guarantors, Simon and Jerry must pay $75,000 each as Abe is presently unable to pay back the loan.

Verdict #3   Trust Me

As discussed in Torah Law, an oral guarantee is binding. It is, however, required that the guarantee be verbalized before or at the time the loan is extended. Since Victor spoke with Joseph only after he shipped the goods and essentially already extended credit, the guarantee is not enforceable. An oral agreement is only binding when the guarantor is trusted and the money or merchandise is advanced at his behest. Hence, Joseph was exempt from making payment.

Our Personal Guarantee

We hope that presenting these cases, and their halachic resolutions, will broaden public awareness and provide practical insights into a guarantor’s rights and responsibilities from a financial perspective. In a spiritual sense, we are also guarantors. Rabbi Akiba teaches that a person’s soul serves as a guarantor for his physical body[10]. If one uses his body to indulge in forbidden activities, the soul must ultimately come in judgment before Hashem. On the other hand, if one uses his body to live properly, he earns great merit for his soul in this world and the next. Hashem conducts this world much like a business. For the diligent, there is opportunity to make great profit. For the negligent, eventually all debt will be collected. May Hashem guide us to live according to the precepts and values of the Torah each and every day of our lives.

[1]Shulchan Aruch 129:8

[2]ibid 129:15

[3]ibid 130:1

[4]ibid 83:2

[5]Bet yossef 83:2

[6]Emek Hamishpat 30, Shimru Mishpat 5

[7]Shulchan Aruch 129:5:2


[9]Baba Batra 176:, Bet Yossef 129:2

[10]Avot 3:16