A small business owner cosigns a $300,000 equipment loan, the borrower defaults, and the borrower files Chapter 7 the same week. Whether the cosigner owes everything, nothing, or a discounted figure depends on three bodies of law colliding inside one fact pattern.
A creditor lending to a shaky debtor often demands a third party stand behind the loan. The distinction between surety and guarantor controls when the creditor can come knocking.
Surety vs. guarantor. A surety is primarily liable: the creditor can demand payment from the surety the instant the debtor defaults, no need to sue the debtor first. A guarantor of collection is secondarily liable: the creditor must first pursue the debtor (judgment, levy, return showing nothing collectible). A guarantor of payment is treated like a surety.
KEY: Cosigner = surety = primary liability. Creditor can collect from the surety immediately on default without touching the debtor first.
- Exoneration. Before paying, the surety can ask a court to compel the debtor to pay first.
- Reimbursement. After paying, the surety recovers from the debtor dollar for dollar.
Common mistakes
- Treating a guarantor of collection like a surety. A surety pays on demand. A guarantor of collection pays only after the creditor exhausts remedies against the debtor. Trap: the question labels the party "guarantor" and the wrong answer treats the obligation as immediate.
- Ignoring the surety's partial discharge when collateral is released. Creditor releases $30,000 of collateral without consent on a $50,000 debt. Surety is liable for $20,000, not $50,000 (no discharge) and not zero (full discharge).
- Forgetting automatic perfection for PMSI in consumer goods. Retailer sells a washer on credit; no UCC-1 filed. Candidates conclude unperfected and rank last. Wrong, PMSI in consumer goods perfects automatically.
Bottom line
- Cosigner (surety) is primarily liable; creditor can demand payment immediately on default. Guarantor of collection is secondarily liable; creditor must exhaust debtor remedies first.
- Article 9 attachment needs three things: security agreement (or possession), value given, and debtor has rights in the collateral. Skip one, no security interest.
- Perfection means filing a UCC-1, taking possession, or control (deposit accounts). PMSI in consumer goods perfects automatically at attachment with no filing.
- PMSI in non-inventory needs filing within 20 days; PMSI in inventory needs filing before delivery plus notice to prior secured parties.
Exam shortcut
For a cosigner or guarantor scenario, identify the type first (surety/guarantor of payment = primary; guarantor of collection = secondary), then check for discharge triggers (released collateral, material modification). The trap answer almost always ignores the discharge. For Article 9 priority: Is each interest perfected? Is any of them a PMSI? Was the PMSI timing satisfied (automatic for consumer goods, 20 days for non-inventory, before-delivery-plus-notice for inventory)?
The full lesson (about 3,010 words, 20 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.C1
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