Are there any Illinois or federal laws affecting how we can collect debts from a co-signer of a loan, versus a guarantor? Does one provide better risk coverage than the other?

Yes, in most cases a lender’s collection rights will differ based on whether it is collecting from a cosigner or a guarantor, and in the case of a guarantor, whether the guarantor is a “guarantor of collection” or a “guarantor of payment.”

In many cases, it is preferable for a lender to require a cosigner rather than a guarantor, because unlike a cosigner, a guarantor’s liability would be secondary to the primary borrower’s liability. For example, under both the Illinois Motor Vehicle Retail Installment Sales Act and the Illinois Retail Installment Sales Act, a lender may collect directly from a cosigner, but cannot collect from a “guarantor of collection” until the lender has first attempted to collect the debt from the primary borrower “by diligently taken all ordinary legal means” — which includes not having received full payment from the primary borrower, or if the primary borrower is insolvent, “or [if] it is otherwise apparent that it is useless to proceed” against the primary borrower. (The two laws are silent as to a “guarantor of payment,” leading to the reasonable inference that these rules do not apply to such guarantors.)

The Uniform Commercial Code (UCC) expressly distinguishes between “guarantors of collection” and “guarantors of payment.” When the UCC applies to a transaction, it similarly permits a lender to collect a debt from a “guarantor of collection” only after the lender shows that: “(i) execution of judgment against the other party has been returned unsatisfied, (ii) the other party is insolvent or in an insolvency proceeding, (iii) the other party cannot be served with process, or (iv) it is otherwise apparent that payment cannot be obtained from the other party.” For a “guarantor of payment,” on the other hand, the UCC provides that the lender may collect the debt when it is due, without first requiring debt collection efforts to be directed at the primary borrower.

We note that this guidance is a general response to a general question. An analysis of the law of cosigners and guarantors depends on the type of transaction, the type of collateral (if any) and the specific language in a promissory note, loan agreement and/or the guarantee. For more information, we recommend reading our article, Cosignors: Illinois Versus Federal Law.

For resources related to our guidance, please see:

Motor Vehicle Retail Installment Sales Act, 815 ILCS 375/18 (“ . . . a parent or spouse or any other person listed as an owner of the motor vehicle on the Certificate of Title issued for the motor vehicle who co-signs such retail installment contract may be held liable to the full extent of the deferred payment price notwithstanding such parent or spouse or any other person listed as an owner has not actually received the motor vehicle described or identified in the contract and except to the extent such person other than a seller or holder, signs in the capacity of a guarantor of collection. The obligation of such guarantor is secondary, and not primary. The obligation arises only after the seller or holder has diligently taken all ordinary legal means to collect the debt from the primary obligor, but has not received full payment from such primary obligor or obligors, or after the primary obligor has become insolvent, or service of summons cannot be obtained on the primary obligor, or it is otherwise apparent that it is useless to proceed against the primary obligor.”)

Retail Installment Sales Act, 815 ILCS 405/19 (“ . . . a parent or spouse who co-signs such contract, agreement or instrument may be held liable to the full extent of the deferred payment price notwithstanding such parent or spouse has not actually received the goods sold or services furnished under such retail installment transaction and except to the extent such person other than a seller or holder, signs in the capacity of a guarantor of collection. The obligation of such guarantor is secondary, and not primary. The obligation arises only after the seller or holder has reduced his claim against the primary obligor and execution has been returned unsatisfied, or after the primary obligor has become insolvent or it is otherwise apparent that it is useless to proceed against him.”)

Uniform Commercial Code, 810 ILCS 5/3-419(a) If an instrument is issued for value given for the benefit of a party to the instrument (‘accommodated party’) and another party to the instrument (‘accommodation party’) signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument, the instrument is signed by the accommodation party ‘for accommodation’.

Uniform Commercial Code, 810 ILCS 5/3-419(d) (“If the signature of a party to an instrument is accompanied by words indicating unambiguously that the party is guaranteeing collection rather than payment of the obligation of another party to the instrument, the signer is obliged to pay the amount due on the instrument to a person entitled to enforce the instrument only if (i) execution of judgment against the other party has been returned unsatisfied, (ii) the other party is insolvent or in an insolvency proceeding, (iii) the other party cannot be served with process, or (iv) it is otherwise apparent that payment cannot be obtained from the other party.”)

Beebe v. Kirkpatrick, 321 Ill. 621, 540–41 (1926) (“In this state contracts of guaranty of negotiable instruments are of two kinds: Contracts guaranteeing the collection of the notes, and contracts guaranteeing the payment of the notes. A contract guaranteeing the collection of a note or debt is conditional in its character, and the guarantor thereby undertakes to pay the debt upon condition that the owner thereof shall make use of the ordinary legal means to collect it from the debtor with diligence but without avail. A contract guaranteeing the payment of a note or a debt is an absolute contract, and by it the guarantor undertakes, for a valuable consideration, to pay the debt at maturity if the principal debtor fails to do so, and upon it, if the debt is not paid at maturity, the guarantor may be sued at once.”)