What Happens to the Guarantor When the Borrower Goes Bankrupt?

When someone agrees to act as a guarantor on a loan, they take on real financial risk. But what happens when the borrower goes bankrupt — and the guarantor ends up footing the bill years later? Does the guarantor have any right to recover what they paid? This case explores exactly that scenario, and the court’s answer offers important clarity: a discharge in bankruptcy does not automatically wipe out what a borrower owes to the person who guaranteed their debt.

By Adv. Yarin Ravivo with the assistance of intern Yehonatan Abuhassira

Background:

This case sits at the crossroads of two areas of law that can pull in opposite directions: guaranty law and insolvency law. Under guaranty law, a person who pays off someone else’s debt has the right to seek reimbursement from the original borrower. Under insolvency law, a borrower who goes through bankruptcy can receive a discharge — a legal release from their debts — and start fresh. The tension sharpens when the guarantor makes a payment after the borrower has already entered insolvency proceedings or received a discharge. In those cases, the question becomes: can the guarantor still sue the borrower to recover what they paid?

The Facts of the Case:

The plaintiff (the “Guarantor”) had signed a bank guarantee back in 1999, agreeing to back a loan taken by the defendant (the “Borrower”). For years, nothing happened. Then, in 2016, the Borrower entered insolvency proceedings. Those proceedings concluded in 2023 with the court issuing a final discharge order — legally releasing the Borrower from her debts.

In the meantime, in 2018 — two years after the insolvency proceedings began — the bank came to the Guarantor and demanded repayment of the outstanding loan balance. After legal action was brought against him, the Guarantor settled with the bank in 2020 and paid the agreed amount, with the settlement receiving the force of a court judgment.

The Guarantor then turned to the Borrower and sued for reimbursement — both the amount he had paid the bank, and the legal costs he had incurred along the way. The Borrower’s response was straightforward: the debt owed to the Guarantor, she argued, was a “contingent debt” that had effectively been created back in 1999 when the guarantee was first signed. Since the Guarantor had not submitted a proof of claim during the insolvency proceedings, she argued, the discharge order barred his claim entirely.

The Legal Question:

When exactly does a guarantor’s right to reimbursement come into existence? Does it arise the moment the guarantee is signed? When the lender first demands payment from the guarantor? Or only once the guarantor has actually paid? And does the discharge order in a bankruptcy case block the guarantor from pursuing the borrower for those payments?

The Decision:

The court ruled in favor of the Guarantor. While insolvency law does recognize “future” or “contingent” debts as claimable within bankruptcy proceedings, the court drew a careful distinction. The Borrower’s debt to the Guarantor does not crystallize at the moment the guarantee is signed. Instead, it comes into being when the lender first demands payment from the guarantor. From that point, a potential right to reimbursement exists. That right solidifies into an enforceable claim only once the guarantor has actually made the payment.

Since the bank’s demand on the Guarantor came in 2018 — after the insolvency proceedings had already begun — the debt to the Guarantor fell outside the scope of those proceedings. The discharge order, therefore, did not protect the Borrower from the Guarantor’s claim.

The court also noted an additional basis for its ruling: even if the discharge might otherwise have applied, the Borrower was estopped — legally barred — from relying on it. She had never listed the Guarantor as a creditor in the insolvency proceedings and had never informed him that those proceedings were underway. This failure to act in good faith meant she could not now use the discharge as a shield against his claim.

Summary:

This ruling sharpens the line between two very different kinds of debt: a theoretical, contingent obligation that arises simply because a guarantee exists, and an actual, enforceable debt owed by the borrower to the guarantor. The court confirmed that the latter only comes into being when the lender first calls on the guarantor to pay — and becomes a real, actionable claim only once that payment is made.

The message from this judgment is clear: a discharge in insolvency proceedings is not a blanket protection against a guarantor’s reimbursement claim when that claim was born after the insolvency order was issued. In those circumstances, the guarantor’s right of reimbursement remains fully intact — and can be pursued outside the insolvency process altogether.

(Civil Case (Rishon LeZion) 58034-03-24 Yevgeni Galaktionov v. Vladimir Narinsky)