The combination of joint liability and loan agreements has the potential to fall foul of the law to such an extent that the co-debtor cannot be made to pay for the debt.
Banking law in Germany sets strict limits on the ability of banks to secure loans. One example of this is the potential for the guarantee or joint liability arrangement securing a loan to be deemed unlawful and thus invalid, notes MTR Legal Rechtsanwälte, a commercial law firm whose practice includes banking law.
Oldenburg’s higher regional court – the Oberlandesgericht (OLG) Oldenburg – recently ruled in a judgment from June 29, 2023, that a joint liability arrangement securing a loan may be unlawful if the bank ought to have realized that it would lead to the jointly liable second debtor becoming severely overburdened financially (case ref.: 8 U 172/22).
The case heard by the OLG Oldenburg involved a young woman who had co-signed a loan agreement concluded by her partner for 90,000 euros. The monthly repayment stood at 1,000 euros, but the woman’s net monthly earnings were only around 1,300 euros. Her initial understanding was that she was co-signing a loan of just 7,500 euros for the purchase of a new car. In reality, her partner needed a significantly larger loan for the purpose of restructuring other existing loan agreements.
Her reality check came about two years later, after she had separated from her partner. Her now ex-partner was no longer able to pay the installments on the loan, and so the bank turned its attention to her and demanded that she repay the outstanding loan debt to the tune of around 50,000 euros. Despite not being able to afford this, Osnabrück’s regional court ruled that she had to pay up.
This ruling was subsequently overturned on appeal by the OLG Oldenburg, which held that the woman was not required to pay the loan debt. Noting that she had not really been a borrower but rather had only assumed joint liability for the sake of her then-partner, the court found that the bank ought to have realized when the contract was being concluded that this arrangement would lead to her being severely overburdened financially. The OLG Oldenburg went on to conclude that the joint liability arrangement was unlawful and thus null and void, which means the woman will not have to make any further payments.
MTR Legal Rechtsanwälte advises on many aspects of banking law, including guarantees and joint liability, as well as other related issues.