ExpertHard1 markMultiple Choice
CPA · Question 16 · Area II: Business Law
Which of the following defenses would effectively release a gratuitous surety from liability to a creditor?
Which of the following defenses would effectively release a gratuitous surety from liability to a creditor?
Answer options:
A.
The debtor filed for bankruptcy.
B.
The creditor failed to notify the surety of the debtor's default.
C.
The creditor and debtor agreed to extend the time for payment without the surety's consent.
D.
The debtor misrepresented their financial condition to the surety.
How to approach this question
Distinguish Gratuitous Surety (unpaid friend) vs. Compensated Surety (bonding company). Gratuitous sureties are favorites of the law; ANY change to the deal releases them.
Full Answer
C.The creditor and debtor agreed to extend the time for payment without the surety's consent.✓ Correct
A gratuitous surety is discharged if the creditor and principal debtor materially alter the contract (e.g., extending time) without the surety's consent. For a compensated surety, the discharge is only to the extent of the loss suffered.
Common mistakes
Applying the 'compensated surety' rule (only released if harmed) to a 'gratuitous surety' (released by any change).
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