Retirement at risk: why pensioners should think twice before becoming a loan guarantor

pension loans

• Banks can recover loan dues from pension accounts of guarantors.
• Pension loses legal protection once credited to bank account.
• Retirees should avoid being guarantors due to financial risks.

Did our AI summary help?

Acting as a loan guarantor can expose a person to significant financial risk even after retirement. The Jammu and Kashmir High Court recently ruled that banks can recover loan dues from a pensioner’s bank account if the individual signed as a guarantor and the borrower defaulted.

While pension benefits enjoy legal protection from attachment, this protection applies only until the pension is disbursed. Once the pension amount is credited to a retiree’s bank account, it becomes part of the individual’s general funds and can be used by banks to recover outstanding liabilities arising from guarantees, the court ruled.

The protection accorded to pension arises primarily from Section 11 of the Pensions Act, 1871 and the exemption contained in Section 60(1)(g) of the Code of Civil Procedure, 1908. Both provisions reflect a clear legislative policy.

“Pension is treated as a welfare measure intended to secure the subsistence and dignity of a retired employee. Accordingly, it is insulated from attachment or seizure by creditors in execution proceedings. The difficulty arises when pension is no longer in the custody of the State but has already been disbursed to the pensioner,” said Shivam Kunal, Senior Associate, B Shanker Advocates LLP.

What is the case?

A retired Range Officer of the Jammu & Kashmir Forest Department move the High Court after a bank deducted money from his pension account to recover a loan. The petitioner, who was receiving a monthly pension of around Rs 35,350, said the bank withdrew about Rs 4.64 lakh from his account without notice. He argued that the deduction was illegal because pension is protected from attachment under Section 11 of the Pensions Act, 1871.

The bank told the court that the petitioner stood a guarantor for a Rs 15-lakh housing loan taken by two persons, Bandana Kumar and Harjeet Kumar. After the borrowers defaulted on their repayments, the bank-initiated recovery from the guarantor. According to the bank, once pension money is credited to a person’s bank account, it loses the special protection given to unpaid pension dues.

The court said the Supreme Court rulings have clarified that pension benefits remain protected only until they are actually paid to the pensioner. Once the amount is credited to the pensioner’s account, it can be attached to meet legal liabilities, including obligations arising from a guarantee.

The court held that the bank acted within its rights in recovering the defaulted loan amount from the petitioner’s account since he had signed as a guarantor. The matter involved a contractual obligation, the court said while dismissing the writ petition.

“The money was already paid out to the pensioner, i.e. the money had been credited to pensioner account. Once the pension money is credited to the individual’s bank account, it is considered ‘paid.’ At this point, it loses its special status as ‘pension’ and becomes part of the individual’s general personal funds. This means the bank can legally treat the money in the account as reachable assets,” said Shashank Agarwal, Founder, Legum Solis.

What precautions should retirees take?

A guarantee creates a legally binding obligation and the liability of a guarantor is co-extensive with that of the borrower.

“A retiree who depends solely on the pension for livelihood must avoid acting as a guarantor for somebody else’s loan. On account of default in repayment of loan, the pensioner could face various adverse consequences, such as restriction on obtaining Pension Loan in case of urgent requirement and attachment of personal assets if the pension amount is not sufficient to recover the entire outstanding,” said Supriya Majumdar, Partner, Elarra Law Offices.

Before agreeing to act as a guarantor, retirees should carefully evaluate the borrower’s financial stability and repayment capacity. “The loan and guarantee documents should also be reviewed to understand the extent and duration of their liability, including whether the guarantee is limited to a specific amount. Furthermore, retirees must consider the potential impact on their own financial security. In the event of default, recovery proceedings may extend to the guarantor’s personal assets. As such, acting as a guarantor should be undertaken only after fully understanding the legal and financial implications,” said Soayib Qureshi, Partner, PSL Advocates & Solicitors.