Detailed Answer
(b) A modification by the principal debtor and creditor
in the terms and conditions of their original contract without the
surety’s consent will automatically release the surety if the
surety’s risk of loss is thereby materially increased. Note that a
noncompensated surety is discharged even if the creditor does
not change the surety’s risk. However, a compensated surety is
discharged only if the modification causes a material increase in
risk. Answers (c) and (d) are incorrect because a surety may not
exercise the principal debtor’s personal defenses (i.e., insolvency
and insanity). Answer (a) is incorrect because although a release
of the principal debtor without the surety’s consent will usually
discharge the surety, there is no discharge if the creditor expressly
reserves rights against the surety.