What happens if a borrower fails to repay a personal loan? In the case of a secured loan, such as a home or vehicle loan, the lender has the right to seize the collateral used to secure the transaction. What legal remedy does a lender have in the event of an unsecured loan, such as a personal loan, to collect the debt from the borrower? Because an unsecured loan provides no security to the lender, the borrower is not immediately threatened by the lender's claim on their assets. An unsecured loan does not require any collateral or a mortgage as a guarantee of repayment and is purely dependent on the creditworthiness of the borrower. As a result, assets are unable to be appropriated. Recovery is dependent on the contract term of dispute settlement and through the legal procedure.
This implies that the lender does not have the legal authority to seize any of your assets on their own. A borrower's assets can only be attached when the due procedure has been followed and a court order has been issued on whatever assets the court deems appropriate. The borrower's assets are beyond the lender's recovery net, and they may only be used to satisfy the debt according to a competent court's assessment and order.
DAMAGE CONTROL IN THE FIRST INSTANCE
When a loan is delayed for an extended period of time, lenders generally become more concerned about recovery. If a borrower's account is 90 days past due, it is classed as a non-performing asset (NPA). When a loan account becomes a non-performing asset (NPA), which implies it has not been paid three consecutive EMIs, the lender will initiate legal action. Before beginning legal procedures, the lender will issue a 60-day notice to pay the debt. This is the moment to do everything one can avoid defaulting. If debtors can persuade the lender that defaults are just temporary and that payments will resume shortly, the legal actions may be postponed. As a result, open and honest dialogue with the lender can halt or at the very least postpone any lender-initiated actions.
A LENDER MAY USE A BANKERS' LIEN TO OFFSET DEBT
Many unsecured loans exist, in which the asset is not mortgaged but merely a lien is placed on it, such as safe custody, bond, fixed deposit, shares, mutual funds, and so on. Once a lien is placed on an asset, the borrower cannot sell it until the debt is paid in full and the lender removes the lien. So, what happens if a borrower defaults and is unable to pay his or her debts? If the borrower has contractually consented, the lender may have the right to exercise the banker's lien and the right to set off. A banker's lien is the right of a bank to keep assets transferred to its possession unless the borrower to whom they belonged has consented that this right is waived, such as in the case of jewels held in the bank for safekeeping.
A bank may use the option of offsetting your debts against your deposits. A lender has the authority to set off a borrower's loan against a debt owing to him. For example, if legally agreed, a bank can set against the sums owing by the borrower against the money deposited by the borrower in the bank's accounts. If there are fixed deposits or a savings account with a bank, the bank may be able to recover dues from these accounts in this circ*mstance.
LENDER FILES A LAWSUIT TO RECLAIM MONEY
The lender has no claim to the borrower's property in most cases, but things might change if the lender brings a lawsuit and receives a favourable ruling. Under the Code of Civil Procedure, 1908, a quick action or summary procedure is available for recovering money by the initiation of a suit in a court of proper jurisdiction. The suit's jurisdiction is decided first by territorial jurisdiction, followed by pecuniary jurisdiction. The pecuniary value (total dues claimed by the lender) of the suit becomes a deciding factor on whether the lender will file the suit either in the district court or in the High Court.
When the lender gets a judgment against the borrower from a court of law, he must enforce the judgment through execution proceedings. When the judgment-creditor or decree-holder receives cash or another item given to him by judgement, decree, or order, the execution comes to an end. The borrower can also have a final chance to pay off the debt without having to attach any assets at this point. If the borrower is unable to pay his or her debts, his or her assets may be seized. If the borrower fails to comply with the court's decision, the court may, upon the lender's request, seize the borrower's assets.
FOR LOANS ABOVE RS. 20 LAKH, THE LENDER CAN GO TO THE DEBTS RECOVERY TRIBUNAL
Under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), a lender can file a claim with the Debts Recovery Tribunal (DRT). The RDB Act stipulates that the amount of debt owed should not be less than Rs 20 lakh, therefore this option is only accessible for high-value debts. In instances where In other words, the minimum debt that should be recovered from DRT should not be less than Rs. 20 lakh. The borrower also has the right to be heard and present his facts to the tribunal, which the tribunal might examine before issuing a final ruling. If the DRT deems it necessary, it may issue orders appointing a receiver of the borrower's property/assets, either before or after the award of a Recovery Certificate (RC), or appoint a commissioner to gather details of the defendant/ property respondent's or sell it. If the tribunal grants an order for attachment of the property after reviewing the case history and provided facts, the DRT recovery office may proceed with the attachment and sale of the borrower's assets.
A BORROWER WHO DEFAULTS ON AN UNSECURED LOAN EVEN HAS SOME RIGHTS
The right to adequate notice, the right to be heard, the right to humane treatment, and the right to register a grievance. The Reserve Bank of India (RBI) has established the Fair Practice Code (FPC) to streamline loan recovery practices for banks and financial institutions, in addition to any other contractual rights that an individual borrower may have under the loan arrangement. Banks are not allowed to engage in wrongdoing or to circumvent the legal process for dealing with defaulters. In the event of wrongdoing by banks, NBFCs, or ARCs, the defaulter will have legal recourse. In the case of harassment or pressure by the bank or recovery agents, the borrower may file a complaint with the RBI's banking ombudsman. In situations of persistent harassment, a police report can be filed, or civil court order might be sought.
CONCLUSION
A substantial default, in which the lender must write off a large portion of the debt, can have a big negative impact on the borrower's credit history. It is nearly impossible for a borrower with a low credit history to obtain credit in the future. Even if the debt has been paid later, it will remain on the borrower's credit report for a long time, and improving the credit score will take several years. Though getting a claim on the borrower's asset to recover the unsecured loan's due may be a difficult and time-consuming process for the lender, if it happens, the cost to the borrower will be much more than the due amount because the lender will not only recover the principal but also the interest, penalties, and legal costs.
Borrowers should be proactive in repaying their loans; otherwise, they may face penalties such as high interest, a negative credit rating, late fees, and legal action. Since civil cases are prevalent and allowable in default instances, in extreme instances, however, criminal charges for breach of trust or cheating may be filed. So, be proactive and make some tough decisions about liquidating your own assets and paying off your debts on time and at a lower rate.
