Legal Action Against Loan Defaulters in India

Oct 30th 2023
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Legal Actions on Loan Defaulters in India: Understanding Consequences

Legal Action Against Loan Defaulters in India, Like with any other type of loan, the borrower of a personal loan is legally required to repay the lender when the principal and interest are due. The defaulting borrower faces legal repercussions if they don't comply. The borrower's credit rating will drop as a result. If the borrower's credit rating drops, it will be exceedingly difficult for them to obtain loans in the future.

What Could Be The Repercussions of Not Repaying a Personal Loan on Time?

In the event that borrowers miss payments for a legitimate cause, they are entitled to a number of protections and guidelines designed to assist them with repayment. The RBI's guidelines safeguard borrowers' rights while also assisting banks and other financial institutions in receiving payments.

In India, a personal loan is considered an unsecured loan, and nonpayment of the debt makes the borrower a personal loan defaulter. They then become part of a list of defaulters, which makes getting loans in the future very difficult. Personal loan default has a number of repercussions, such as:

1. A Serious Drop in Credit Score

When determining your CIBIL score for a personal loan, lenders regularly provide credit bureaus with updates on your repayment habits. Your credit score may suffer if you are careless in repaying your personal loans. In actuality, your credit score may drop by 50–70 points for each late payment on an equivalent monthly installment (EMI). Relentlessly missing loan payments can undoubtedly harm your credit ratings over time, making it harder and harder to raise them.

2. Legal Action

For those of you who do not know, there might be legal repercussions if you do not repay your loan within 180 days. Under Section 138 of the Negotiable Instruments Act of 1881, lenders are permitted to bring legal action against you and serve a notice of default on the loan. Furthermore, under Sections 403 and 415 of the Indian Penal Code, 1860, the lender may pursue criminal proceedings against you if they conclude that you are a willful defaulter.

3. Notification Issuance

When a borrower misses payments on a loan, the lender notifies the borrower and demands repayment. This usually happens following the first or second late payment. In order to make this easier, the lender frequently assigns a designated person to follow up with the borrower by phone or text, pleading with them to make their payments.

4. Increase in Financial instability

The increase in your debt load is one of the major consequences of missing loan payments. It extends beyond only your monthly installment when you are unable to make timely payments on your loan. Your outstanding balance is increased by further penalties and late fees, which makes your financial responsibilities even more onerous.

5. Post-dated Cheques Submission

Let's say you don't seek a solution with the lender and you disregard the notices. After that, you will receive a notice from the lender specifying the date on which the bank will receive your post-dated checks. To guarantee that the cheque clears, make sure there is a sufficient amount in the account. If your checks bounce, you may face criminal charges in accordance with RBI rules for personal loan defaulters, which are outlined in section 138 of the Negotiable Instruments Act of 1881.

I am a personal loan defaulter for 10 years. Can I go to jail?

If you are a personal loan defaulter for 10 years, the chances of yours going for imprisonment are low. Loan default is seen as a civil crime, and criminal prosecution is not usually brought in these situations. As a result, legitimate loan defaulters are not imprisoned. It is essential to negotiate with the lender if you are truly unable to return the debt. There are established guidelines and processes in place to deal with situations in which defaulters have good cause for not being able to repay. Those who purposefully break the law or knowingly default on debts are not protected by these regulations, nor are they given any tolerance.

Legal Consequences of Personal Loan Default

In India, there are several procedures and factors to take into account when one defaults on a personal loan. Those are:

  • Check the loan agreement for terms and provisions pertaining to default.
  • Official notices detailing the default and the 180-day payback deadline should be sent to the defaulter.
  • *Hire a debt collection firm to negotiate or collect the debt if the first notices are not returned.
  • When trying to settle an issue outside of court, arbitration or mediation may be quicker and less expensive. If all else fails, you may always file a lawsuit in the proper court. Present any required paperwork and proof of the debt.
  • A judgment is issued to you if the court finds in your favor. This makes debt repayment legally enforceable.
  • Put liens on the defaulter's property, seize assets, or garnish earnings to enforce the judgment.
  • The repayment procedure may get more difficult if the defaulter files for bankruptcy.
  • To guarantee legal compliance and increase the likelihood of success, get advice from a lawyer with experience in debt collection throughout the procedure.

Rights of Loan Defaulters

The borrower has rights even if they are unable to repay the debt. These are the following:

Right to notify

A lender must allow sufficient time for the borrower before pursuing collection of the overdue money or seizing the collateral asset.

Right to fair value

The value cannot be determined only by the lending organisation if the borrower defaults on the loan and the lender seizes the delivered assets. The borrower must also get a fair value notification notifying them of the assessed sale price.

Right to be listened

During the notice period, the borrower is entitled to object to the lender's notice of repossession.

Tight to claim the balance

The borrower may be entitled to the remaining balance if the lending institution receives a high price for the item that they have repossessed.

Right to Be treated courteously

Throughout the debt recovery procedure, the borrower cannot be mistreated, harassed, humiliated, or abused.

FAQs

What are the major RBI guidelines regarding loan recovery?

Loan recovery is one of the RBI standards for personal loan defaulters, with a focus on fair practices, openness, and communication. Lenders are required to abide by the Fair Practice Code and RBI laws.

If a borrower in India is unable to repay their personal loan, may they declare bankruptcy?

If debtors are unable to repay their loans, they may indeed file for bankruptcy. But it's crucial to realise that declaring bankruptcy has dire repercussions and ought to be a last choice.

What Changes Have You Seen Over The Years in India Regarding Personal Loan Nonpayment?

The Indian government has taken several steps in recent years to lessen the burden of loans that are not repaid. 

For example, in 2016 the Insolvency and Bankruptcy Code was passed, making it simpler for lenders to pursue legal action against borrowers who are unable to repay their debts. Additionally, it gave debtors more defence against lawsuits.

The Conclusion

Personal loans in India are given to those who are having financial troubles, and they have to be repaid within a certain amount of time. Make sure you can pay back the loan in accordance with the terms and circumstances before taking out a personal loan. Preventing any payment defaults is crucial. Borrowers should be cautious when choosing a lender because different banks and financial organisations have varied interest rates. By selecting one of the leading loan companies in India, applicants may obtain a personal loan without any hassles. These trustworthy lenders provide customers with a positive borrowing experience by offering adjustable payback terms and competitive interest rates.

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