Will a legal recourse help you for debt repayment failure?

Adhil ShettyBankbazaar.comThere are times when we are unable to pay our loans. The reason can be a temporary financial distress, loss of job, poor planning of finances or illness. Unpaid EMIs piling up usually results in an irrevocable situation of heavy debt and legal entanglement.The legal recourse for resolution of unpaid loans is a long and uncertain procedure in India, and the outcome varies across cases.How and when does legal recourse come into play?Banks have all the rights to take legal recourse, in the form of a civil or criminal case, against defaulting borrowers. Genuine defaulters too can take legal recourse in self-defense. Usually, banks start following up even if a single EMI is missed. If you happen to miss 4-5 EMIs, banks would hand over your details to Asset Reconstruction Agencies (ARCs). ARCs are notorious for harassing borrowers to meet their targets. If they are likely to cross civil language, borrowers can talk to the bank. Borrowers can also request the bank to consider reconstruction of the loan with flexible terms like relaxed EMIs or EMI holidays.However, if the borrower is not turning up, banks can issue legal notice as next step. The Reserve Bank of India states that borrowers should be given 15 days time to respond to the notice through the bank’s Grievance Redressal Committee. The committee would hear the borrower’s clarifications and pass a verdict whether to treat him as a willful defaulter or not.Will a legal recourse help?Filing a legal case may help banks accelerate their recovery process. But defaulters who take up legal course for prolonging and complicating the case may only end up with interest piling up, unless they are proven bankrupt or insolvent. But in that case too, banks have the full rights to recover the amount that is due to them. This is because, a loan is a legal contract in which the borrower agrees to repay the loan with interest. Banks can file even a criminal suit for breaching this law. Who can file insolvency?If you are genuinely out of options when it comes to repaying your loan, you can file insolvency. But one can file an insolvency petition only if his liabilities exceed his assets, making it impossible for him to repay his debts. If a petition is filed on flimsy grounds, or if the borrower is unable to prove that he cannot pay off his debt, the petition will be dismissed. How will be the debt treated on declaring insolvency?On filing petition of insolvency, the court will fix a date for hearing and the borrower will be required to file all books of accounts, income statements, details of his assets etc. The court will investigate on this to ensure that he is genuine and he has made full disclosure of his assets.The treatment of the debt will be as per the court’s verdict. However, if the loan is having collateral, the lender still has all the rights to acquire the mortgaged asset. For non-collateralized loans like personal loans or credit card loans, the lender will have to follow the court's directives.On being declared as insolvent, the court will appoint an officer who will take charge of the property and take decisions on dividing it among the lender(s) to settle his debts. There is no fixed period for legal recourses and the proceedings depend upon the complexity of each case.The advantage of the borrower on declaring insolvency is that the lenders will no longer be behind him for recovery. Also, while the matter is in the court, the lenders cannot file separate suits against the borrower without the court’s permission. What if you are found to be fraudulent?There are many borrowers who complicate the case by suing banks on different grounds if only to prolong the case. Some borrowers may also make it a practice of transferring their assets before filing insolvency petition.However, if revealed, such transactions can be viewed as fraudulent, and stringent criminal procedures can be initiated, if the borrower has been found to make false representations and dishonest intentions.This may also result in publishing of details of defaulters in media and barring them from other business entities in which they are associated, and from borrowing money from any other banks. The bottom lineThe primary thing a borrower should do is to inform the bank about the problem he is facing. Discuss with the banker and come up with a solution. He can look for other options like refinancing the loan from other banks, or any other means like selling his assets to close the loan.A legal course is a long procedure, and can be adopted only if you cannot repay your debt as well as have sufficient evidence to prove the same.