A new way to clean up the default loan mess

The new laws related to loan repayment, being introduced by the government, could make life easier for defaulters.

A new way to clean up the default loan mess

Taking a loan is a financial decision that must be carefully thought through. While on one hand it can offer immediate funds when you need them, a loan will always hang over your head as a liability until it is repaid. However, individuals who are genuinely unable to repay their loans have an even harder time. In addition to facing a serious financial crunch, they are also constantly hounded by banks. 

This, however, is expected to change in the near future. The government has started laying down a new process, enabling individuals to declare bankruptcy, to manage a financial crisis in a more structured way. This will be a welcome change from the current method, which forces individuals to repay loans, even when they don’t have the funds to do so. 

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This move aims to make repayment rules more humane for everyone, from small-time shop owners and farmers, to middle class individuals, who are facing a genuine financial crunch from something like unemployment.


What are the current laws on bankruptcy?

  • Laws related to Bankruptcy and money recovery have been in existence, in some form, for many years now; however, they have not been used often. 
  • To recover dues, banks generally approach Debt Recovery Tribunals (DRTs), which fall under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi). 
  • Additionally, jurisdiction for such cases tends to lie with district judges.

Last year, the Parliament enacted the Insolvency and Bankruptcy Code (IBC), which made provisions for individuals to declare themselves bankrupt. However, till date, only big and small corporate entities have come under this ambit. The reason for this is that these laws are usually state specific, and most individuals are unaware of these because they can be quite confusing. 

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With the ministry of corporate affairs and the Insolvency and Bankruptcy Board of India now opening up discussions, rules for individual borrowers can be laid out better as well. 

In addition to this, laws have been passed to regulate the means through which banks can recover dues. These laws spell out what collection agencies, hired by banks, can and cannot do, including- 

  • Maintaining customers’ privacy
  • Not resorting to uncivilized or unlawful means for loan recovery
  • All conversations between debt collectors and customers to be recorded after informing the borrower etc. 

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Under these rules, customers can also take the recourse of Lok Adalats for settlement of personal loans, housing loans, credit card bills etc., below 10 lakhs. Additionally, banks must honour the Lok Adalat’s verdict. 

What is filing for bankruptcy? 
Filing for bankruptcy is like a legal announcement stating you are in no position to pay your debts in near future. In India, it is governed by two acts:

  • Presidency Towns Insolvency Act, 1909 which is applicable in Chennai, Mumbai and Kolkata.
  • The Provincial Act, 1920 which is applicable in the rest of India.

Filing for bankruptcy can help debtors start afresh. With this legal approach, thy can avoid being constantly hounded by creditors. Here are the steps you need to take if you plan to file for bankruptcy.

  • Do the accounting: The filing must be done in a court, and you would be required to provide proof in the form of a balance sheet. You must make a detailed disclosure of all your assets and liabilities, which will be examined in court.
  • Hire a lawyer: Legal advice is necessary here. So, hire an expert to study your assets and liabilities. Only then, he or she can explore chances of winning the case. You can also get advice on individual filing if you are married.
  • File the petition: After filing the petition under the correct lawsuit, you will legally acquire the status ‘bankrupt’. Once this is done, your creditors will be unable to harass or hound you to paying off your debts.




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