What happens when you don't repay loans

To own a house is every layman's dream and aspiration. When compared to the past, these days, it is possible to realise such dreams with loans. When you are trying to own a house for the first time, you will need to shell out all your savings. Many are going in for loans, according to their capacity, and buying or constructing a house.

After struggling to own a house, what if you are unable to bear the burden of Easy Monthly Instalment (EMI)? Supposing you lose your job at this very point of time or you are taken seriously ill. Just imagine. Your financial condition will be upside down. You will not be in a position to repay the loan. It is necessary to know what to do in such circumstances.

According to Reserve Bank of India (RBI) rules, if a loan is not repaid for 90 days in a row, it is categorised as Non-Performing Asset (NPA). At this point, the bank will send notice to the account holder concerned, to repay the pending loan amount, at one go. If you do not pay this, it will warn you of proceeding legally.

Two months after first legal notice, (meaning five months after not repaying loan amount), another legal notice will be sent. The notice is to inform about the estimated value of the house and for auctioning it. A date is fixed for auctioning, which is usually one month after the notice is issued. Normally, in housing loans, there are not many NPA cases. So banks do not take immediate action and keep pressurising the account holders. Even then, if the person does not respond, then legal action is taken.

To protect the usefulness of the loaning agencies, Parliament has approved a law in 2002, called Survey C. According to this, if a housing loan is not repaid, the bank will seize the property and put up for auction. Prior to this, banks do examine other options. Their job is to try to collect the pending repayments. The extreme option is taken only when the others have failed. Because, the primary job of a bank is to give loans and try to get the amounts back.

But if the bank seizes the house and sells it, the problem does not end there. If the house is sold for an amount that is greater than the actual debt, the remaining money is credited in your account. However, if the amount is less than the debt amount, than you will need to still repay the remaining amount.

You might need to pay Capital Gains interest towards the amount that has been credited in your account. Selling it within 36 months from the date of buying, gaining profits (after subtracting the invested amount), you will need to pay tax on the gains on Capital income. Which means, these profits should be shown in your annual returns and you should pay the tax, if it incurs any.

If you sell the house, three years after you have bought it, the profit is less due

to inflation. To avoid tax on interest on Capital Gains you can invest the amount in government bonds. Or you can buy another house within six months, with the amount.

If you have to sell the house five years after buying it, you must remember that the tax exemption that you enjoyed over the loan, under Section 80 C, will no longer apply. If the loan is not cleared, the bank will then auction the house and sell it.

According to Credit Information Companies Act 2005, concerning all loans by financial institutions and failure of repayments, CIBIL and other information gathering units are notified. Your credit score will automatically reduce, in case of failure to repay the loan.

If housing loan is not repaid within a certain date, banks will seize the house and auction it. At this juncture, it is not wise to argue with the bank officials or representatives. Explain the situation and behave respectfully with them, to resolve the problem in an amicable manner, if possible.

There are not many cases, where housing loans are not cleared. If such a situation arises, it is necessary to study the reasons behind it, like losing the job or illness. These are temporary situations. So approach the bank officials and explain the situation to them. Also assure them that you will clear the loan as soon as possible. If you have taken a loan previously and cleared it on time, you can show proof of this. If the bank officials are satisfied, they will revive your loan.

If the bank refuses to give you more time or revive the loan, you can approach another bank. If the other bank is giving a loan for lesser rate of interest, you can clear this loan.

If you have any other investments like Fixed Deposits, Mutual Funds or equities, and you are unable to repay loan, you can transfer or divert those funds towards this. As such, your house will remain intact.

If there is no chance of protecting your property, you will have to sell it. Instead of waiting for the bank, you can do it yourself. You will have the chance to sell it to the right party, at the right price. Sell it off for a good price, clear the bank loan and with the remaining amount, buy a new house in the outskirts of the city.

There is no need to give up your rights, just because you owe the bank some amount. Before selling the property, banks should give sufficient time to the debtors. Property of those who do not repay loan for at least 90 days in a row, is considered as NPA. Banks have to give notice after 60 days. Which means, you had two months of time to repay. The notice, stating that your time limit is extended for another 30 days, with a warning to auction the property, is given. If the property has to be sold, banks authorities will send valuators to the spot to evaluate the property. Also, they have to mention in the notice, where, when and for how much the house is being auctioned. If you think that the amount is not right, you can express you objections. Banks should respond to this, within seven days. If you are able to show a better offer, the bank can rethink.

If it is personal loan, the pressure is more when EMI is not paid on time. A private bank employee, Preethi Garg has explained that from the date that EMI is not paid, the debtor will keep getting calls from the bank continuously. They will also approach your office. If you are able to send them away with some promise, the problem is not over yet. This is only for that day. The same scene repeats the next day. If you have not repaid even after 30 days, this pressure is increased. They ask you respectfully and bring about a lot of pressure.

The situation worsens after 60 days for such non-repayment. Anyone can call you and ask you to clear the loan. The calls might come at any moment, during the day or night. If you have taken the loan from a Non-Banking Financial Corporation (NBFC), the situation is worse than this. Collection workers will keep coming over to your house and office. They will put up the matter in social media, like newspapers. If the deadline of 90 days is over and property becomes NPA, it is handed over to special agencies. These agencies will bring about mental and social pressure and even threaten. If still you do not pay, you will get court notice under Section 58, which is punishable.