In this blog post, Gurshabad Singh Sandhu, a student from Rayat and Bahra University School of Law, Mohali and pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata describes an individual’s legal remedies if that individual is not able to pay credit card bill or loan EMI. 

What is an Equated Monthly Instalment – (EMI)?

It is a fixed Monthly Installment which is made by the Borrower of the Loan to the Lender. EMI is paid to set off both the Interest and the Principal Amount. The benefit of an EMI for borrowers is that they know precisely how much money they will have to pay towards their loan each month,[1] which helps a person to keep a check on its expenses and savings, hence making their personal budgeting process easier.

 

Consequences of Non-Payment of EMI

When the Credit card is chosen as the mode of Payment, this would mean that the person using the Credit Card might not be having enough Cash in hand to spend. Using a credit card would mean that the individual using it shall be responsible when it comes to credit card payments, i.e., making the due payment before the deadline. Irregular payments or failing altogether to make payments of your credit card dues can have consequences detrimental to your financial plans and management. The following consequences may arise due to nonpayment of Loan or EMI:

Ø Hike in the interest rate

If you have already made a payment default on your credit card EMI and continue to make purchases from the card in spite of that, the interest rate on services like cash withdrawals or credit card EMIs might be hiked.

Ø Loss of credit limit

This is one of the biggest consequences where excessive defaults in EMI results in a reduction of credit limit which restricts your spending power for future transactions.

Ø Credit Score gets Affected

The defaults that are made are updated by the banks to CIBIL which negatively affects the credit score. A knockdown effect of your credit score getting affected is that any current or future applications you make for new credit cards or loans might be rejected. Specifically, in the case of loans, a bad credit score can result in loans being offered to you at interest rates which are much higher than the loan rates in the market at the time.

Ø The Hassle to deal with Recovery Agents

If you fail to make payment on your credit card’s due payment for 90 days, the case gets forwarded to the banks which will regularly follow up with you for recovering the credit card due to payment and shall cause a lot of Harassment.

 

What can be done?            

Any Person caught in this trap cannot shift his liability hence the appropriate way is that the individual shall defend himself with a reason that why he could not pay his EMIs on time. The reason could be anything; he might have lost his job, an emergency would have arisen which consumed all the savings, expenses on education could have been huge or some other urgent requirement. The person can choose any of the following options:

1. Defer the payments: An EMI holiday for a few months by informing the bank about the inability to pay. A situation of this nature can occur during a job change or a temporary loss of business or employment. Banks can accept these as genuine reasons but may impose penalties for the deferment.
2. Reducing your EMI: If you are struggling with the EMI amount, consider having the monthly EMI reduced. You can approach the lending institution and request them to increase your loan tenure. This would reduce your monthly EMI amount though you may end up paying a higher amount in interest. Once your financial situation is sturdier, you should try to increase the EMI amount again.
3. Restructuring the loan: If a borrower is unable to maintain the terms and conditions of his loan, he can request the lender to relax the same. This may lead to a reduction of charges, lowering of interest rate, lengthening of the loan tenure, a moratorium on interest, etc.
4. Refinancing your loan: If your problem is one where the EMI is too high, due to either an increase in overall interest rates or any other matter personal to you that reduces your bank balance or a combination of these factors and others, then what the bank will do is restructure your loan.

 

Example: If you are currently paying Rs. 5,000 per month for N years and this is too high; the bank might offer you an EMI lesser than Rs. 5,000 per month, for a little more than N years. So your EMI goes down, giving you some breathing room but the payments you now make will eventually cost you more regarding total money repaid.

 

Minimum Amount Due (MAD)

An alternate method which a person can adopt is Minimum Amount Due in this the person has to pay the minimum amount to the bank/credit card company by the deadline this is done to keep the account regular and avoid payment of any late payment fees.[3]

Payment of minimum amount due ensures that you get away with paying only the interest. This is done so that the bank does not report the account as irregular to the credit bureaus. If your credit card account is reported irregular, your credit history will be adversely affected. This can be a problem if you are planning to take a loan shortly.

 

Bankruptcy

Bankruptcy is the legal status of an individual or company which is unable to pay off outstanding debt. It is a status that can only be granted by the court.

Personal bankruptcy is considered a last resort for people who are caught in the trap of Default Payment although going bankrupt is an effective way to wipe out most or all debt obligations; there are long-lasting consequences which the person who is declared bankrupt has to face in his near future.[4] When you’re bankrupt, your non-essential assets (property and possessions) and excess income are used to pay off your creditors (those you owe money to). At the end of the bankruptcy period, most debts are ‘discharged’ (cancelled).

If the court satisfies their claim, it appoints a financial manager, an intermediary between the credit institution and the debtor. He evaluates the borrower’s income and property and creates a plan for restructuring the debt that the court later approves.

The restructured debt may be significantly less than the initial one, and it will be easier for the debtor to pay it off. Additionally, creditors do not have the right to demand the payment of loans from individuals who file for personal bankruptcy while the case is still in progress.

 

Insolvency

The condition of having more debts than total assets, which might be available to pay them, even if the assets were mortgaged or sold. A determination by a bankruptcy court that a person or business cannot raise funds to pay all of his debts. The court will then discharge some or all of the debts, leaving those creditors holding the bag and not getting what is owed them. The supposedly insolvent individual debtor, even though found to be bankrupt, is allowed certain exemptions, which permit him/her to retain a car, business equipment, personal property, and often a home as long as he/she continues to make payments on a loan secured by the property.

 

Conclusion

Hence, if a person is proved to be Bankrupt or Insolvent by the court then in that case it shall be decided by the Court that the Person cannot pay the Interest or the EMI, and hence the court shall waive off the debts and EMI or may in another scenario provide the extension of time to the person so that he can pay at least the Minimum Amount Due, which would not make the Person’s account Irregular.

 

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

 

 

---

References:

[1] Investopedia

[2] Article on ‘Why Paying Credit Card ‘Minimum Payment Due’ Is a Bad Idea DEEPESH RAGHAW , SEPTEMBER 22, 2015

[3] How to Eliminate Credit Card Debts By Vera Gibbons

[4] Article by AL Krulick “America’s Debt Help Organization.”

[5] Chapter 7 Bankruptcy