this appeared in the personal finance section of reuters.in under my byline

Escape from Debt

If all the people who talk to me are sensible, well educated people, how is it that the Human Relations Managers of many companies call me for asking questions like “Can we do a 3 hour session on how to handle debt?” Obviously the debt has become so much that the company has been able to find out the employee’s flirtation with debt!

Readers have written in with questions related to “defaulting” on their loans. Unlike in case of investment questions, if a person talks about his “mistakes” it takes a lot of courage. Some people are clearly living far beyond their means, but some people have got into debt just because they did not have medical insurance! This article is just to see what does one do NOW?

Like always there are some people who have already defaulted, those who are about to default, and some who are worried that they will default 5-6 months from now.

Default is simply failure to meet your payment commitments. So if you have promised to pay an EMI on the 10th of the month, and you do not make a payment, you have defaulted.

The companies that lend monies normally put defaulters in “buckets” – people who have defaulted once, but quickly recover and pay. Then there is a second category which is in default for a much longer period – say 3 months. Then there is the third category of defaulters who do not show any sign of paying!

Initially as a defaulter you will get gentle reminders, then as the default continues, however, companies tend to get more aggressive, contacting you repeatedly with stronger language.

Thanks to CIBIL your default will start to affect your credit. CIBIL currently is off limits for us as retail users. However banks exchange default information – and this default of yours will affect your chances of getting a credit card, a home loan, a car loan AND even a job.

A loan default results in repossession or foreclosure – for loans backed with assets like a car or a house. Of course if it were a loan against shares, the asset would have been sold off the day the security value went below a particular level. The impact on your credit card worsens over time, as the lender is charging you interest and you are not paying – the impact is clearly because of the interest on interest (negative compounding, if you may!). For loans not backed by assets, the loan will be handed over to a collection agency – and you know how they collect!

Obviously, what should I do if I am in default? Is this question in your mind?

As soon as you recognize you are ABOUT TO BE in default or have just defaulted, contact your lender! Talk to them and consider various alternatives.

Most of the time, lenders would far rather work out a payment solution directly with the borrower than entering into a foreclosure situation. Quite often, foreclosures and repossessions and collection situations are the result of a lack of communication between the borrower and the lender. Your best bet is to be proactive.

What if I don’t have the money to pay? This is the reason that most people are afraid to be proactive about their debt situation. They simply don’t have the money to pay the debt, and they figure that contacting the lender won’t help, so instead they choose to stay put and hope things get better.

Here’s the problem with that approach: lenders will assume that you never have any intent to pay. They have no reason to believe otherwise, so they will lump you in with the rest of their debts and treat you in a standard fashion.

If you are making a genuine effort to repay your debts, communicating to them is the best option. You are far more likely to get an easier payment schedule or some other solution if you contact your lender and deal with the situation.

If your debt has already been turned over to a collection agency, your best bet is to negotiate with the collection agency. Do this entirely in written form via registered mail with receipt requested, not over the phone, and keep thorough records of this process. Even if they call you, ignore the call and follow up with mail.