How loan settlement helped a woman in her 20s ease the burden of ₹30 lakh in debt

This is the story of a woman in her late 20s who has been reeling under the stress of debt that accumulated to about ₹30 lakh in almost eight years.

A series of medical emergencies and deaths in the family placed the burden of financially supporting dependents on her. Additionally, raising a toddler and poor financial advice from friends landed this young salaried professional, who did not wish to be identified, in the never-ending loop of debt.

Relief finally came in the form of a debt settlement company, which is helping her pay off ₹19 lakh of the total debt.

The rigmarole started eight years ago, when a close relative maxed out the woman’s credit card limit of ₹2.5 lakh and refused to pay her back. She was in her early 20s with a small salary that allowed her to pay only the minimum due amount every month. In two years, the outstanding amount ballooned to over ₹4 lakh.

“I didn’t have financial support from my family. A friend suggested that I take out a personal loan to pay off the credit card dues. I did that and was going to repay the loan over the next two years, but soon after, the Covid-19 pandemic hit, which resulted in salary cuts,” she recalled. “Ever since then, things have just been downhill for me.”

Over the next four years, she took out personal loans of about ₹12 lakh from two non-banking financial companies and used six of her credit cards for another ₹15 lakh to fund three major medical emergencies, support a dependent family and repay the mounting debt.

“For the last 24 months, I have just been revolving credit and paying the minimum amount due. This kept adding ₹7,000-10,000 each month to my outstanding debt and pushed me to a point where it started getting out of hand as I was spending 90% of my salary just on EMIs,” she said. “I have had thoughts that it would be easier to just end my life than keep dealing with this.”

Hope emerges

At this stage, she was finally made aware of a plan that would help her out from the spiraling debt.

“A friend told me about debt settlement platforms that negotiate with lenders to lower the repayment liability. I decided to reach out to one of them in March and signed up with it to settle ₹19 lakh of my outstanding loan across six lenders. I want to repay the remaining myself as it’s from major private banks and I don’t want to jeopardise my banking relationship with them,” she said.

A debt settlement company negotiates with lenders to forgive a part of the loan and accept 40-70% of the outstanding amount from the borrower. This is done for borrowers who are unable to pay back and have either defaulted or are likely to default on the loan repayment.

To be sure, the debt settlement company doesn't repay the borrower's debt – it's the borrower who repays. However, the company negotiates a lower amount on the borrower’s behalf.

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A loan settlement benefits both the delinquent borrower and the lender – the former's repayment liability decreases about 30-50% and the lender stands to get back at least a part of the loan balance rather than forgo the entire amount. In the woman’s case, the platform will settle about 40% of the loans and she will pay the remaining ₹11 lakh.

Mint reviewed the loan agreements, credit card statements and the loan settlement programme to verify the claims made.

How loan settlement works

In India, platforms such as Freed, Expert Panel, Single Debt and Settle Loan provide loan settlement services to delinquent borrowers who have fallen behind on their payments.

Ritesh Srivastava, founder and CEO of Freed, said those who have defaulted on repayments due to financial hardships but intend to resolve their debt and regain their creditworthiness are signed up for debt resolution.

“While assessing the applicant, we check by how much the person is delinquent, their sources of income to determine how much they can set aside each month towards repayment, and intent to resolve the debt. Some source of income is required as we, as a company, are not assuming the debt and are just negotiating the settlement on the borrower’s behalf. Ultimately, the borrower has to repay it even if they have a reduced repayment capacity,” he explained. “Those who don’t have any capacity to save at all, can’t be signed up for debt resolution.”

After the company assesses the borrower on these metrics, it draws up a payment term wherein the borrower has to deposit a fixed amount every month for a pre-decided tenure. This monthly amount is less than the loan EMI and gets deposited in an escrow account so that the borrower can’t use it.

Once the amount agreed upon is accumulated, the platform negotiates a one-time settlement with the lender. In cases with multiple lenders, the loans are settled one by one, so the settlement tenure could run into many years. In the woman’s case, the settlement has been structured over six years as debt across six lenders needs to be settled.

If the borrower is unable to make the monthly deposits in between, the agreement with the debt settling platform gets null and void and the amount accumulated is returned to them.

The platforms charge 5-15% of the debt enrolled as their fee and collect it after the loan is settled. For example, if a borrower signs up on a platform that charges a 15% fee to repay a ₹4 lakh debt, it will charge ₹60,000 after the loan is settled.

It should be noted that these platforms don’t guarantee that the loan will be settled. In the rare instance that the settlement doesn’t happen, the amount accumulated is returned to the customer and the fee is not charged. However, as per Srivastava, in his experience in the Indian and the US market, no lender has ever refused to settle.

“All lenders settle because they have to write off the loan in six months and after that if they are getting 40-45% of the loan balance back, why would they refuse?” he asked. “But we never guarantee the settlement as we don’t want to advocate delinquencies.”

Ruthless recovery agents

When a borrower defaults on an unsecured loan repayment for six consecutive months, the lender has to write it off and can initiate legal proceedings. It is common for lenders, both banks and NBFCs, to send third-party debt collectors after the first default itself. Though the Reserve Bank of India’s guidelines clearly state that such collection agencies must not be coercive and threaten the borrower, these are hardly practiced in reality.

The woman toldMintthat since the day of her first EMI default this year, she has been bombarded with calls and messages from collection agencies.

“I get an average of 100 calls every day and I have blocked over 200 numbers already. These agents are ruthless,” she said.

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Even after the lender writes off a loan, it doesn’t absolve the borrower from repaying it.

“Once declared as a defaulter or NPA (non-performing asset), the borrower’s only option is to repay the loans or face recovery litigation from banks. There is no way to get their loans closed, unless the government, through RBI or banks or such other bodies like NABARD, comes up with amnesty schemes or debt relief schemes,” said Shashank Agarwal, advocate and founder of Legum Solis.

Until the loan is repaid, collection agencies keep hounding the borrower. Each year, several reports of suicides surface due to coercive debt collection. Last week, the Tamil Nadu government introduced a bill to protect economically weaker groups from unethical actions of money lenders.

Borrower's options

After defaulting on repayments, borrowers have a few options. One, they can approach the lender to restructure the loan into a secured one by providing collateral, which buys them a 90-180-day EMI-free period to arrange funds. This is usually approved only when the borrower has a good past record with the lender and a strong credit score.

Second, they can declare personal insolvency.

“It is a better option than facing litigation from the lender but the provisions for declaring bankruptcy by individuals under the new law, viz. Insolvency and Bankruptcy Code, 2016, are yet to be brought into force. The current provisions of IBC in force pertain to the personal guarantors for the debts of corporate debtors/companies,” said Agarwal.

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Since the IBC is not yet applicable, the Provincial Insolvency Act, 1920, and the Presidency Towns Insolvency Act, 1909, apply to individuals, said Bhoumick Vaidya, equity partner at Shardul Amarchand Mangaldas & Co. “Section 243 of the IBC code provides for repealing the old laws, but the section has not been notified yet for individuals.”

The third option is loan settlement. Borrowers can do this directly without going through a third party if they have a good longstanding relationship with the bank or NBFC. Where the borrower is buried in debt with multiple lenders, signing up with such platforms is a better option.

However, take note that a settled loan will hit your credit score.

“The loan appears as “settled” and not “paid off” or “repaid” in the credit report. The credit score takes a hit, but the borrower can rebuild it over the next 12-24 months,” said an official of a credit bureau. “It is better than a delinquent loan staying on the report for several months.”