What Happens in the Event of Default in Loan Agreements?
Facing debt is never an easy situation, be it from unforeseen circumstances or not, and it is easy for debts to snowball. Financial woes ensue and it may spiral into an unending cycle of struggling to pay off your debts.
Such situations can feel beyond your control, and it becomes even more overwhelming when you are unsure of what awaits you when you are unable to repay your debts.
In this article, we look specifically at events of default in loan agreements with banks and licensed moneylenders. We will cover the following points:
- What is an “event of default” in loan agreements?
- What happens in the event of a default?
- Whether you can “cure” a default?
- What happens if you still fail to meet your debt obligations?
- What debt collectors in Singapore can and cannot do?
What is an “Event of Default” in Loan Agreements?
An event of default is essentially an umbrella term. It covers different scenarios in which a borrower is unable to repay their debts in a typical loan agreement.
Common events of default include:
- Failure to make a repayment on time;
- Not complying with an undertaking, representation or warranty in the loan agreement;
- Insolvency; and
- Failure to comply with other obligations under the loan agreement.
Though moneylenders will usually not ask you to repay them before the stipulated deadline, an event of default allows them to do just that. When an event of default occurs, it grants the non-defaulting party (usually, the lender) the right to terminate the entire agreement. Such termination then allows a lender to demand immediate and full repayment of the loan.
In actual practice, however, if an event of default occurs, the lender is more likely to revisit the loan agreement and include tighter terms, higher interest rates or collect a certain fee (more below).
What Happens in the Event of Default?
Common consequences you may face in the event of default in loan agreements include:
- Having to pay additional fees (Increased interest, late penalty fees, etc.)
- Lowered credit scores
- Seizure of money from your accounts
If you have pledged any collateral, a moneylender may also seize what you pledged, to sell and eventually recoup the loan amount.
In certain loan agreements, collateral is an asset that you would have agreed to put up as security for your loan. It acts as a form of security for the lender to ensure that they still have a means of recouping their money if you fail to repay your debt. These loans are classified as secured loans, such as a mortgage loan secured by a house, or unsecured loans such as credit cards. For example, if your house is being used as collateral, then it can be seized if you default on your loan.
Can You “Cure” a Default?
A default triggers consequences, such as the seizure of the property securing the loan or late fees and other penalties. However, you may also “cure” the defaults by making payments to bring the loan current.
When you sign a loan agreement, a clause stating a “cure period” will likely be included in the contract. This cure period clause would denote the time frame you have to execute an action, such as pledging additional securities or paying a substantial sum of money, to retain the loan despite having defaulted on it.
In short, curing a default generally means that you can avoid the consequences of your default, and reinstate the loan. If applicable, you may also be able to keep the collateral that you may have pledged.
What Happens If You Still Fail to Meet Your Debt Obligations?
Continued failure to pay off your loans can bring about far more costly and painful consequences. Depending on the type of loan you have taken, you may end up with a seizure of your collateral or a lawsuit.
Consequences for failing to repay secured loans
With secured loans, failure to repay your debt may result in your property being repossessed and sold off to pay the loan.
Consequences for failing to repay unsecured loans
On the other hand, with unsecured loans, you have no security tied to your debt. As a result, your lender may resort to legal recourse to recoup their loan. For example, if the lender is of the opinion that you are intentionally skipping out on your payments, the matter can be taken to court, leaving you with a lawsuit.
Alternatively, the lender may serve a Statutory Demand on you. This is basically a notice demanding payment from you. The lender may then proceed to file a bankruptcy application against you if you do not:
- Make payment within 21 days; or
- Apply to the court within 14 days to set aside the Statutory Demand.
Other routes to consider and fall back on
As an alternate solution, you may also turn to negotiation when you are facing trouble repaying your loan. This includes appealing to your lender for a lower instalment rate.
Debt consolidation is another good option to consider when you find yourself stuck. It allows you to combine all your existing unsecured loans into a single loan, greatly simplifying your debt repayment process.
There will be eligibility criteria to fulfil when applying for a debt consolidation plan, such as making a certain amount of income annually. However, if you qualify for a debt consolidation plan, it can be a powerful tool for your debt repayment.
Find out more about debt consolidation in our other article.
Filing for bankruptcy / the Debt Repayment Scheme
If your financial situation becomes so dire that you are unable to keep up with at least S$15,000 worth of debt, you may also look into applying for bankruptcy.
When you declare yourself bankrupt, your debt will stop accumulating and creditors will not be able to sue you for it. The Official Assignee will then decide on a suitable monthly contribution amount to help you pay off your debt.
After you have submitted a bankruptcy application, the court will consider your eligibility for the Debt Repayment Scheme (DRS), so as to help you pay off your loan while avoiding bankruptcy.
Learn more about filing for bankruptcy in Singapore in our other article.
You can also read up on the Debt Repayment Scheme here.
What Debt Collectors in Singapore Can and Cannot do?
The lender may engage a debt collector to seek repayment from you. However, some unscrupulous debt collectors may result to unruly ways to compel you to repay the loan. The powers and job scope of debt collectors in Singapore are sometimes misconceived, but rest assured that there is a clear boundary, and you cannot be badgered or hounded by them.
Debt collectors cannot:
- Inflict injury on you;
- Threaten or intimidate you;
- Vandalise your property; or
- Stalk you.
Should you encounter a debt collector that crosses the line, you can report them to the police.
If a licensed moneylender whom you borrowed from reaches out to you directly, be aware that they cannot:
- Use abusive or threatening language;
- Ask for your SingPass ID or password; or
- Refuse to return your NRIC card or other important personal ID documents like an ATM card or passport.
In the event that you are met with such an incident, you may want to report the moneylender to the Registry of Moneylenders at the Ministry of Law, besides making a police report.
For more information, you may wish to read our other article on what debt collectors can and cannot do.
The last thing you would want when in debt is to allow the situation to worsen to the point of no return. There is no shame and no harm in seeking help, and it is better to figure out your options as soon as possible.
It may seem redundant when you are facing an overwhelming pile of debt but engaging a good bankruptcy lawyer may be the right move for you. Employing the help of someone who can expertly assess your situation and best notify you of your options will take a huge load off your chest, especially if you are not sure of the courses of action available to you to resolve your debt.
Alternatively, if you are unable to afford a bankruptcy lawyer, you can also seek legal aid at the Legal Aid Bureau. This is a good way to obtain affordable legal assistance on bankruptcy and other financial matters.
- What Happens in the Event of Default in Loan Agreements?
- Debt Recovery in Singapore
- Debt Recovery Lawyers in Singapore
- IOUs: Personal Loans to Friends and Relatives in Singapore
- How to Legally Borrow Money from Licensed Moneylenders in Singapore
- What Can Debt Collectors in Singapore Do and Not Do Under the Law?