Friday, March 4, 2011

Loan Defaults

When Banks take your Cash 

If you default on your payments, the bank can withdraw money from your savings account or fixed deposits

Did you know that banks can hold your money hostage? Well, they can, and the ransom you have to pay to get your money back: clear all outstanding dues. Banks have devised a clever way of ensuring that customers clear credit card dues and repay loans on time. If you default for several months, the bank can deduct money from your savings accounts or refuse to pay money from the fixed deposit when it matures.

No, banks aren't trying to con you. What they are doing is perfectly legal. In fact, they have your permission to do so. You don't remember giving it, do you? But you did when you signed on the dotted line while availing of the loan or the credit card and accepted the terms and conditions (T&C). The fine print will have a statement similar to this: "I hereby grant and confirm the existence of the right of lien and set-off with the Bank, which it may use anytime to utilize any money belonging to me and deposited with the bank, towards any outstanding dues".

All this legalese simply means that the bank has the right to deduct money from your account. Any collateral that the bank can legitimately hold can be held back. Of course, if your T&C does not state this, the bank cannot touch your money. Banks can't debit unless you agreed that such measure can be taken while taking a loan. However, if you have signed on the loan contract and it mentions that the assets can be adjusted, then they can.

So, if you aren't careful about clearing all your dues with the bank, you might find yourself bankrupt.

If you think you can avoid such a situation by opening a second account, you still won't be able to get away. You can't default on one account and get away by keeping to the straight and narrow on the other. In fact, the bank can lock any account of yours, even if it is with another bank. If a bank wants to lien an account of the defaulting customer with another bank they can do so by filling for a garnishing order. You cannot question this right as the money belongs to the bank.

However, some accounts and facilities that you use can't be touched by the banks. If you have a safe deposit vault where you have kept jewellery, the bank does not have the authority to break open the vault without your approval. Neither can the bank touch your money if your spouse or relative has defaulted on his payments, unless you are the guarantor or a co-borrower.

Your bank isn't suddenly going to land on you like a ton of bricks. Before taking such a drastic step, they follow procedure and mail warnings to the account holder. The procedure is that phone calls are made initially, then a notice is given and the bank follow up on it. If there is no response to any of these, the bank will deduct money from the savings account.
So, if you are facing a financial difficulty and are unable to repay the loan for a reason, don't escape but approach directly the bank to find a solution. Banks are willing to provide a moratorium of about six months, which they may extend it on a case-to-case basis. The banks are ready to listen if a person has an emergency such as health problems or an accident. 

The mistake that most customers make is that they talk to the call centre. You should write to the bank and start documenting all your communications and set up a time frame to resolve the issue.Once you do this, the problem will not grow to an unmanageable size.

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