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How can business owners deal with loan default and debt collection harassment?written by Mr. Benedict S. Carandang - October 3, 2022
Business owners should avoid defaulting on a loan as much as possible, especially since one must have a realistic payment plan in mind when getting financing. However, extraordinary circumstances such as the pandemic can derail even the most prepared SMEs. In these cases, you may not have any choice but delay repayment or go into loan default.
Since the pandemic, the government has received – and continues to receive – an increased number of complaints for debt collection harassment. From 485 complaints in May 2019, the National Privacy Commission (NPC) handled 1,867 complaints in December 2020, an increase of over 200%.
What to expect if you miss a business loan payment
First, know that no one gets imprisoned for non-payment of a loan, as per the 1987 Philippine Constitution.
If you miss a payment, legitimate lenders will contact you with payment reminders, and impose late payment penalties. If the payment delay goes on for the next three billing cycles, your lender will then declare the loan as “delinquent” or “in default”. It usually means you have to pay the full loan balance immediately – including the total interest amount, penalties, and other charges.
The lender will also report your case to the Credit Information Corporation (CIC), the central registry of borrowers’ credit information and history. The report can damage your credit history and make future loan applications more difficult and expensive.
If your loan is unsecured, the lender will turn over your loan to a debt collection agency. These agencies will contact you more aggressively via call, text, or even mail to get repayments. If your loan is secured, your lender will simply inform you once your loan is in default, and begin the process of seizing your provided collateral.
The worst-case scenario is the lender can file a civil case against you for non-repayment. If the lender wins, the court will demand you pay the full loan balance, interest, and penalties to the lender – plus legal damages.
What counts as debt collection harassment?
The Security and Exchange Commission (SEC) counts the following as unfair debt collection practices punishable by law:
- Use or threat of use of violence or other criminal means to harm a person, their reputation or property;
- Use of threats to take any action that cannot legally be taken;
- Use of obscenities, insults, or profane language to abuse a borrower and/or which amounts to a criminal offense under applicable laws;
- Disclosure or publication of the name and other personal information of a borrower who allegedly refuse to pay a debt (with exceptions);
- Communicating or threatening to communicate loan information which is known or should be known to be false, including failure to communicate that the debt is being disputed (with exceptions);
- Use of false representation or deceptive means to collect or attempt to collect a debt or obtain information concerning a borrower;
- Contacting a borrower at unreasonable times, defined as before 6 AM or after 10 PM, except if the account is past due for >15 days or the borrower has given written, electronic, or recorded consent
- Contacting the persons in the borrower’s contact list, other than those named as guarantors or co-makers.
Take note, however, of the following exceptions that allow disclosure of your information:
- With your written or recorded consent;
- Released, submitted, or exchanged with other financial institutions, credit information bureaus, lenders, their agents or other representatives;
- Required by a court, government office, or agency authorized by law;
- Disclosure to collection agencies, counsels, and agents of the lender to enforce their rights against the borrower;
- Disclosure to a third-party service provider to assist or provide services that help the lender administer its financing/lending operations;
- Disclosure to an insurance company for the purpose of insuring the lender and/or borrower.
What can you do against unfair debt collection practices?
You can file a report with the NBI’s Cybercrime Division, the PNP’s Anti-Cybercrime Group, the NPC, or the SEC. These government agencies will process the complaints and coordinate actions to enforce relevant punishments.
For instance, accessing your contact list without authority is a violation of the Cybercrime Prevention Act, punishable by up to 12 years in jail and fines of at least ₱200,000. Malicious disclosure of your personal information is punishable by up to 5 years’ imprisonment and up to ₱1 million in fines. The SEC also imposes separate fines to lending companies found guilty of unfair debt collection practices.
What can you do if you know you’re unable to pay?
Be proactive by reaching out to your lender and negotiating. Request for loan rescheduling, where the lender extends your loan term to reduce your monthly or quarterly payments; or loan restructuring, where the lender changes the type or structure of your loan. The latter can reduce your current interest payment, prolong your billing cycles, or modify the frequency of your interest payments. Note that you may end up with a higher final loan cost for both options.
Lastly, ask if any of your loan fees can be waived or reduced, and if a grace period is possible. If you are a good payer and show sincerity in fulfilling your obligations, your lender may be more willing to adjust. Legitimate private lenders are also more likely to adjust due to less stringent internal protocols; some even proactively prevent clients from going into default. For instance, First Circle, a fintech firm financing growing SMEs since 2016, freezes their clients’ credit line if they are borrowing too often or beyond their means. This protects their clients from putting their businesses at risk. First Circle also assigns a dedicated account manager to each client. In case of repayment issues, the account manager can then recommend tailor-fit, in-depth solutions.
Another option is debt refinancing: taking out another loan to pay off your current loan. However, your new loan must have better rates or terms than your current one. You may also incur early payment charges for paying off your initial loan. For these reasons, debt refinancing isn’t for every business.
Loan defaults can happen even to the best entrepreneurs, as there will always be financial circumstances out of your control. It shouldn’t define your business – or your skills as a business owner. It is also not a cause for shaming, threats, and other forms of harassment from lenders and debt collectors. So know your rights, understand what behavior is out of bounds, and lodge a complaint once you have adequate documentation of debt collection harassment.
(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is Member of the MAP. He is the Vice President for External Relations of First Circle, a fintech provider that helps SMEs grow through long-term partnership, flexible financing, and free tools to help them find government opportunities. This article is co-written with Jess Jacutan, First Circle’s Content Marketing Lead. Feedback at <email@example.com> and < firstname.lastname@example.org>).