Laws on unsecured loan defaults
Unsecured loans are offered based solely on the borrower’s creditworthiness. The lender receives no collateral or other security for the loan repayment other than the borrower’s intentions to make good on the full principal and interest due.
When a borrower defaults on an unsecured loan, the lender has little recourse to recover the debt. The lender must make a case to, in essence, convert an unsecured loan into a secured amount to seize assets equal to the full loan amount and the recovery costs (such as attorney and collection agency fees).
Lenders can make every legal attempt to recover the loan amount through collection.
The lender can report the loan default to all credit reporting bureaus and subsequently cause a serious lowering of the borrower’s credit score. Lenders can also maintain contact with the borrower through accepted means such as the telephone, e-mail and postal mail.
Lenders are prohibited, however, to threaten or intimidate borrowers through false information.
For example a lender cannot tell a borrower the house or other property are subject to liens or seizure if the loan is not paid in full. The loan was unsecured and attaching assets after the fact can only be accomplished through successful legal action.
Lenders can pursue more vigorous collection action if there is any evidence of fraud on the part of the borrower to receive the loan. Fraud can consist of false income reports, employers or tax records indicating past income amounts.
If the borrower received the loan under false pretences, then the lender can more readily pursue legal recourse to acquire security for the unsecured loan. Lenders, however, cannot make assumptions concerning the borrower’s character or personal information.
Only verified evidence of the borrower’s fraudulent intent is acceptable. Such efforts may involve contacting the tax agencies directly for legitimate tax information on file or contacting listed employers or income sources for additional verification of the borrower’s status.
Financial laws limit the time a lender can pursue borrowers for unpaid unsecured debt. With most unsecured loan types, seven years is the maximum time the loan is recoverable. Without a legal judgment, collection attempts and the veracity of the unpaid debt expires after 84 months from the time the loan was declared in default. Borrowers should know, however, this time line could start up to several months after making the last loan payment. Lenders may not immediately declare the loan in default until after all efforts to collect past due payments are exhausted.
Civil judgments against borrowers can last up to ten years. If assets such as a home or automobile already have an existing lien, however, seizure of the assets are very unlikely.
The lender would have to assume the full loan amount and pay off the debt in order to take title to the asset.
The total costs incurred could far outweigh the amount of the initial loan. Again, however, the judgment and lien action can only occur if there is a successful argument to convert an unsecured debt to one secured with tangible assets.