What To Do In Case of Default

Sometimes a loan gets off track and the borrower simply can not or will not make an effort to meet the obligation. Although this is rare in our experience, when the loan is in default the lender has the right to collect on the loan, as detailed in the promissory note.

While no one likes to think about this happening, its best to have these details in writing and agreed to by both before the situation occurs. Technically, a loan is in default the moment a payment is missed. But you should discuss with your borrower when you will consider the loan to be in default. Is it after one payment is missed, or two, or three?

Communicate the actions you will take should the loan default. Since each borrower/lender relationship is unique, you should pursue default options based on your situation. Following are some options you might want to consider, in order of increasingly severity:

Forgive a missed payment - You might decide, for whatever reason, to waive a missed payment and simply continue forward with the repayment schedule.

Move a missed payment - Up until 3 days before your borrower's due date the payment can be delayed, rescheduled or moved to the end of the schedule to accommodate short-term cash flow problems.

Restructure the payment schedule - If the borrower's circumstances have changed since the loan was set-up, the payment schedule may have to be changed (e.g., lower payments, longer interval between payments, etc.) to get the loan back on track.

Elect to have a series of collection letters sent -If your borrower is not cooperating or communicating with you to get back on track you may choose to use a licensed collection agency to send a series of increasingly aggressive collection letters. At the culmination of this process, the unpaid debt will be reported to the major credit bureaus and show up on the borrower's consumer credit history.