If borrowers no longer meet their payment obligations for loans, these loans are deemed to be distressed after a certain period of time. Each credit institution assesses the situation somewhat differently; according to the definition of banking supervision in Germany, a non-performing loan is at least 90 days in arrears. This means that the debtor has not paid a installment payment agreement for at least three months’ contributions.
How does a bad loan come about?
Basically, the banks try to lend only to people with a good credit rating. However, the credit check only takes into account the state of borrowing. Thereafter, no further tests take place. If the borrower only has a lower income due to job changes, unemployment or sickness, he or she can no longer pay the originally agreed rates. Frequently, the borrower has little influence on the changed situation and eventually gets behind with the installments.
What can I do if I can not pay my installments?
If, for financial reasons, you are no longer able to pay the installment of your loan, you should contact your bank as soon as possible before you default on the installment. If you have paid regularly so far, you may be able to reorganize the loan agreement. The rates of the loan are adjusted, for example, by a term extension. For some banks, you may also suspend redemption payments for a defined period of time and pay only interest. If you make an agreement yourself with the bank, you generally benefit from better conditions than with a forced change. Also for the bank pays a courtesy. If you can pay the installments again in the future, the bank will prevent a default.
What happens if a bad loan is not repaid?
If the debtor decides against an agreement with the bank or can no longer afford lower payments, the bank has the normal way of late payment. The credit institution first demands the outstanding amount, then if necessary terminates the loan agreement and attempts to enforce the claims also in court. For example, the bank can apply for foreclosure or have a foreclosure sale on real estate. Ideally, the bank will recover the full loan amount through foreclosure.
If foreclosure is not possible because the debtor has provided asset information, the company can not do much at first. Some banks are selling their non-performing loans to other companies who are trying to recover the claim. If a large number of loans to a bank are in dire straits, a so-called bad bank is often set up to take over and settle all non-performing loans. Bad Banks are often founded with state participation.