IBC Code 2016 and loan settlement – ​​what is the connection?

Summary

The relationship between IBC Code 2016 and loan settlement has become very important in today’s time. First of all, it is important to understand that IBC, i.e., Insolvency and Bankruptcy Code, is a law that gives the right to initiate bankruptcy proceedings against individuals or companies who do not repay the loan. On the other hand, loan settlement is a process in which the bank and the borrower decide to repay the loan in a smaller amount by mutual consent.

Now, if we talk about the connection between these two, it is clear that IBC has become a means of legal pressure, due to which many times borrowers come forward for settlement with the bank. For example, when a company defaults and the bank initiates the IBC process, the company comes up with a Resolution Plan, which includes partial payment or restructuring. This is also a type of loan settlement, but it comes under the judicial and controlled process.

Along with this, in personal loan cases also, banks talk to the borrower and try to find a solution by showing the fear of IBC. This makes it clear that both IBC and loan settlement are complementary to each other.

Introduction

In India, when a person or company takes a loan from banks or financial institutions, nd, for some reason, is unable to repay it on time, this situation is called ‘loan default’. In such cases, banks resort to different legal ways to recover their money. One of these ways is – IBC Code 2016, i.e., Insolvency and Bankruptcy Code, 2016. This law is specially designed for those situations when a debtor becomes unable to repay their loan.

First of all, let us know what is IBC Code 2016 is. This law was implemented by the Government of India in the year 2016, so that the recovery of debt can be made fast, transparent, and fair. Earlier, when a company went bankrupt, it used to take many years to sell its assets and recover the loan. But after the implementation of IBC, now a complete solution can be found within 180 to 270 days. This makes it possible for banks to recover their money quickly.

Now let’s talk about loan settlement. When a person is not in a position to repay the loan taken from the bank, they can demand “settlement” from the bank. In this, the bank waives off some amount, and the matter is considered closed after paying the remaining amount in a lump sum. However, this hurts your CIBIL report. But sometimes it is seen as the last option.

Let us now further know in detail in this article how IBC works, how the loan settlement process is affected, and what the relationship between the two is.

What is Loan Settlement?

It is a financial process in which a bank or financial institution allows the loan taker to settle the loan by paying a lesser amount than the entire outstanding loan amount. This facility is for individuals who are unable to repay their loans on time and have a history of continuous default.

Under a settlement, the bank can agree on a lump sum amount, which closes the loan. However, it is essential to note that settling the loan can negatively impact your CIBIL score, potentially making it more challenging for you to obtain a loan in the future. Therefore, it should be adopted only as a last option.

How does a Loan Settlement work?

When a person is unable to pay the EMI of his loan on time and the outstanding amount accumulates over a long period, the bank or financial institution offers the option of loan settlement. In this, the bank allows the customer to pay a discounted amount instead of the entire outstanding amount, thereby settling the loan matter.

The process of settlement comprises discussions between the bank and the customer, wherein the bank assures that the customer can’t pay the entire loan amount. Thereafter, the bank issues a single-payment offer, which is typically lower than the outstanding loan balance. On the payment of this settled amount by the customer, the bank marks the loan as “Settled”. Yet, this is not good for the CIBIL score since it is not treated as a “Complete Payment”.

Hence, loan settlement should be opted for as a matter of last resort, and if at all possible, loan repayment schemes, loan restructuring, or alternative financial solutions must be opted for so that the credit rating is not impacted.

What documents are required for a Loan Settlement?

The following documents are required:

• Aadhar Card, PAN Card, Passport, or Driving License, etc.

• Salary slips, income tax returns, bank statements, etc.

• Loan Settlement letter, loan details, payment receipts, etc.

• Investment documents, property documents, insurance policies, etc.

How do I apply for a Loan Settlement online?

If you want to apply it online, then follow the easy steps given below:

Visit the bank’s website or app.

• Open the official website or mobile app of your loan provider or bank.

• Sign up if you already have an account, then log in. Otherwise, create a new account.

Check the customer support section.

• Go to the ‘Customer Support’ or ‘Contact Us’ section on the website or app.
• Here, you can find the option related to “Loan Settlement“, such as:
• Filing a loan-related complaint.
• Request form for loan settlement.

Fill out the request form for the settlement.

• Select the “Loan Settlement Request” option.
• Fill in the required details, such as:
• Your name
• Loan account number
• Email ID and mobile number
• Reason (why you want to settle, such as financial problems or reduction in income).

Upload the required documents.

• Upload documents that show your current financial situation, such as:
• Income certificate or salary slip
• Bank statement
• Any other proof that explains your problem?
• Upload all the documents by scanning them in the correct format (PDF or JPEG).

Submit and wait for the bank’s response.

• Once you have submitted the form, the bank will verify your request.

• The bank will most likely contact you within 7-10 working days. They will notify you of the settlement through email, call, or message.

Read the bank’s offer.

• The bank will make an offer to waive some portion of your pending amount. Carefully read it.

• If you accept the offer, go ahead. Otherwise, bargain further.

Make payment

• Pay the decided settlement amount from the bank in online payment mode.

• The bank will provide a payment confirmation and close your loan account.

What is the difference between a Loan Settlement and a Credit Card Loan Settlement?

Although both Loan Settlement and Credit Card Loan Settlement aim to provide relief to the borrower, there are some important differences between them.

Points of Difference	Loan Settlement	Credit Card Loan Settlement
Type	Settlement of any type of loan (personal, home, car, education, etc.)	Settlement of Credit Card dues only
Settlement Process	The bank fixes a lump sum amount, on payment of which the loan gets settled.	The credit card company settles the amount at a fixed rate.
Impact on CIBIL score	CIBIL score may drop by 50-100 points, and it may become difficult to get a loan in the future	There is a huge impact on the CIBIL score, and it may be difficult to get a new credit card.
Possibility of getting a loan in the future	You may face problems in getting a home loan, a car loan, or any other loan.	Credit card companies may refuse to issue the card.

How much impact does a Loan Settlement have on your CIBIL score?

Loan Settlement has a direct and negative impact on your CIBIL score. When a person takes a loan from a bank or NBFC and is unable to repay the entire amount due to some reason, the bank gives him a chance to make a settlement, which is called a Loan Settlement.

However, there is a huge difference between a Loan Settlement and a Loan Closure. If you close your loan by repaying its full amount, it is recorded as “Closed” in your credit report, which improves your CIBIL score. But if you have some amount of the loan waived off under an agreement with the bank, it is reported as “Settled”, which can harm your credit score.

What are the effects of a Loan Settlement on your CIBIL score?

• When a bank or NBFC reports to CIBIL that your loan is “settled”, your score drops immediately. The amount of drop depends on how good your score was earlier.

• Banks and financial institutions put customers who have settled their loans in the “high-risk” category. This means that in the future, if you try to take any type of loan (personal, home, car, or education), your application may be rejected.

• If you have settled a loan, it may be difficult to get a credit card from any bank in the future. Banks look at your credit history, and if they see a “settled” status, they may refuse to give you a credit card.

• Even if a bank decides to give you a loan, you may get the loan at a very high interest rate. This is because banks consider you a risky customer and charge a higher interest rate to protect their money.

• Loan settlement information remains in your CIBIL report for at least 7 years. This means that even if you improve your financial behavior later, your settlement record will continue to be visible to banks and may affect your creditworthiness.

What are the ways to improve your CIBIL score after a loan settlement?

If you have settled the loan and now want to improve your CIBIL score, then you can take the steps given below:

• Pay all loan and credit card bills in full on time.

• If possible, try to change the “Settled” status to “Closed” by contacting the bank.

• Use credit cards limitedly and make full payments on time.

• Take a small loan and repay it regularly to build a new good credit history.

• Check the CIBIL report regularly and request that CIBIL rectify any mistakes.

How do you choose the loan settlement service?

Here are some important points to consider that will help you choose the right Loan Settlement service:

Check the service provider’s credentials.

Before hiring a settlement service, make sure that the service provider you are hiring is registered and certified with financial institutions and banks. Only a reliable service provider can provide you with the right guidance and support. Checking online reviews and customer feedback is a good way to do so.

Check the service charges and other expenses.

Many service providers also charge a service fee, but make sure that the charges are not high and there are no hidden costs. Negotiate with the service provider beforehand about which services are free and which you will have to pay extra for.

Customer support and communication

A good service provider will always stay in touch with the customer and resolve their problems properly. Make sure they answer your questions quickly and are ready to work with you in any difficult situation.

Join our service

If you are also trapped in the debt trap and are facing a financial crisis, and want to adopt the path of Loan Settlement, then you can apply for our Loan Settlement service. We will help you settle your loan. Along with this, we provide you relief from the burden of the loan within 6 – 8 months. If you want to get more information about our service, then you can contact us.

How long does it take for a Loan Settlement to be processed?

The time taken for the settlement process also depends on various factors, such as the policies of your bank or lender, the outstanding amount, and the communication between the two of you. Usually, this process can take from 1 to 3 months.

The first action in the process of settlement is to approach the bank, where you tell your problem and payment status to the bank. Then, the bank proposes a settlement offer according to your situation. In case you agree with that proposal, you need to pay the amount to the bank within the agreed time. The bank indicates the loan as settled, and this would take some time.

The longer this entire process continues, the more it can impact your CIBIL score, so it is preferable to resolve the issue sooner.

What is the difference between Loan Settlement and Bankruptcy?

Let us understand the difference between them in simple language:

1. Definition

• Loan Settlement: It is a mutual agreement between a bank and a borrower. In this, the bank accepts that the borrower cannot repay the entire loan, so it takes a fixed amount and forgives the remaining amount.

• Bankruptcy: It is a legal process. When a person or organization is unable to repay its total liabilities, it applies for bankruptcy in the court, and the court decides how its assets will be distributed.

2. Process

• Loan Settlement: It is an illegal process that takes place directly between the bank and the customer. No court is involved in this.

• Bankruptcy: It is a judicial process in which the court and insolvency professionals are involved.

3. Debt Relief

• Loan Settlement: After paying some part of the loan, the rest of the loan can be waived off, but the CIBIL report has a tag of “Settled”.

• Bankruptcy: The court decides which loans will be waived off and which will not. This can get rid of the debt completely, but the property can be confiscated.

4. Effect on CIBIL score

• Loan Settlement: CIBIL score has a serious negative impact. The tag of “Settled” can become an obstacle in getting a loan in the future.

• Bankruptcy: CIBIL score falls completely, and it has a long-term impact.

5. Cost & Time

• Loan Settlement: This process is completed quickly, and there are no legal expenses.

• Bankruptcy: This can be a long and expensive process, which requires lawyers and professionals.

What are the advantages and disadvantages of Loan Settlements?

It has the following advantages and disadvantages:

Advantages 

• Loan Settlement improves the financial condition of the borrower.

• By doing a Loan Settlement, you can manage your income and costs better and avoid a financial crisis in the future.

• The heavy burden of debt often causes mental stress. With Loan Settlement, the borrower gets relief from this stress, and he can find mental peace in his life.

• Through Loan Settlement, the borrower gets a chance to get part of their debt waived off.

• This helps to improve his financial condition and gives him relief from a heavy financial burden.

• Although a Loan Settlement can affect the borrower’s credit score, by following the agreement on time and properly, he can gradually improve his credit score.

Disadvantages

• In the future, the borrower may have difficulty getting loans from these institutions.

• Through Loan Settlement, the entire loan of the borrower is not waived off. He still has to pay some amount, which can affect his financial condition.

• During a Loan Settlement, the agreement between the bank and the borrower has many conditions. The borrower is required to follow these conditions, which can limit their freedom.

• After a Loan Settlement, the borrower’s credit score may be affected.

• Loan Settlements may create difficulties in taking new loans or obtaining credit cards in the future.

• Due to a Loan Settlement, the borrower’s relationship with the bank and other financial institutions may deteriorate.

What is the connection between IBC Code 2016 and loan settlement?

Let us understand in simple words.

What is loan settlement?

When a person or company is unable to repay the entire loan to the bank, the bank makes a settlement with them. In this:

• Part of the principal amount or interest is waived.

• The customer is given the option to pay a lump sum amount or in easy installments.

• This solution is usually done by mutual consent between the bank and the customer.

What does the IBC Code do?

Under the IBC Code 2016, when a defaulter is unable to repay the loan on time, the bank or lender can start the IBC process against him. In this:

• There is a process of declaring a company or a person bankrupt.

• A Resolution Professional is appointed.

• A way is found to repay the loan by selling the company’s assets.

• The entire process is completed in a maximum of 270 days.

How is there a connection between IBC and loan settlement?

Now let’s talk about the real connection:

a. Part of the resolution process:

When action is taken against a defaulter under IBC, the solution often comes in the form of a settlement plan. In this, the banks get a fixed amount, and the company gets relief from the remaining loan. This is a kind of loan settlement, ​​but it is legally controlled and approved by the NCLT.

b. Means of pressure:

When a person or company does not repay the loan, the banks negotiate a settlement by threatening to initiate the IBC process. This forces the defaulter to negotiate and settle.

c. Safe path:

Loan settlement done through IBC is more transparent, judicial, a nd timely. This provides reliable recovery to the banks and legal relief to the defaulter.

How to settle a loan declared as NPA?

Below, we will know in detail how this can be done.

1. First, contact the bank

• When the loan is declared as NPA, the borrower should first contact their bank or financial institution directly.

• Instead of getting scared, talk.

• Tell the bank about your financial situation.

• Tell them that you want to repay the loan but cannot make the full payment in the current situation.

2. Ask for an OTS (One-Time Settlement) proposal

• Banks often bring the OTS scheme for NPA accounts, in which

• Some amount is waived,

• The remaining amount has to be paid in a lump sum or installments.

3. Take the settlement deal in writing (Settlement Letter/NOC)

• If the bank accepts your settlement proposal, then:

• Take a written settlement letter from them.

• After completing the payment, do not forget to take the NOC (No Objection Certificate).

• This will serve as proof for you in the future.

4. Understand the impact on CIBIL score

• The settlement of an NPA loan affects your CIBIL score.

• Your score may fall for some time.

• But by paying other bills/credit cards/EMIs on time, you can improve the score again.

5. Avoid default again in the future

• Do financial planning.

• Take a loan only as per your need.

• Pay installments on time.

• Spend according to your budget.

Conclusion

It is important to understand that there is a deep and practical connection between the IBC Code 2016 and loan settlement. While on one hand loan settlement is an option in which the bank and the customer decide the process of repaying the loan by mutual consent, on the other hand IBC is a legal framework that makes this entire process more planned, transparent and time-bound.

Apart from this, IBC increases mental and legal pressure on loan defaulters, which forces them to take steps towards settlement or solution. This is not only beneficial for banks, but also provides relief to borrowers. Earlier, where loan recovery used to take years, now the same process can be completed in a few months.

Along with this, it is also worth noting that IBC is now applicable not only for companies but also on individual defaulters, which has increased both its scope and impact. The direct impact of this has been that now banks have started speeding up the legal process even in personal loan cases, thereby increasing the possibility of settlement and scope of negotiation.

Frequently Asked Questions (FAQ’s)