|
Debt recovery
03/02/2004 The Star Articles of
Law with Bhag Singh
AN INDIVIDUAL could buy property that could be a house to stay in, premises
to do business or as an investment with rentals and capital appreciation making
up the profit. Sometimes a housebuyer is unable to pay the balance of the
purchase price or even the monthly instalments. When this happens the bank
will proceed to foreclose the property.
In this connection, foreclosure means that the bank will proceed to take steps
in accordance with the agreement with the borrower to have the property sold
off so that the bank can recover its loan and related expenses and the balance
will be paid to the borrower.
Whilst banks and other financial institutions provide all types of incentives
for the public to borrow money, it is a different matter when the borrower
defaults. In many cases it can be difficult to get the bank to reduce the
accumulated debt by a few thousand or even a few hundred ringgit.
If the borrower cannot come up with the money to pay up, the borrower will
in many cases just give up and allow the bank to proceed as it wishes.
Many caught in such a situation think that the only option is to leave it
to the bank to auction off the property.
However, allowing the bank to auction off the house may not always be the
final solution to the problem. It may be the start of another. When the bank
auctions off the house, the amount realised raised may not be enough to pay
off the entire debt. The bank could take further action to recover the balance
outstanding through a separate action against the borrower. So the problem
does not end there. But how could such a situation arise when the loan taken
is less than the original purchase price of the property?
It may be that there has been a crash in property prices and the value of
the property has gone below the purchase price or even below the loan amount.
Or it could be that because of different types of default by the borrower,
interest charges, penalties and legal charges as well as other expenses have
accumulated.
In other cases, after the default occurred the efforts by the bank to dispose
of the property have not been successful even though a number of auctions
have been held. When this happens, more legal expenses are incurred and the
auctioner’s expenses and advertisement costs still have to be paid.
All these will add up to the principal amount owing and could easily exceed
the value of the property. And then when the property is sold it leaves the
borrower still owing the bank.
It would be in the interest of the borrower not to leave everything to the
bank. A borrower who defaults can avoid this situation by taking certain preventive
steps even though at the end of the day he may still lose the house.
He should start looking for a buyer on his own by advertising in the newspapers
or with the help of a real estate agent.
He should also inform the bank that he wants to sell off the property and
use the proceeds to pay the bank. If the price is more than what is due to
the bank it would not object to the sale as long as it is assured of repayment
of the debt.
The agreement will have to reflect that the owner of the property is indebted
to the bank and appropriate provisions will have to be incorporated to ensure
that the deposit itself and the eventual balance of purchase price up to the
amount owed is paid to the bank.
The problem arises when a potential buyer is only willing to pay an amount
below the amount owed to the bank.
In such cases the bank may insist that the borrower top up the purchase price
so that the loan can be repaid in full.
This could prevent the sale from taking place because whilst the borrower
is prepared to lose his house and hand over all the proceeds to the bank he
may not have the resources to top up to fully settle the loan.
In such a situation the more beneficial approach would be to allow the property
to be sold and for the bank to receive the proceeds of the sale to reduce
the loan.
This would leave a balance which the bank could seek to recover as an ordinary
debt.
If the bank refuses to allow the property to be sold but continues to stage
unsuccessful auctions, its efforts would merely increase the amount of the
debt.
Whilst it is in the interest of the borrower to sell the property as quickly
as possible, the bank has the contractual right to refuse to release the property
in the absence of the loan being fully settled though this stance may appear
unfair to the borrower!
All said and done, the end result can be unpredictable. A dramatic drop or
rise in the value of the property can cause even greater hardship or turn
out to be a blessing.
|
