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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.

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