One of my clients recently had a case which I am explaining below and if you are stuck in such similar situation, here is what to do.
Note: Due to attorney-client privilege, I cannot disclose complete case details or identify the actual parties involved. However, I am sharing the essential facts and legal approach so that if you find yourself in a similar situation, you can understand the available solutions and legal remedies.
TL;DR: For an old unsecured loan default, a civil suit for recovery is the lender's primary remedy—criminal cases are rare and typically tied to fraud or cheque bounce. You can negotiate a settlement directly with the lender, often at 30-40% of the principal amount. Ignoring calls won't make it go away, but panic isn't necessary either.
Renu Sharma took a small business loan from an online lending app in early 2020. The business—a small tailoring shop in old Ahmedabad—collapsed during the first COVID lockdown. By mid-2020, Renu and her husband had stopped payments entirely. They changed phone numbers and moved to a rented flat in a different part of the city. For three years, silence. Then, in late March 2025, Renu checked her credit report and within an hour received a call from a person claiming to represent the lenders collection arm. The demand: over ₹1.1 lakh, including compounded interest and late fees.
She contacted the office of Advocate Sudhir Rao. Her first instinct was to deny the loan altogether—a panicked reaction. Advocate Sudhir Raos office explained why that approach would backfire: it would forfeit any goodwill and harden the lenders position. Instead, they guided her to verify the debt, identify the correct lender entity, and approach them directly for a settlement. The result? Within six weeks, Renu settled the account for 38% of the principal amount, paid in two monthly instalments. The lender issued a full and final settlement letter and confirmed deletion of the negative credit entry. Advocate Sudhir Raos expertise in debt recovery and financial disputes—specifically, navigating these negotiation windows—was what made the difference between a clean exit and mounting legal harassment.
Key Facts of the Case
- Loan was an unsecured personal/business loan—no collateral or property attached to it.
- Payments stopped during the first COVID-19 lockdown in early 2020.
- The borrower changed phone numbers and residential address—collection agency reconnected via Aadhaar-updated address.
- Outstanding amount had ballooned to over ₹1.1 lakh due to interest and penalties.
- No property or significant assets were owned by the borrower.
- The lender was a registered NBFC—not an unlicensed lender—so recovery was legally enforceable.
- Settlement was achieved at 38% of the original principal amount, paid in two instalments.
The Direct Legal Answer
Can a collection agency file a criminal case for this?
Unlikely, but not impossible. A simple loan default is a civil matter—the lender can file a money suit, not a police complaint. Criminal cases arise only if there was fraud at the time of borrowing (fake documents, forged identity) or if a post-dated cheque bounced under the Negotiable Instruments Act. In Renu's case, the loan was genuine, and no cheques were involved. So criminal liability wasn't a realistic threat.
Can they seize property or assets?
No. For an unsecured loan, there is no collateral to seize. The lender cannot touch your house, vehicle, or jewellery unless they obtain a court decree after a civil suit. And even then, execution is a long, expensive process—rarely pursued for small amounts.
Can they track me through Aadhaar?
Yes—and they will. If your Aadhaar address is current, collection agencies can cross-reference it with your phone number or bank records. Changing numbers isn't a permanent shield. Better to negotiate from a position of engagement than one of hiding.
Advice in Such Cases
First, stop panicking and stop hiding. The debt is three years old—that's actually an advantage. Lenders factor in the cost of recovery and often write down such accounts.
Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation to come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think.
Second, never speak to the collection agency's field agents. Contact the lender's official customer care or Nodal Officer directly. Third, demand a written statement of account and a settlement offer in writing. Verbal promises mean nothing. Fourth, if you genuinely cannot pay, be honest—lenders prefer a partial recovery over nothing. Finally, this type of financial dispute negotiation requires a lawyer who regularly handles debt recovery and settlement work. A general practitioner may not know the nuances of communicating with recovery agents or evaluating settlement percentages.
Applicable Sections of Law
This was a civil recovery matter. The applicable framework includes:
- Indian Contract Act, 1872 — Section 73 (compensation for breach of contract) governs the lender's right to recover principal and interest.
- Limitation Act, 1963 — Article 25 provides a 3-year limitation for a suit on a loan. The clock starts from the date of last payment or demand.
- Bharatiya Nagarik Suraksha Sanhita, 2023 (BNSS) — For any criminal dimension (e.g., e-NACH debit bounce, which could fall under cheating), Section 111(1) BNSS deals with cognizable offences—but this is rare in standard loan defaults.
- Negotiable Instruments Act, 1881 — Section 138 applies only if a cheque was issued and dishonoured. No cheque means no Section 138 case.
Limitation Period
Under the Limitation Act, 1963, a suit for recovery of money must be filed within three years from the date the debt becomes due. If no payment or acknowledgment has been made since early 2020, that three-year window likely closed by early 2023. However, each payment—even a partial one—or a written acknowledgment resets the clock. Since Renu made no payments after 2020, the lender's right to sue is probably time-barred now. That's a strong negotiating card.
Interim Reliefs Available
In a civil recovery suit, the lender can seek:
- Attachment before judgment (Order 38 CPC) — only if the lender proves the borrower is about to remove assets or dispose of them fraudulently. Rarely granted for unsecured loans.
- Temporary injunction (Order 39 CPC) — usually sought by the borrower to restrain coercive recovery actions, not by the lender.
- Status quo orders — possible if there's a dispute over the loan terms.
Most lenders won't bother with interim reliefs for amounts under ₹2-3 lakh.
If You Are the Victim
- Never pay a collection agency on the spot. Ask for a written notice and verification documents.
- Check if the debt is within the limitation period—if it's older than 3 years since last payment, the legal right to sue may be dead.
- Negotiate a settlement directly with the lender's Nodal Officer—target 30-40% of the principal outstanding.
- Get the settlement in writing with a full and final discharge letter before paying anything.
- Keep records of all calls, messages, and letters from recovery agents.
Documents You Must Keep Ready
- Loan agreement (copy or digital version)
- All payment receipts or bank statements showing past payments
- Aadhaar card and PAN card for identity verification li>Written statement of account from the lender
- Any correspondence with the collection agency or lender
- Proof of income/business loss during COVID
- Bank statements showing the loan account activity
- Credit report (CIBIL/Experian/Equifax)
What Evidence Is Required?
- Primary evidence: signed loan agreement, disbursement proof, and repayment history.
- Secondary evidence: bank statements, SMS/email communication, call recordings (if you recorded with notice).
- For the borrower: evidence of financial hardship—business closure letters, loss of income documents, medical records if applicable.
- For settlement negotiations: proof that you approached the lender in good faith.
- Witness testimony: not usually needed for straightforward loan recovery disputes.
How Courts Typically Approach Such Cases
Civil courts handling money suits are procedural and slow—a contested recovery suit can take 2-4 years for a first hearing. But the trend is shifting toward case management and pre-trial mediation. Courts look for clean documentation and clear breach of contract. If the borrower admits the loan but pleads financial distress, many courts refer the matter to Lok Adalat for amicable settlement. The cost and delay of litigation drive both sides toward settlement—it's rarely a full trial to judgment.
Timeline of Legal Process
- Notice stage: 30 days — lender typically sends a legal notice before filing suit.
- Plaint filed: 1-2 weeks for drafting and filing.
- Summons served: 30-60 days.
- Written statement: 90 days from receipt of summons.
- Issues framed: next hearing (approximately 6-12 months after filing).
- Evidence: 6-18 months (depends on court backlog).
- Final arguments and judgment: 3-6 months.
- Execution decree: additional 6-12 months if borrower doesn't comply voluntarily.
Understanding the Costs
The total cost of a matter like this varies significantly from one case to the next — it depends on the complexity of the dispute, the forum involved, the number of hearings, and the specific facts of your situation. There is no single fixed figure that applies to everyone.
A professional advocate can give you an accurate estimate only after reviewing all your facts and documents in a consultation.
Can the Matter Be Settled Out of Court?
Yes—and that's exactly what happened here. Settlement out of court is the most practical route for both sides. You can approach the lender directly with a one-time settlement offer. Many lenders have internal settlement policies—they'd rather recover something now than litigate for years. If the case has already been filed, you can still settle and record the compromise before the Lok Adalat or the civil court. For unsecured loans, lenders typically accept 30-60% of the principal if the borrower shows genuine financial hardship. Always get the discharge letter before making payment.
Common Mistakes People Make
- Denying the loan altogether — this destroys trust and hardens the lender's stance. A partial admission with financial explanation works better.
- Changing phone numbers and addresses repeatedly — it buys time but creates a permanent record of evasion that works against you in any legal proceeding.
- Paying collection agents directly without a settlement letter — you may end up paying full amount and still receive a lawsuit later.
- Ignoring the problem altogether — the debt doesn't vanish; interest and late fees keep mounting, and the negative CIBIL mark stays for 7 years.
- Engaging a lawyer without domain experience in financial disputes and settlement negotiation — this type of case involves knowing how to value settlement offers, when to push back on inflated charges, and how to structure a payment plan that the lender will accept. A general practice lawyer may not know these tactical nuances and could miss the window for a good settlement.
FAQs People Normally Have
Can I be arrested for not paying a personal loan?
No. Loan default is not a criminal offence. Arrest is only possible if a court issues a warrant in cases of fraud, cheque bounce, or contempt of court. Simple non-payment will never lead to arrest.
Will my CIBIL score be ruined forever?
No. A default remains on your credit report for 7 years from the date of last payment or settlement. But once the account is settled or closed, the negative entry stops affecting your score after 2-3 years of good payment behaviour with other accounts.
Can the lender tell my employer or family?
Collection agents sometimes do this—it's illegal harassment under the RBI Fair Practices Code. You can file a complaint with the RBI Ombudsman or with the local police if they threaten or harass you. But proving it is hard.
Is it safe to settle for less than the full amount?
Yes—if you get it in writing. A full and final settlement letter confirms the lender cannot sue you later for the balance. It also triggers the closure of the loan account in your credit report.
What if the lender says they will file a criminal case?
Ask them to put it in writing. Most are bluffing. A genuine loan default without fraud or cheque bounce does not support a criminal case. If they file, your lawyer will get it quashed at the earliest stage.
This article is general legal information, not legal advice. Consult a qualified advocate about your specific situation.
Advocate Sudhir Rao, Supreme Court of India
Facing a similar matter? Speak to a criminal advocate in Delhi — Advocate Sudhir Rao appears in bail, trial and appellate matters before the Delhi District Courts, the Delhi High Court and the Supreme Court of India.