If you are stuck in such a situation, here is what to do.

Mr. Alok Sharma, a resident of Nagpur, had a long-standing relationship with a finance company, “SwiftLoan Solutions,” having successfully availed and repaid loans in the past. Recently, he took a personal loan of ₹75,000. He managed to pay three initial EMIs of ₹13,000 each through an auto-debit facility linked to his bank account. However, due to unforeseen financial difficulties, he has been unable to pay the subsequent EMIs for the last six months. The outstanding principal, which was around ₹40,000, has now escalated to nearly ₹60,000 with accumulated interest and penalties.

The company’s recovery agents have been contacting him and are now threatening to file a case against him under “Section 25.” Mr. Sharma is concerned about the gravity of this threat, wondering if the amount is significant enough for the company to pursue legal action and what steps he can take to resolve the matter, as he intends to repay the loan within the next few months but needs more time.

Advice in such cases

Facing legal threats for loan default can be stressful. It is important to handle the situation calmly and strategically. Here are some immediate steps to consider:

• Do not panic or ignore the communications from the lender. Ignoring the problem will only make it worse.
• Review your loan agreement thoroughly to understand the terms and conditions regarding default, penalties, and the legal recourse available to the lender.
• Communicate your situation to the lender formally, preferably in writing (via email), expressing your intention to repay and requesting a revised payment schedule or a temporary moratorium.
• 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 of 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.

Applicable Sections of Law

The “Section 25” mentioned by the lender most likely refers to Section 25 of the Payment and Settlement Systems Act, 2007. This section deals with the dishonour of electronic funds transfers for insufficiency of funds. It is a quasi-criminal offence and is treated on par with a cheque bounce case under Section 138 of the Negotiable Instruments Act, 1881.

For a case to be filed under this section, the lender must first send you a legal notice demanding payment within a specific period. If you fail to pay within that period, they can file a complaint before a Magistrate.

Apart from this, the lender also has the right to file a civil suit for the recovery of the outstanding amount. In rare cases, if it can be proven that there was a dishonest intention to not repay the loan from the very beginning, charges of cheating under the Bharatiya Nyaya Sanhita (BNS) could be alleged, but this is unlikely when several EMIs have already been paid.

If you are the complainant

If you are the lender (the company) in such a scenario, you must follow the due process of law:

• The first step is to send a formal legal demand notice to the borrower’s registered address through a lawyer. This notice must specify the defaulted amount and provide a period (usually 15-30 days) to make the payment.
• Compile all necessary documents, including the loan agreement, statement of account, records of the bounced auto-debit instructions, and all communication with the borrower.
• 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 of 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.
• If the borrower fails to pay after the notice period, you can file a complaint under Section 25 of the Payment and Settlement Systems Act, 2007, in the appropriate Magistrate’s court.

If you are the victim

If you are the borrower who has defaulted, you are considered the “accused” in a potential legal case. Here is what you should do:

• Upon receiving a legal notice, do not ignore it. It is a formal warning before legal proceedings begin.
• Attempt to negotiate with the lender for a one-time settlement (OTS) or a restructuring of the loan. Any agreement reached should be documented in writing.
• 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 of 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.
• If a court case is filed, you will receive a summons. It is mandatory to appear in court on the given date, either in person or through your lawyer. Failure to appear can lead to the court issuing a warrant.

How the police behave in such cases

The police have a very limited or no direct role in a case filed under Section 25 of the Payment and Settlement Systems Act. This is because it is a complaint case filed directly by the complainant (the lender) before a Judicial Magistrate. The court, not the police, handles the proceedings, including issuing summons.

Police intervention would only occur if the lender files a separate FIR alleging criminal offences like cheating, criminal breach of trust, or criminal intimidation under the Bharatiya Nyaya Sanhita (BNS). However, the Supreme Court has repeatedly held that loan defaults are primarily civil in nature, and the police should not be used as a recovery mechanism. In a straightforward default case like this, police involvement is highly unlikely.

FAQs people normally have

Can I be arrested for defaulting on a personal loan?

Loan default itself is a civil wrong, not a crime, so you cannot be arrested for it. A case under Section 25 is quasi-criminal, but arrest is not the immediate consequence. An arrest warrant could only be issued by the court if you repeatedly fail to appear for the hearings despite receiving the court’s summons.

Is ₹60,000 too small an amount for a company to sue over?

No. Financial institutions and NBFCs have dedicated legal teams and processes to handle defaults of all sizes. They are very likely to pursue legal action to recover their money and to set a precedent for other defaulters.

Will this default impact my CIBIL/credit score?

Yes, significantly. The moment you default on an EMI, the lender reports it to credit bureaus like CIBIL. This negatively impacts your credit score, making it very difficult to secure loans or credit cards in the future.

What evidence is required?

• For the Lender: The primary evidence includes the digitally signed loan agreement, proof of loan disbursal, the borrower’s bank account statements showing the failed auto-debit instructions, a copy of the legal notice sent to the borrower, and proof of its delivery.
• For the Borrower: Evidence would include proof of all payments made, any written communication with the lender proposing a repayment plan, and bank statements. If there are disputes regarding the outstanding amount, supporting calculations would be needed.

How long will the investigation take?

Since a Section 25 case is a summons trial before a Magistrate, there is no police investigation. The legal process itself involves several stages: filing the complaint, court taking cognizance, issuing summons, appearance of the accused, framing of notice, evidence from both sides, final arguments, and judgment. This entire judicial process can take anywhere from several months to a few years, depending on the court’s caseload and the adjournments sought by the parties.

Advocate Sudhir Rao, Supreme Court of India