Loan default and related procedures

Loan default and related procedures

In this article, we clearly review the meaning of default on a loan, the actions taken by the bank, and the systemic options available to the customer to correct his financial situation before reaching a legal dispute.

When are you considered defaulted in the eyes of the bank?

Failure to pay means the client’s breach of his financial obligations towards the financing entity in accordance with the contract concluded between them. A customer is considered to be in default if:

• Delay in paying 3 consecutive installments or 5 separate installments (depending on the type of loan and contract).
• Did not respond to the funder’s notifications within the specified period.

The regulations of the Central Bank of Saudi Arabia (SAMA) also require the financing entity to send an official notification within 7 working days from the date of late payment, while giving the customer a period of up to 30 days to correct the situation before taking any additional action.

Important information:

Being late for a day or two does not mean that you are legally in default. Default is only classified after a period of time and in accordance with the conditions stipulated in the financing regulations issued by the Central Bank.

The applicable legal and regulatory framework

The Central Bank issued regulations regulating dealing with cases of delay and failure, the most prominent of which are:

• Article (8): It specifies when the customer is considered to be in default, and obliges the financing entity to notify him and give him a period not exceeding 30 days to compensate for the delay.
• Article (10): It gives the client the right to propose solutions such as rescheduling the debt or settling the debt according to his financial ability, provided that they do not include solutions that increase the financial burden on him.

What actions does the bank take when it defaults?

The financing entity does not have the right to take immediate legal action upon the first delay. Rather, it must follow specific regulatory steps, including:

1. Send an official default notice indicating the value of late amounts and new payment dates.
2. Propose amicable solutions such as rescheduling the loan or settling the debt depending on the client’s financial capacity.
3. Not obligating the client to provide new funding as a condition for rescheduling or settlement.

When can a bank file a case for non-payment?

After exhausting all amicable solutions and settlement attempts, the financier has the right to file a lawsuit to recover the amounts due.

This is done in one of two ways:

1. Filing a financial claim before the competent court (public or commercial)
2. Request direct execution before the enforcement court, if the debt is proven by a document that is considered an executive bond (such as a bill of exchange or notarized financing contract).

In both cases, the financing entity must have officially notified the client and given him an opportunity to settle the debt before resorting to the judiciary.

What are the legal consequences of default?

Failure to repay loans has significant legal consequences that vary depending on the situation, including:

• Inclusion in a credit attribute record:

The client is classified as “stumbling”, which affects his future ability to obtain new financing.

• Enforcement procedures after judgment:

After the final judgment is issued, the bank may request the enforcement court to seize the mortgaged bank accounts or assets.

What are the penalties for non-payment of the loan?

It is important to clarify that the Saudi regime does not impose “criminal penalties” for simply defaulting on loans, because the matter is considered civil or contractual, and not a crime.

However, there are systemic effects and consequences resulting from a customer’s breach of his obligations, known as procedural or civil penalties, which include:

Contractual liability (breach of contract provisions)

When signing the financing contract, the client is obligated to pay the installments on the specified dates.

If this obligation is breached, the provisions of the Civil Transactions Law and the rules of the Central Bank shall apply, which stipulate that:

“Whoever breaches his contractual obligation shall bear compensation for the resulting damage, in accordance with what is stated in the contract or as determined by the court.”

This compensation may be:

• A late fee specified in the financing contract (penalty clause) provided that it does not conflict with SAMA’s instructions.
• Or judicial compensation estimated by the judge if actual damage results from the financing entity.

Registering the customer in the credit registry (SIMAH)

The financing entity is obligated to notify the credit information company (SIMAH) about the status of the defaulting customer

This results in restricting his future ability to obtain loans or

Financial facilities until debt settlement.

Judicial enforcement procedures

If a court ruling is issued in favor of the bank, it is possible to approach the Enforcement Court, which has powers such as:

• Seizure of bank accounts or enforceable property.
• Temporarily stop financial transactions until payment is made.
• Travel ban in very specific cases if the court finds that the debtor is evading implementation despite his financial ability.

Termination of contract or withdrawal of guarantee

• The financing party may, after official notice, terminate the contract and fulfill its right to the provided guarantee (such as a mortgage or personal guarantee) in accordance with the terms of the contract and the implementation system.

Exemption in exceptional cases

In the event of the client’s death or permanent total disability,

SAMA’s instructions require the financing entity to exempt it from the remaining amount and issue a final financial settlement, if the loan insurance policy is valid.

What options are available to a defaulting debtor?

Saudi regulations allow debtors several legal paths to correct their financial situation, including:

• Debt rescheduling: without unjustified additional fees.
• Submit a request for an amicable settlement: before or during the hearing of the case.
• Resorting to the bankruptcy system: if debts exceed the repayment capacity, whether for individuals or establishments.

The role of financing case lawyers

You can contact a group of licensed lawyers specializing in financial cases from the office of Attorney Abdul Majeed Al Rashid to help you:

• Review the financing contract and identify items that can be negotiated.
• Negotiate with the financing entity and consider the possibility of reaching a mutually appropriate settlement.

Finally

Loan default is not the end of the road, but a situation that can be dealt with once it is addressed in a timely and correct manner.

The Saudi system is keen to achieve a balance between the rights of creditors and taking into account the debtor’s circumstances. Therefore, taking the initiative to request legal advice and taking organized steps towards settlement or rescheduling is the best solution to overcome the stumbling block with the least possible consequences.