Credit Card or Personal Loan Default: Notices, Arbitration and Cases

What happens after you stop paying a credit card or personal loan?

The first ninety days are mostly about classification and calls. Once an EMI or the minimum amount due is missed, the account becomes overdue and the lender starts reminders by SMS, email and phone. RBI's framework classifies overdue accounts as special mention accounts in stages (up to 30 days, 31 to 60 days, 61 to 90 days), and once the dues remain unpaid for more than 90 days the account is classified as a non-performing asset. Your credit report records each stage.

Around this time the account usually moves from the lender's own collection team to an outside recovery agency. Late payment fees, penal charges and interest continue to be added. On credit cards, interest on the unpaid balance runs at the card's rate, which is high.

Legal action, if it comes, usually starts after the NPA classification, sometimes many months later. Lenders weigh the size of the debt against the cost of pursuing it. Smaller card debts are often sent to Lok Adalat or sold or assigned to an asset reconstruction company; larger personal loans, particularly from NBFCs and digital lenders, are more often sent to arbitration.

The usual stages after a default, and what each means

Can the bank file a criminal case for credit card or loan default?

Not for non-payment alone. Failing to repay a loan is a breach of contract, a civil wrong. Cheating under section 318 of the Bharatiya Nyaya Sanhita requires a dishonest or fraudulent intention at the time the loan was taken, for example applying with forged salary slips or a false identity. The Supreme Court has said repeatedly that a mere failure to keep a promise, or to repay money, does not by itself amount to cheating.

There are three situations where a criminal case can genuinely arise. The first is a cheque given for repayment that bounces, which can lead to a complaint under section 138 of the Negotiable Instruments Act. The second is the dishonour of an electronic mandate such as NACH or ECS for insufficient funds, which section 25 of the Payment and Settlement Systems Act 2007 treats in a similar way. The third is fraud at the start: false documents, impersonation or a loan taken with no intention of repaying.

Messages from agents saying that an FIR will be lodged, that police will come to your office, or that a warrant has been issued, are usually pressure tactics. A real criminal summons comes from a court, with a case number, and can be verified on the eCourts website. If you are threatened in this way, keep the messages; they are useful evidence of improper recovery, discussed in recovery agent harassment.

Which legal notices matter, and which are just pressure?

Lenders and their agents send many kinds of documents, and they are not equally important. A demand notice from the lender or its advocate, demanding the outstanding amount within a period, is a preliminary step. It does not start a case. A notice under section 138 or section 25 of the PSS Act is different: it starts a 15-day period after which a criminal complaint can be filed. A notice invoking arbitration under section 21 of the Arbitration and Conciliation Act starts the arbitration itself. A Lok Adalat notice invites you to a settlement sitting.

Then there are documents designed to look official: 'final warning' letters with court emblems, WhatsApp images of a 'summons', or messages from a 'legal department' threatening arrest. A genuine court summons carries the court's name, a case number and a date, and is served by the court through post, process server, or sometimes email or messaging as the court rules permit. You can check any case number on the eCourts services website. If it does not exist there, it is not a court case.

When Advocate B.K. Singh reviews a bundle of recovery papers, the first thing he separates is the one document that has a legal clock attached. In most bundles there is only one, and it is often not the one that looks most alarming.

How to respond to a legal notice for credit card or loan default

1. Identify what kind of notice it is

   Read the heading and the sections cited. Is it a demand, a cheque or NACH dishonour notice, an arbitration notice, or a Lok Adalat notice? The response and the deadline depend on this.

2. Check the figures against your statements

   Compare the amount claimed with your loan or card statements. Look for interest charged after the account was closed or written off, penal charges added as interest, insurance premiums you never agreed to, and payments not credited.

3. Get your own documents

   Ask the lender in writing for the loan agreement, the sanction letter or card terms, the statement of account and the key fact statement. You are entitled to them, and they show what interest and charges were agreed.

4. Reply where it helps

   A short written reply disputing wrong figures, pointing out uncredited payments or objecting to a unilaterally appointed arbitrator puts your position on record. Do not admit amounts you have not checked, and do not make promises you cannot keep.

5. Act on deadlines

   For a cheque or NACH dishonour notice, decide within 15 days whether you can pay or settle. For an arbitration notice, object to the arbitrator in writing promptly. For a Lok Adalat notice, decide whether to attend with a realistic offer.

6. Keep everything in writing

   Communicate by email or letter, keep copies, and record dates of calls. If you pay anything, pay only into the lender's own account and get a receipt that states what the payment is for.

Arbitration in personal loan cases: the unilateral arbitrator problem

Most personal loan agreements, and some card agreements, contain an arbitration clause. Many of them let the lender alone choose a sole arbitrator. In practice, a borrower often receives a notice naming an arbitrator the lender has picked, followed by notices from that arbitrator, often from a distant city or an online platform, and then an award passed ex parte.

The law does not allow this. In Perkins Eastman Architects v HSCC (India) (2019), the Supreme Court held that a party interested in the outcome cannot unilaterally appoint a sole arbitrator. A Constitution Bench in Central Organisation for Railway Electrification v ECI-SPIC-SMO-MCML (2024) went further, holding that clauses allowing one party to unilaterally appoint a sole arbitrator offend the principle of equal treatment of parties, for appointments made after that judgment. Under section 12(5) of the Arbitration Act, a person with a disqualifying relationship to a party cannot act as arbitrator unless both parties waive the bar by an express written agreement made after the dispute has arisen. Merely taking part in the hearing is not such a waiver.

Courts, including the Delhi High Court, have set aside awards made by arbitrators the lender appointed on its own. If you receive an arbitration notice naming an arbitrator you did not agree to, object in writing to the lender and the arbitrator, and if needed apply to the court under section 11 for a proper appointment. See appointment of an arbitrator under section 11, and for arbitration generally, our page on arbitration practice in Delhi.

If an ex parte arbitral award has already been passed

Many borrowers learn of an award only when the lender files for execution or a bank account is attached. The remedy is an application under section 34 of the Arbitration Act to set the award aside, filed within three months of receiving the award, extendable by up to 30 days for sufficient cause. After that, the court cannot extend time. The date you actually received the signed award matters, so find out how and when it was served.

The usual grounds in loan cases are that the arbitrator was appointed unilaterally and was ineligible under section 12(5), that you were not given proper notice of the appointment or proceedings, that the award grants interest and charges beyond the contract, or that it is otherwise in conflict with the public policy of India. A detailed treatment is in challenging an arbitral award under section 34.

If no challenge is filed, or it fails, the award is enforced as a decree under section 36. The Supreme Court held in Sundaram Finance v Abdul Samad (2018) that execution can be filed directly wherever the borrower's assets are, without first transferring the decree. The lender can then seek attachment of bank accounts and a portion of salary, subject to the protections in the Code of Civil Procedure.

Lok Adalat notices for credit card dues

Banks send large numbers of unpaid card and small loan accounts to pre-litigation Lok Adalats organised by the legal services authorities. You receive a notice to attend on a given date, often a Saturday, at the district court complex or online. Attendance is voluntary. If you do not go, nothing is decided against you; the bank may then take some other route.

If you go and reach a settlement, the Lok Adalat records it as an award. Under the Legal Services Authorities Act 1987, that award is deemed to be a decree of a civil court, is final and cannot be appealed. So the advantage is a negotiated figure, often with interest and charges waived, and the risk is agreeing to instalments you cannot keep. If you default on a Lok Adalat settlement, the bank can execute the award directly.

Go with your statements, a clear figure you can actually pay, and a written proposal. Bank officers at Lok Adalats usually have authority to agree within limits. Read the settlement before signing and make sure it says the account will be closed on payment. More detail is in settling cases in Lok Adalat.

Bounced EMI cheques and NACH mandates

Personal loans are often repaid through NACH mandates or post-dated cheques. If a cheque is returned for insufficient funds, the lender can send a notice within 30 days of the return memo, and if you do not pay within 15 days of receiving it, file a complaint under section 138 of the Negotiable Instruments Act. NACH or ECS mandates dishonoured for insufficient funds are covered by section 25 of the Payment and Settlement Systems Act, which follows a similar notice and complaint procedure.

These are criminal complaints, tried summarily, and the court can order interim compensation of up to 20 percent of the cheque amount in a section 138 case. The cases are compoundable, and many settle at the first hearings or in mediation. Undated or blank security cheques taken at the time of the loan can still attract section 138 if they were filled in for a debt that was actually due on the date written on them; see security cheques and section 138.

If you receive a dishonour notice, the 15-day window is the time to act: pay, settle, or reply disputing the debt if the amount is wrong. If summons have already been issued, appear on the date; ignoring it leads to warrants. Our page on cheque bounce cases explains the defence.

Civil suits, summary suits and the DRT

A lender can also file a recovery suit in a civil court, often as a commercial suit, and frequently under Order 37 of the Code of Civil Procedure as a summary suit based on the written loan agreement. In a summary suit you must apply for leave to defend within the time allowed and show a real defence; otherwise a decree follows quickly. See summary suits under Order 37.

If the amount due is ₹20 lakh or more, a bank or financial institution files an Original Application before the Debts Recovery Tribunal instead of a civil suit. That is uncommon for credit cards but happens with large personal or business-purpose loans. The defence there is covered in defending a bank's Original Application.

Limitation is a real defence in older accounts. The lender generally has three years from default to sue, but every written acknowledgment of the debt and every part payment restarts the period under sections 18 and 19 of the Limitation Act. Paying a small token amount to stop calls can revive a claim that was about to expire.

Interest, penal charges and the amount claimed

Lenders' claims in card and personal loan cases are often inflated by charges stacked on charges. Since April 2024, RBI's penal charges rules require that penalties for default be levied as penal charges, not added to the interest rate, and not compounded. Charges must be disclosed in the loan agreement and key fact statement. A claim that capitalises penal interest month after month is open to challenge.

Credit card interest is high, and there is no statutory cap. In December 2024 the Supreme Court set aside the National Consumer Commission's 2008 ruling that had capped credit card interest at 30 percent a year, holding that rates are a matter for the contract and RBI's regulation. So the argument is not that the card rate is illegal, but whether the lender has charged what the terms and RBI's directions allow.

In arbitration and suits, the tribunal decides what interest to allow after the claim is made, and it has discretion over interest pending the case and after the award or decree. Arbitrators and courts do reduce interest that is plainly excessive. Check the figures and put your objections in writing at the first opportunity.

Recovery calls, digital lenders and your contacts

RBI's rules on recovery require lenders and their agents to call only between 8 am and 7 pm, to identify themselves, and not to use threats, abusive language or public humiliation. Calls to your employer, relatives and friends to shame you are not permitted. The remedies, from a complaint to the lender's nodal officer to a police complaint, are covered in recovery agent harassment.

Loan apps raise a particular problem. RBI's digital lending rules require that loans be made by a regulated bank or NBFC, that the borrower gets a key fact statement, and that apps do not access contact lists and photos beyond what is needed. Apps that harvest contacts and send morphed images or abusive messages to them are often unregulated, and some are outright frauds. Report them on 1930 and cybercrime.gov.in, keep screenshots, and complain to the regulated lender if there is one.

Service failures by a regulated lender, such as wrong charges or refusal to give a statement, can also go to the RBI Ombudsman; see how the RBI Ombudsman complaint works. The Ombudsman will not stop recovery itself.

Settling a credit card or personal loan: settled versus closed

Card issuers and personal loan lenders settle defaulted accounts all the time, often for a fraction of the claimed amount once the account has been an NPA for a while. The catch is the credit report. A settled account is reported as 'settled', which tells future lenders that you paid less than you owed, and that status can make fresh credit harder or costlier for years. Paying the full outstanding, or negotiating a waiver of only penal charges and getting the account reported as 'closed', is better for your record if you can afford it.

Never pay a settlement amount without a written settlement letter from the lender itself, on its letterhead, stating the amount, the dates and that the account will be closed and reported accordingly on payment. Pay only into the lender's own account, not to an agent's personal account or a UPI handle. Keep the no dues certificate. Our posts on one-time settlements and correcting a CIBIL entry cover the details.

If you hold a savings account with the same bank, check your card or loan terms. Many allow the bank to set off overdue amounts against your deposits. Salary credited to that account may be swept towards the dues.

Job loss, illness or death of the borrower

If you cannot pay because of job loss or illness, write to the lender early and ask for restructuring, a payment holiday or a reduced EMI, with documents. Lenders are not obliged to agree, but a written request made before default looks very different from one made after a year of silence. Check whether the loan carried a credit protection or loan insurance cover; many personal loans do, and the cover may pay EMIs for job loss or disability.

When a borrower dies, the debt does not pass personally to the family. The legal heirs are liable only to the extent of the assets they inherit from the deceased, and a credit card balance is recovered from the estate. Agents who tell a widow or children that they must pay personally are wrong. If the loan had a co-borrower or guarantor, that person's position is different; see a guarantor's liability.

A point Advocate B.K. Singh often makes to families in this position is to ask the lender, in writing, for the insurance details linked to the loan before discussing payment. A claim is sometimes available that nobody had mentioned.

Documents to gather after a default

Mistakes that make a default worse

• Ignoring arbitration notices. An ex parte award is enforceable like a decree. Object to a unilateral appointment at the start; it is far easier than fighting the award later.
• Paying agents in cash or into personal accounts. The payment may never reach the lender, and you will have no proof that it did.
• Signing acknowledgments to stop calls. A signed acknowledgment or a token payment restarts the limitation period.
• Agreeing to instalments you cannot keep at Lok Adalat. The award is final and can be executed directly if you default.
• Missing the section 34 deadline. Three months plus a maximum of 30 days, and then the award stands regardless of its defects.
• Panicking over fake summons. Check the case number on eCourts before reacting to anything sent by WhatsApp.

What to do this week

• Sort every notice you have received by type: demand, dishonour, arbitration, Lok Adalat or court.
• Mark the one with a deadline and calculate it from the date you received it.
• Ask the lender in writing for the agreement, key fact statement and statement of account.
• Check the claimed amount for penal interest, uncredited payments and unexplained charges.
• If an arbitrator has been named by the lender alone, send a written objection.
• Check for any loan insurance or credit protection cover.
• Keep screenshots of threatening calls and messages.
• If an award or summons has already been passed or issued, get it read by an advocate now.

Getting the papers read in time

Credit card and personal loan defaults are mostly decided by deadlines: 15 days on a dishonour notice, the window to object to an arbitrator, three months to challenge an award, the date on a summons. Meeting them keeps your options open, whether you plan to pay, settle or contest the figures.

If you have a notice, an award or a summons and want to know what it means and what the deadline is, the team at B.K. Singh & Associates can look at the papers and tell you. Send them through our online enquiry form.