What happens if you owe the bank money and don’t pay?

There may come a time in your life when you can’t afford to pay for everything…

Rent, electricity, groceries, petrol, school fees, or debt…what’s more important?

A lot of people skip debt payments first.

This isn’t necessarily the best decision—here’s why…

 

What happens if you owe the bank money and don’t pay

When someone owes money to the bank, and they don’t pay it back, they’ll face several negative consequences. Late fees and interest will start to build on the debt. Debt collection and legal action follow. Which could lead to the bank taking assets like money, car(s), or the borrower’s home. Plus, there is long-term credit record damage.

Here’s a breakdown of what could happen:

• Pay late fees and see interest accumulate
• Expect collection efforts
• Prepare for legal action
• Risk losing collateral (for secured loans)
• Face limitations on bank accounts and other services
• Watch your credit score drop

 

Let’s go over each of the risks.

 

 

Consequences of not paying debt

When you miss payments on a loan or debt, things go from bad to worse very quickly. It starts with late fees and accumulating interest. Eventually leading to more serious actions like legal proceedings and asset repossession.

 

Late fees and interest accumulation

Banks continue to charge interest and add penalties fees when borrowers don’t pay their debt.

Late fees and growing interest make it harder to catch up. This creates a snowball effect, where the debt keeps increasing.

Key points:

• Late fees and penalties build up: When you miss a payment, the bank charges a penalty, which adds to your debt.
• Interest keeps accumulating: Interest keeps building up on the outstanding balance. This means the longer you wait to pay, the more you owe.

 

Debt collection efforts

In South Africa, if missed payments continue, the bank will start taking action to recover the money. This begins with reminders through phone calls, emails, and letters. If you still don’t respond, the account may be handed over to a debt collection agency.

(See: The debt collection process.)

Debt collectors must follow the laws of the National Credit Act (NCA), but they will be persistent and will build a case to go to court over time.

 

Legal action

If early phases of the debt collection process are unsuccessful, the bank or debt collectors can take [and will] legal action.

The first step is to send an S129 Notice, after which they can go to court.

While this legal route is serious, it’s important to note that you cannot go to jail for failing to repay a personal loan in South Africa.

(But the court can grant an order that allows the creditor to take money or assets in an effort to settle the outstanding debt.)

 

Seizure of assets or repossession (for secured loans)

For secured loans, such as a home or car loan, the bank can take possession of the collateral (the car or home) if the borrower defaults. This means the bank will repossess the asset in the case of a car or home loan. For unsecured loans, the lender may be able to get a garnishee order and take money directly from the borrower’s bank account.

Key points:

• Repossession: If borrowers default, the bank can legally seize the secured asset (car, home, etc.). The bank will sell the home or car to recover the outstanding balance on the loan.
• Shortfall: If the sale of the asset doesn’t cover the full debt, the borrower will still be responsible for paying the remaining balance. Known as shortfall.
• Garnishment: In some cases, the court may grant a garnishee order to recover the debt. Which lets the lender get money directly from the borrower’s employer or bank.

 

Bank account and other service limitations

Failing to repay a loan can also affect other banking services. Banks could freeze credit cards, cancel overdraft facilities, or restrict access to other financial services. Additionally, they may use funds from other accounts to settle the debt—known as “set-off.”

Key points:

• Frozen accounts: The bank may restrict access to services like overdraft facilities or credit cards.
• Set-off process: If the borrower has accounts with the bank, they may take money from those accounts (like a savings account) to pay off the debt. This is called the “set-off” process and only applies when it is clearly stated in the loan agreement.

 

Credit score impact

Not paying debt on time or in full has a serious impact on the borrower’s credit score. Credit bureaus like TransUnion and Experian keep a record of all missed, late, and incomplete payments. This also applies to judgements from legal proceedings. 

The trouble is that a bad credit score makes it harder to get loans or credit in the future. A poor credit score can also result in higher interest rates on any credit a financial service provider is willing to lend in the future. In some cases, it may even affect things like rent or employment.

Key points:

• Negative listings on credit reports: Missed, late, or incomplete payments and judgements are reported to credit bureaus and flagged on the borrower’s credit report.
• Long-term impact: A poor credit score can result in higher interest rates on future loans and can even affect someone’s ability to access credit, rent a property, or get a job in the future.

 

 

I can’t pay my debts—what options do I have?

There are several things anyone who is struggling to pay their debt can do. They can negotiate with the bank (or creditor), apply for debt counselling (debt review), or, as a last resort, declare bankruptcy.

It’s important to take action. Ignoring the problem will only make it worse.

Here’s what you can do:

• Contact your bank or lender: Reach out to discuss renegotiating the terms of your loan. The lender may be willing to extend the repayment period or temporarily reduce the monthly instalment.
• Apply for debt counselling (debt review): This is the best option for South Africans who can’t afford to pay their debt. Debt counselling is a regulated process that helps lower the cost of existing debts. The service also provides legal protection and simplifies the repayment process by consolidating the debt.
• Consider voluntary sequestration: As a last resort, there’s bankruptcy (or voluntary sequestration). This is a big deal. Try to avoid it. During voluntary sequestration, the court appoints a sheriff who recovers any outstanding debt by selling assets. This process has serious, long-lasting consequences and should only be considered if all other options have failed.

 

In summary

While someone can’t go to jail for not paying their debt…defaulting on a loan has far-reaching consequences and isn’t a good idea (at all).

Luckily there are ways around it. Solutions like debt counselling (debt review) can get you back on track.

If you want to talk to someone about managing your debt, we can help. Try our online assessment at My Debt Hero to see if you qualify to reduce your debt.