Bad credit is a loan granted by a financial institution that is not repaid by the customer within the agreed-upon terms.
Non-performing loans, or credit in default, is a term used to describe a loan granted by a bank or other financial institution that is not paid back by the customer within the agreed upon time frame. Generally speaking, a loan is considered to be in default when payment is more than 90 days late.
Bad credit is considered a financial risk not only for the consumer, but also for the institution that granted the loan, since the latter may suffer financial losses if the loan is not repaid.
Portugal is one of the countries with the highest levels of non-performing loans in the European Union. This has made credit default a very important issue for the country in recent years.
The financial crisis that affected Portugal in 2011 and 2012 had a strong impact on our economy, leading to increased unemployment and the bankruptcy of many companies. These factors ended up influencing the clients' ability to pay their loans.
However, the situation has been gradually improving, with banks adopting measures to reduce the number of bad loans in their portfolios. One of the measures, for example, was the sale of non-performing loans to companies specializing in credit recovery.
Despite the improvements, non-performing loans are still considered a significant issue in Portugal, and financial institutions are still facing some challenges to recover overdue loans.
5 Situations that can lead to bad credit
Bad credit is not only a problem for those who took out a loan that they are now unable to repay, but also for the banks or other financial institutions that granted the loan.
There are several situations that can lead to a credit default. Among them, we highlight:
In order to minimize the risk of non-performing loans in their portfolios, financial institutions should always assess credit risk when granting loans and continue to adopt risk management measures throughout the process.
What are the consequences of bad credit?
Bad credit can result in several negative consequences, not only for those who are in default, but also for the financial institution that granted the credit.
Therefore, it is essential that financial institutions manage credit risk effectively and adopt measures to prevent non-performing loans in their portfolios.
Consequences of a credit default include:
How to know if you are in credit default?
To find out if you are in default on your credit, you should consult the Bank of Portugal's Central Credit Register, also known as the Banco de Portugal's Black List.
This platform gathers all the information about bank credit contracts from the last 5 years and can be consulted by any person or company.
4 Solutions to get out of bad credit
Resolving bad credit can be a very complex and time-consuming process that requires a careful and strategic approach. To get out of this situation, you may need to enlist the help of financial professionals!
Check out 4 possible solutions for getting out of bad credit:
1. Settle the debt: If you have the means to settle the debt immediately, do it! This is the fastest and most effective way to resolve the issue. Once you pay the debt, the bank is obligated to update your information in the Bank of Portugal's Central Credit Register, and your name is cleared.
For example, if you missed a month's payment, but the following month you are able to pay the outstanding amount, you will no longer be in default. However, be aware that the default data is kept for at least 10 years. So even when you pay off the debt, your record of defaults will not disappear.
2. Renegotiate credit: If settling the debt is not an option, you can try to renegotiate the credit with your bank. How? In the following ways:
If an agreement is reached, this information will be communicated by the financial institution to Bank of Portugal. In this situation, the credit is no longer classified as non-performing and is designated as renegotiated credit.
3. Sale of assets: If you have assets in your name that can be sold, such as real estate or vehicles, you can use the proceeds from the sale to help pay off outstanding debt.
4. Filing for insolvency: Your last resort is to file for insolvency, i.e. to declare your personal bankruptcy. However, this solution should only be considered in a limit situation, due to the strong consequences it entails.
When you declare insolvency, you are deprived of your assets and your property can be sold in court to pay off the debt. Your salary will also be limited, since you will only receive the equivalent of the national minimum wage, and the rest will be used to pay off the debt.
In addition to these conditions, their state of insolvency will be public knowledge, being published in Diário da República and communicated to judicial institutions and at their place of work.
Filing for insolvency is a complex and demanding process that can only be carried out through a lawyer. The costs of this process are usually between 500€ and 3.500€. If you cannot afford these costs, you can apply for legal aid from Social Security.
For our part, we recommend that you always seek advice from a financial advisor or lawyer before making any significant decisions!
The Domusvenda Group works with a wide variety of service providers and has a solid network of specialized companies with many years of experience in the Distressed Assets market.