Do you have a non-performing loan with a microfinance organization? Are you concerned about your legal rights in the event of default and the legality of threats issued by debt collection agencies? In this article, we will explain the regulations of the Civil Code of Georgia in simple terms, including statutory caps on penalties and strategies for loan restructuring or preventing asset forfeiture. Learn everything about your financial rights and legal recourse.

Microfinance Loans and the "Effective Rate" Trap

Before addressing dispute resolution, it is essential to understand why debt accumulates catastrophically. Most consumers focus solely on the nominal interest rate; however, the primary indicator is the Effective Interest Rate (EIR).

Under current legislation, upon loan issuance, a microfinance organization is legally mandated to disclose the effective interest rate, which includes:

• The nominal interest rate;

• Loan origination/disbursement fees;

• Insurance costs;

• Other undisclosed or hidden charges.

Advice: Always demand the loan agreement and verify the effective interest rate. According to the regulations of the National Bank of Georgia, this rate must not exceed the statutory cap (currently set at 50%).

Consequences of Default: Statutory Caps on Penalties

The greatest fear regarding loans is associated with default (failure to pay). Many believe that a 500 GEL debt can escalate to 10,000 GEL within a year. This is a myth!

The Civil Code of Georgia protects the borrower from infinite indebtedness. According to the law:

1. Cap on Penalties (Liquidated Damages): The total amount of accrued penalties cannot exceed 1.5 times the residual principal amount of the loan.

2. Daily Penalty: In the event of default, the one-time penalty (overdue interest) shall not exceed 0.27% of the outstanding principal per diem.

Example: If the principal amount of your loan is 1,000 GEL, the total penalties and surcharges cannot exceed 1,500 GEL in aggregate, regardless of the duration of the default.

Management of Non-Performing Loans and Debt Collection Agencies

Microfinance organizations often assign (sell) non-performing loans to third-party debt collection agencies. Here, borrowers often face significant psychological duress.

What constitutes a legal violation during the collection process?

• Intimidation and Harassment: Statements such as "we will confiscate everything" or "we will bring the police" are, in most cases, false and constitute harassment.

• Disclosure to Third Parties: Providing information regarding your debt to neighbors, relatives, or employers is a direct violation of the Law on Personal Data Protection.

• Harassment outside business hours: Nuisance calls during late-night hours.

If such facts occur, you have the right to file a complaint with the Police or the Personal Data Protection Service.

The Solution: Restructuring or Litigation?

How should you proceed to prevent the case from reaching enforcement proceedings?

Step 1: Communication

Do not cease communication. Visit the organization and file a formal application for loan restructuring (rescheduling the payment schedule). Demonstrate that you are not evading the obligation but are requesting a reasonable repayment term.

Step 2: Judicial Mediation / Litigation

If the creditor refuses to settle and demands unreasonable amounts, going to court is not always a negative outcome. Judges often reduce disproportionate penalties imposed on the borrower.

Step 3: Statute of Limitations

Be aware of the statute of limitations. For contractual loan claims, the standard limitation period is generally 3 years. If the organization has not filed a lawsuit within 3 years, the debt may be considered time-barred (though this requires individual legal assessment).

Conclusion

Microfinance organizations are part of the financial sector, and interactions with them must fall within the legal framework. Remember:

• Do not incur new debt to service old obligations (avoid the debt spiral).

• Be aware of your rights regarding the accrual of penalties.

• Do not succumb to psychological pressure.

If you believe your rights are being infringed upon, legally consult a lawyer or the relevant authorities immediately.