What happens to a debt nobody has paid for months

When does a late loan become a non-performing loan?

In the European Union the line is drawn in the banking rulebook, the Capital Requirements Regulation. A loan is non-performing, an NPL in the trade's shorthand, when a material amount has been past due for more than 90 days, or when the bank judges that the borrower is unlikely to repay in full without the bank selling whatever secures the loan. The second test matters more than people expect: a customer who has just lost their job or entered an insolvency process can be classed as non-performing well before day 90.

The label is about the bank's books, and it has consequences there. A non-performing loan needs a larger provision, money set aside against the expected loss, and for loans granted since 2019, EU rules require that cover to grow each year until an unsecured non-performing loan is fully provisioned after three years. Every month an account sits unresolved costs the bank capital, which is why NPL portfolio management is run as its own discipline in most banks, with its own targets and its own deadline pressure.

For the person who owes, almost nothing visible happens at day 90. The letters may change tone, the account may move to a different team, and from here on the bank starts weighing what the debt is worth to keep against what it is worth to sell.

What does writing off a debt actually mean?

In accounting, a write-off is the moment a lender stops pretending the money will come back. Under IFRS 9, the standard most European banks report under, a loan is written off when the bank has no reasonable expectation of recovering it, in full or in part, and the write-off removes it from the balance sheet. Smaller businesses meet the same idea as bad debt, and the textbook name for the balances behind it is uncollectible accounts. In accounting terms, an uncollectible account is one the business has stopped counting as an asset; it goes through the bad debt expense line and the receivables shrink.

Legally, nothing has moved. The contract still stands, the balance is still owed, and the creditor can keep collecting it. The standard says so in its own way: banks must disclose how much they have written off that is still subject to enforcement activity, because a written-off debt is very often still being chased. What ends a debt is payment, a settlement, a formal release, an insolvency discharge, or the limitation period running out, which in Spain is five years for most personal claims since the 2015 reform of the Civil Code. Each market sets its own period and its own rules on what restarts the clock.

Latin American lenders call the same stock a cartera castigada, which translates most closely as a charged-off portfolio. The vocabulary changes; the gap between the ledger and the law does not. A charged-off portfolio has left the balance sheet, but each account in it is still a real obligation of a real person, and anyone who works it inherits every rule that applied to the original lender.

Should a bank work old debt, outsource it or sell it?

Once a debt is old, the bank has three honest options. It can keep working the accounts with its own recovery team, which keeps the customer relationship and the upside but also keeps the cost and the capital charge. It can outsource the servicing, paying a specialist to run out-of-court debt collection on its behalf, usually for a share of what comes in, while the loans stay on its books. Or it can sell the portfolio outright and turn a slow, uncertain stream of recoveries into one payment today.

Most large lenders use all three, sorted by account. Recent arrears with a customer who still answers stay in house. Older unsecured balances go to a servicer. Portfolios the bank wants off its balance sheet before a reporting date go to sale, and that last decision is mostly about capital rather than about any individual account.

When the answer is a sale, buyers price the portfolio by forecasting what it will actually collect, subtracting what collecting will cost, and discounting the remainder back to today at the return their investors demand. The result is quoted in cents on the euro: the price as a share of the total balance owed, called face value.

Here is an illustration, with round numbers chosen for clarity, not market data. A bank sells 4,000 unsecured consumer loans with an average balance of 2,500 euros, a face value of 10 million euros. The buyer's model says the book will collect 12 percent of face over six years, 1.2 million euros. Servicing will eat a quarter of that, leaving 900,000 euros. Most of it arrives early, about 250,000 euros in year one, tapering to 60,000 in year six. Discount that stream at 15 percent a year and it is worth roughly 630,000 euros today. The bid: 6.3 cents on the euro.

Three things move that number more than any negotiation. The age of the debt matters first, because collections fall every year an account goes unworked. Security comes next: a mortgage portfolio carries property that an unsecured card book does not, and trades far higher for it. Then data quality, since a buyer who cannot see payment histories, current contact details or the signed contracts will assume the worst and bid accordingly. The seller, meanwhile, compares the price against what the loans are carried at after provisions, so a bank that has already provisioned heavily can sell at 6 cents and still book a gain.

What did the EU Credit Servicers Directive change?

Directive (EU) 2021/2167 created one European framework for the sale and servicing of bad bank loans. Member States had to transpose it by 29 December 2023 and apply it from 30 December 2023; several, Portugal among them, legislated late. It covers non-performing credit agreements originally issued by EU banks, and only transfers made after that date, so older sales still sit under each country's previous rules.

For the industry, it split the trade in two. Credit servicers, the firms that manage and collect the loans for whoever owns them, now need authorisation from a supervisor in their home country and can then operate across the EU. Credit purchasers, the investors who buy the portfolios, need no licence under the directive, but a non-bank purchaser of consumer loans must appoint an authorised servicer or a supervised lender to deal with the customers. Selling banks must also give prospective buyers loan-by-loan information, using standard data templates written by the European Banking Authority, which in practice means a better data tape, the spreadsheet of balances, histories and collateral a buyer prices from.

For the borrower, the protections follow the debt. Before anyone collects, the customer must be told the loan has been transferred, who owns it now, who is servicing it and where to complain. Servicers must act in good faith, give clear information, protect personal data and avoid harassment or undue pressure. Consumers keep every defence they had against the original lender, including set-off, and the directive tightened the consumer credit and mortgage rules to require reasonable forbearance, meaning adjusted terms such as a payment holiday, a longer term or a partial write-down, before enforcement starts. Whether a servicer may hold the customer's payments itself is left to each Member State.

Where does automation help with old debt, and where doesn't it?

Old portfolios are mostly small balances, and that is where the economics of people break down. Take a 300 euro account worked for a 15 percent servicing fee: if it pays in full, the servicer earns 45 euros, and that has to pay for every call, letter and follow-up the account needs, at the full cost of a trained person's time. Across thousands of accounts, that budget forces triage: the large balances get the calls and the small ones get a letter. Automation changes that arithmetic for banks and servicers. A system, today often an AI agent that holds the conversation by voice or written message, can reach every account, offer a plan sized to what the person says they can pay, and confirm it in writing, at a cost that makes a 300 euro balance worth a conversation.

The second gain is conduct. The directive expects every customer to be treated in good faith, told who owns the debt and contacted without pressure. A person working through two hundred accounts on a Friday afternoon is a variable; a system that sends the transfer notice before the first contact, respects the hours and logs every word applies the same standard to account one and account ten thousand. That consistency is the strongest case for using AI to service NPL portfolios, and it is also the risk: a badly written script is repeated at the same scale, so the rules have to be right before the volume arrives.

Some work should not be automated away. A customer who disputes the balance after a debt has been sold twice deserves a person who can find the original contract. Someone describing illness, bereavement or a situation that makes them vulnerable needs a trained human and often a pause. Large secured settlements, insolvency cases and anything heading to court need judgement and authority a script does not carry. The sensible design hands those accounts over early, with the history attached, and lets automation do the patient, polite, high-volume work that people were never going to reach.