Anatomy of a loan default and what it will cost you

The demand letter from a lender is not the real problem. Ignoring it is.

For many Kenyans, receiving a demand letter through email, WhatsApp or the post office can be unsettling.

The common reaction is to ignore it and hope the issue goes away. Unfortunately, it rarely does. Instead, the matter quietly moves from attempts at negotiation to formal legal action, and the costs begin to pile up.

Let me walk you down that whole road and put a price tag at every gate because each toll was avoidable.

The first thing you lose is goodwill. A creditor who sends a demand letter is usually still willing to talk and negotiate a solution. Once you remain silent, however, that goodwill disappears. You lose the benefit of the doubt, and what could have been resolved through discussion starts becoming a legal matter. The next step is often a formal or statutory demand issued through an advocate.

At this stage, legal fees enter the picture. These costs are not borne by the creditor alone; they are often added to the amount you already owe.

For businesses, the consequences can be even more serious. Under Kenya’s Insolvency Act, 2015, a company that receives a statutory demand for Sh100,000 or more and fails to settle or respond within 21 days can be presumed unable to pay its debts.

This gives creditors grounds to begin liquidation proceedings against the company. If the matter is still not resolved, the creditor may file a lawsuit. Court filing fees are paid, summons are issued, and legal expenses continue to grow. The larger the claim, the higher the potential costs. Should you fail to file a defence or respond to the case, the court may enter judgment against you by default.

In simple terms, the creditor wins because you did not challenge the claim. At that point, you become a judgment debtor.

The debt then becomes much more expensive. In addition to the original amount owed, you may now be required to pay accumulated interest, court fees and legal costs awarded by the court. Interest continues to accrue until the debt is fully settled, meaning every day of delay increases the amount you owe.

The next stage is execution, where a court judgment is converted into enforcement orders, commonly known as warrants.

A court-licensed auctioneer issues a proclamation and returns to attach and sell your movable property; a charge or sale can be placed on land; a garnishee order can freeze the very bank account your business runs on.

Auctioneer charges, storage and transport are added on top. Worse still, attached goods are sold at distress value, a fraction of what they are worth; so, you surrender far more in assets than the debt was ever worth.

For companies, this is the liquidation petition; for individuals, where the debt reaches Sh250,000, a creditor may petition to have you declared bankrupt.

Finally, the shadow that outlives the case. A negative listing with the credit bureaus follows your name for years, long after the matter is closed, quietly shutting the door on the next loan, the next supplier credit, the next tender.

The debt is paid, but the reputation keeps paying.

Now tally the losses. The Sh200,000 that you avoided has become: principal, interest, advocate’s costs, court fees, auctioneer charges, the assets sold below value, management hours bled into the fight, plus years of blocked credit.

Sh200,000 becomes Sh350,000 and a wounded name, and every one of those tolls began at the gate you drove past in silence. That is precisely why the notice is mercy, not menace.

So, when that letter lands, open it. Read it. Respond in writing, even if you cannot pay today: acknowledge the debt or dispute it with reasons, propose a realistic plan with a date and an amount you can keep, and put every agreement in writing. If the language frightens you, get advice early, not after the auctioneer is at the gate.

- The writer is the founder and CEO of Marathon Debt Recovery Ltd, a credit management specialist, and a certified public accountant