# Nonperforming Assets Explained: Impacts, Examples, and Recovery Strategies

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## What Is a Nonperforming Asset?

A nonperforming asset (NPA) is a loan or [debt instrument](https://www.investopedia.com/terms/d/debtinstrument.asp) for which the borrower has [defaulted](https://www.investopedia.com/terms/d/default2.asp) on the payments. The lender of the funds hasn't received the borrower's [principal](https://www.investopedia.com/terms/p/principal.asp) and [interest](https://www.investopedia.com/terms/i/interest.asp) payments for an extended period of time. In such cases, the lender can repossess the collateral used to secure the [loan](https://www.investopedia.com/terms/l/loan.asp) to recover any losses. NPAs can result in damage to a borrower's credit record and the potential inability to get credit in the future. For lenders, NPAs can mean a loss of income and a disruption to earnings.

### Key Takeaways

*   Nonperforming assets (NPAs) are loans or debts where borrowers have missed payments for an extended period.
*   NPAs can damage a borrower’s credit score and hinder future credit or loan applications.
*   Lenders can mitigate losses from NPAs by repossessing collateral, restructuring debt, or selling bad loans to collection agencies.
*   Lenders face reduced cash flow and earnings disruptions from carrying NPAs on their balance sheets.
*   After 90 days of missed payments, a loan is typically classified as nonperforming.

## In-Depth Look at Nonperforming Assets

A nonperforming asset such as a [mortgage loan](https://www.investopedia.com/terms/m/mortgage.asp) occurs when the borrower stops making payments, defaulting on the loan. After prolonged nonpayment, the mortgage lender might require the borrower to sell assets pledged as [collateral](https://www.investopedia.com/terms/c/collateral.asp).

With a nonperforming mortgage loan, the lender typically begins the foreclosure process after 90 days of delinquency. Foreclosure includes the lender repossessing the property and reselling it to recoup money to pay off the outstanding loan. If no assets were pledged, the lender might [write off](https://www.investopedia.com/terms/w/write-off.asp) the asset as a [bad debt](https://www.investopedia.com/terms/b/baddebt.asp) and then sell it at a discount to a [collections agency](https://www.investopedia.com/terms/c/collectionagency.asp).

## Hypothetical Scenario: Nonperforming Asset

Let's say a borrower with a $350,000 mortgage loan and a $2,500 monthly payment has not made a payment in the last three months due to loss of income. The mortgage lender would consider the loan delinquent or nonperforming after 90 days.

If the borrower has not contacted the bank to resolve the unpaid debt or an agreement cannot be reached between the bank and the borrower, the home will go into foreclosure. The lender will sell the home to recoup the loan loss. Similarly, a loan can also be categorized as nonperforming if a borrower makes all the interest payments on an interest-only loan but cannot repay the principal at maturity.

> **Tip**
>
> If you fall behind on your mortgage payments, please contact your lender or mortgage servicer right away since they can review your options to avoid foreclosure.

## How Nonperforming Assets Affect Borrowers and Lenders

Nonperforming assets can adversely impact the lender and borrower.

### Impact on the Borrower

A nonperforming asset for a borrower indicates an inability to repay a loan. The [default](https://www.investopedia.com/terms/d/default2.asp#toc-what-happens-when-you-default-on-a-loan) on your [credit report](https://www.investopedia.com/ask/answers/102814/how-long-does-it-take-items-show-my-credit-report.asp) can remain in your credit history for years, showing that you didn't repay a debt. A nonperforming asset for a consumer can also lower your [credit score](https://www.investopedia.com/terms/c/credit_score.asp). Your credit score is a three-digit number that measures your [creditworthiness](https://www.investopedia.com/terms/c/credit-worthiness.asp) based on your credit history.

As a result, you may get denied when applying for new credit or loans, including a car loan or credit card. Also, the interest rates you pay on your debts will likely be higher due to the damage to your credit.

### Impact on the Lender

Carrying nonperforming assets, also referred to as nonperforming loans, on the balance sheet places distinct burdens on lenders. The nonpayment of interest or principal reduces cash flow for the lender, which can disrupt budgets and decrease earnings.

[Loan loss provisions](https://www.investopedia.com/terms/l/loanlossprovision.asp), which are set aside to cover potential losses, reduce the capital available to provide subsequent loans. Once the actual losses from defaulted loans are determined, they are written off against earnings.

## Strategies for Recovering Losses Due to Nonperforming Assets

Lenders have a few ways to recoup some or all of the losses resulting from nonperforming assets.

When companies are struggling to service debt, lenders can take proactive steps to restructure loans to maintain cash flow and avoid classifying loans as nonperforming. If defaulted loans are secured by assets, lenders can repossess and sell the collateral to cover losses, depending on resale value.

Lenders can also convert bad loans into [equity](https://www.investopedia.com/terms/e/equity.asp#toc-what-is-equity) or stock shares, which may appreciate in value and cover the losses from the defaulted loan. Companies with bond debt can also convert their debt to equity shares if they can't repay the bond to investors. When bonds get converted to new equity shares, it wipes out the value of the original shares.

In some cases, banks and lenders may sell the nonperforming loan or bad debt for a steep discount to companies that specialize in loan collections. Typically, lenders sell defaulted unsecured loans when the other means of recovering losses are not cost-effective.

> **Warning**
>
> Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report, either with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).

## When Is a Loan Considered Nonperforming?

Typically, after 90 days of delinquency or nonpayment, the loan gets classified as nonperforming.

## What Is the Foreclosure Process?

The foreclosure process can vary by state, but typically, the lender will contact the borrower to inform them of the foreclosure. The loan is considered nonperforming at 90 days. During foreclosure, the lender will take possession of the property to resell it and recoup losses from the outstanding loan.

## What Is Debt Restructuring?

[Debt restructuring](https://www.investopedia.com/terms/d/debtrestructuring.asp) for consumers involves a [loan modification](https://www.investopedia.com/terms/l/loan_modification.asp) by the lender to help the borrower repay the debt. The loan amount, [interest rate](https://www.investopedia.com/mortgage-rates-5094943), or term may be adjusted to give the borrower more time to pay. However, loan restructuring can harm your credit and hinder future credit opportunities.

## The Bottom Line

A nonperforming asset (NPA) involves the default on a loan or debt instrument, meaning the borrower can no longer make the payments. NPAs can impact [lenders](https://www.investopedia.com/best-mortgage-refinance-companies-5092956) since they are no longer getting repaid for the loan. NPAs reduce earnings, necessitating strategies like collateral repossession or loan restructuring. Borrowers who default on a loan can damage their credit standing, preventing them from obtaining new credit. If you are struggling to repay a loan or credit card, contact your credit provider to inform them so you can discuss options for finding a payment plan you can afford.

> **Article Sources**
>
> 1.  Federal Housing Finance Agency Office of Inspector General. "[An Overview of the Home Foreclosure Process](https://www.fhfaoig.gov/Content/Files/SAR%20Home%20Foreclosure%20Process.pdf)."  Page 5.
>     
> 2.  Consumer Financial Protection Bureau. "[If I Can’t Pay My Mortgage Loan, What Are My Options?](https://www.consumerfinance.gov/ask-cfpb/if-i-cant-pay-my-mortgage-loan-what-are-my-options-en-268/)"
>     
> 3.  Federal Trade Commission Consumer Advice. "[Mortgage Discrimination](https://consumer.ftc.gov/articles/mortgage-discrimination)."