What Happens to Salary-Deducted Loans If You Lose Your Job?

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Understanding the Operation of Salary Assignments

The practice of salary assignment, commonly referred to as “cession of the fifth,” is widely adopted.
However, what happens if the employee loses their job due to termination or resignation? This mechanism acknowledges such circumstances.
In the event of employment termination, the amounts owed to settle the remaining debt can be deducted from the payments due to the employee by the employer.

This also impacts the severance pay (TFR); however, is this provision permitted by law? The potential risk here is that the entirety of the TFR might be seized to cover the debt.

Legal Framework for Salary Assignment

The oversight of salary assignments for employees is governed by Article 52 and subsequent articles of the Presidential Decree 180 of 1950.
Article 55 establishes that upon cessation of employment before the debt is paid off via salary assignment, the debt must be extinguished through deductions from any outstanding allowances owed to the worker until the remaining obligation is satisfied.

What Happens During Employment Cessation?

When the employment relationship ends while the salary assignment is active, employers may withhold amounts from outstanding vacation pay and entitlements.
These deductions adhere to the limit of one-fifth of the salary of the employee, while any remaining debt can be offset against the TFR, which could potentially be retained fully if necessary.

The Court of Cassation confirmed in ruling 3913 of 17 February 2020 that TFR contributions do not only consider the 20% limit for debt settlement.
Should the financial institution that granted the loan charge excessive fees, the employee may reclaim the TFR portion wrongly included.

Using TFR to Pay Off Debt

Thus, when opting for a salary assignment, the TFR is earmarked as collateral for debt repayment.
Upon the termination of employment, the accumulated TFR can be utilized entirely to clear the outstanding debt.

What if TFR Does Not Cover the Debt?

Even with deductions on the TFR, the total debt may remain unpaid.
What occurs in such instances? If the TFR falls short of settling the debt, the employee must ultimately cover the difference, even if they are unemployed.

This scenario highlights the importance of insurance: salary assignment mandates life insurance coverage and protection against potential job loss.
This insurance aims to assure the lender of recouping their funds even if the employee can no longer make the repayments.

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