In the revival of interest in private debt regulation through extrajudicial mechanism the improvements made by the Ministry of Finance are aimed at accelerating the inclusion of 34.6 thousand settlement cases with a total debt of 20.4 billion euros, as well as the inclusion of new debts that have so far been excluded.

These are cases in the early stages of application and stagnating with an uncertain future, compared to 12.9 thousand cases worth €6.3 billion that are either completed or under negotiation. Of the latter, debts of only 1.5 billion euros have been repaid, that is, they have been accepted by both debtors and creditors.

The extrajudicial mechanism allows you to settle debts both to the state and to banks or funds and management companies and is part of the bankruptcy law that came into force in 2021. It is based on an algorithmic settlement proposal, i.e. without the intervention of creditors or human factors and without the need for judicial confirmation.

An application for the repayment of a debt apply to both individuals and legal entities, regardless of the turnover or the amount of debts. The only condition is that the debt must be more than 10,000 euros. The condition that you do not have to have 90% of your total debt to a financial institution, which has so far excluded most debts from out-of-court coverage, is removed. The law prohibits filing an application for inclusion in the process three months before the date of the auction.

In addition to those who are in arrears either on loans or on debts to the state, debtors with informed loans can also apply to the out-of-court mechanism. The condition is that they have suffered a proven reduction in their income of at least 20%. This obligation only applies when all debts have been repaid, i.e. when someone has repaid their loan but owes the state, there is no need to suffer a 20 percent reduction in income in order to apply to an out-of-court mechanism.

Regulation

The automated solution is based on an algorithm that calculates the ability of a business or individual to repay debts based on its income and its obligations to all creditors, taking into account living needs based on reasonable living expenses when it is an individual or liquidity needs if it is a business . The automated decision includes an installment that the debtor must pay to each creditor and a possible haircut. Payments for mortgaged loans are calculated on the basis of euribor +2.50%, for loans without mortgages from euribor +3% and for state debts from euribor +3%.

a haircut”

The settings generated by the online platform may include:

Borrowers with informed loans can also apply.

a) Partial cancellation (“haircut”) of debts, which may amount to:

• Up to 75% for the principal debt and up to 95% for the increase in arrears to the state (AADE, e-EFKA and debts to municipalities).

• Up to 80% on principal and up to 100% on interest on non-performing loans to banks and credit and receivable management companies

or also

b) Long-term repayment of debts:

• Up to 240 government payments (AADE and e-EFKA).

• Up to 420 installments for banks and credit and receivables management companies.

In practice, the “haircut” of debt according to the standards today is much lower, namely, 22% of the average rate of writing off debts to the state and 31.5% of debts on loans. This is due to the fact that in order to provide a haircut, additional conditions of the law are also checked, such as, for example, the financial situation of the co-debtor or co-guarantor, if the commercial value of the property is less than the amount of the debt, if there is no residual income after and covering reasonable living expenses, etc. d.

The “key” to the agreement is the value of the debtor’s property

A key factor that debtors usually “ignore” is that creditors take into account the value of the debtor’s liquid assets in order to agree to the resulting agreement. This parameter also explains the very high percentage of rejection of applications, both by creditors and by the debtors themselves, which, according to the Ministry of Finance, reaches 46% and 44%, respectively. That is why the amendments submitted to Parliament provide justification for the rejection of the application on both sides.

Thus, since the debt is higher, the debtor must pay at least the value of his liquid assets (regardless of whether this amount is covered by his declared income). For real estate, salvage value is defined as the maximum amount between the taxable value and the commercial value, reduced by 3% due to the costs of the liquidation process. Thus, the minimum monthly loan payment following from the algorithm is calculated based on the income and value of the property of the debtor, his co-debtors and guarantors. The restructuring agreement, as the settlement agreement is called, is signed after obtaining the consent of the debtor and the majority of the creditors involved. Thus, the offer is not binding on either the creditor, i.e. bank or management company, nor for the debtor. However, it is mandatory as long as it is agreed by banks and management companies for the state, since regulated debts, of course, include government debts. It is assumed from the agreement that the agreement makes the individual creditworthy and, accordingly, the debtor’s business is viable, thereby preventing bankruptcy.
The restructuring agreement is signed within two months from the date of application and is binding on all participating creditors (prolongation is possible at the request of the parties or in the event of an error). If this period passes without agreement, the procedure is terminated as inconclusive, but without the exception of submitting a new application after 12 months.

When a restructuring agreement is reached, the occupied creditor is not allowed to expedite enforcement, and individual and collective enforcement measures against the debtor are automatically suspended to meet the regulated claim.

In addition, in relation to state and social protection authorities: confirmation of tax and insurance awareness is provided, criminal prosecution for an offense related to non-payment of debts to the state and third parties and insurance premiums is suspended, automatic cancellation of early settlement of debts under a restructuring agreement and a statute of limitations on regulated debts is suspended for the entire period of regulation.

Three basic rules

1. Solvency, i.e. the debtor must pay on the basis of his income, as well as the income of his guarantors.

2. Non-deterioration of the position of the creditor, that is, no creditor can receive less money than he would have received in the event of the liquidation of the property of the debtor and his guarantors.

3. Symmetrical satisfaction of creditors, i.e. that the debtor’s money should be divided proportionally to cover all creditors (public and financial sector).