The Law on Debt Discharge entered into force on 13 May 2016 and allowed for the discharge in full of any bank loans contracted by natural persons and secured by a mortgage agreement, subject to the conditions that the applicant (i.e. the debtor) is a consumer and the amount of the loan does not exceed the amount of EUR 250,000.
The scope of the Law on Debt Discharge was limited only to bank loans concluded for the purpose of acquiring/building/extending/modernizing/laying out/rehabilitating an immovable asset with residential purposes, or, irrespective of the purpose for which the bank loan was contracted, one of the security interests granted in favor of the bank is a mortgage over an immovable asset which has residential purposes. As an effect of the debt discharge, the mortgaged asset is transferred into the ownership of the bank.
However, the Law on Debt Discharge was not limited to certain debtors and should have been applied irrespective of the financial status of the debtor and his capacity to continue servicing their debt; hence it was likely to increase risks in the banking sector. For this reason, several banks raised concerns regarding the wide applicability of the Law on Debt Discharge to any debtors.
Due to such extended application of the Law on Debt Discharge, approximately 4.000 cases have been registered in the courts resulting from disputes between debtors and banks arising from the application of this law. In these pending cases the banks claimed that the Law on Debt Discharge violated the Romanian Constitution and the Romanian Constitutional Court was asked to rule on this issue.
On 28 October 2016, the Romanian Constitutional Court issued its decision and ruled that the provisions of the Law on Debt Discharge are constitutional only under certain circumstances. The Romanian Constitutional Court deemed that the Law on Debt Discharge can be applicable to debtors only subject to the occurrence of hardship in their specific case.
Therefore, it appears that the decision of the Romanian Constitutional Court is narrowing the application of the Law on Debt Discharge only to situations where the hardship (exceptional circumstances) can be proved in front of the court.
It is therefore certain that the courts will have from now on the duty to verify the circumstances raised by each debtor and to decide if there have been exceptional circumstances that can be remedied only by debt discharge.
We believe that one of the major effects of this decision will be noted in the number of cases pending in front of the Romanian courts as the banks now have a good reason to reject the debt discharge applications and ask the court for an assessment on the hardship occurrence. Hence, the number and complexity of court cases will most probably increase and we will see the development of a significant practice on the application of hardship.