The new Act CV of 2015 on debt settlement procedure for private individuals provides an opportunity for debt settlement both outside and within the scope of a court procedure.
Major parties to the procedure:
- Debtor: any private individual who is a tax resident in Hungary.
- Family Insolvency Service: the administrative body that appoints and recalls the Family Administrator and performs a specific supervisory and coordination role in the proceedings.
- Family Administrator: a government official who oversees the debtor’s management capabilities.
- Main Creditor: the financial institution in whose favour a mortgage was established over the debtor’s real property (where the debtor lives) or which (as a lessor) concluded a financial lease agreement with the debtor in connection with such real property.
- “ARE” Register: the public register of debt settlement procedures maintained by the Family Insolvency Service.
Conditions for initiating debt settlement proceedings:
- The debtor has outstanding debts of between HUF 2M (approx. EUR 6,500) and HUF 60M (approx. EUR 195,000) in total (including interest and ancillary charges), enforceable through an authority or before a court;
- The debts exceed the debtor’s assets but do not exceed 200 % of the debtor’s assets which are situated in or are otherwise accessible in Hungary (including the income expected to be collected within the upcoming 5 years);
- The debtor has acknowledged or has not disputed at least 80 % of the debts;
- At least one of the debts has been past due for over 90 days and the sum of this debt (including interest and ancillary charges) exceeds HUF 500,000 (approx. EUR 1,625);
- None of the debts originate from a court decision which established the civil or criminal liability of the debtor;
- There are less than 5 creditors of the debtor who are either the close relatives of the debtor or are a company in which the debtor is a managing director or a shareholder whose shareholding exceeds 5 %; and
- The debts include debt originating from consumer credit or from credit associated with the financing of the debtor’s private business.
Out-of-court debt settlement must precede the court procedure.
Debt settlement out-of-court:
The debtor must liaise with the main creditor and declare in writing, whether he/she:
a) intends to keep his/her residential property in case of an amendment of the terms of his/her credit/financial leasing agreement favourable to him/her;
b) consents to the sale of his/her residential property and agrees to purchase a new residential property of a smaller value over the course of the debt settlement, with a mortgage being put on such property;
c) consents to the sale of his/her residential property but does not intend to purchase another property;
d) consents to the sale of his/her residential property and intends to enter into a financial lease agreement for another property.
The goal is to reach a debt settlement arrangement: the main creditor prepares its proposal together with the debtor and the debtor sends the proposal to the other creditors. An agreement is reached if all of the other creditors accept the proposal. All execution proceedings cease during a debt settlement procedure.
The main creditor must inform the debtor about the minimum monthly instalment which is payable by the debtor. Under the new act this will be between minimum one-twelfth of 7.8% of the creditor’s claim secured with the mortgage and maximum one-twelfth of 7.8% of the fair market value of the property.
During the procedure,
- may only enforce their claims (including setoff) within the debt settlement procedure (with the exception of account keeping fees);
- may not terminate the loan agreement because of the debt settlement procedure or non-payment or late payment etc.; however creditors are not obliged to keep loan facilities available or to disburse a loan; and
- must manage his/her assets in consideration of creditors’ interests;
- may not sell or encumber the assets involved in the proceeding;
- may undertake obligations in fair value only to the extent required for his/her own everyday life and for that of his/her relatives living in the same household, not exceeding ordinary management.
If the debtor does not have a main creditor, the out-of-court procedure cannot be applied. In such cases, the application for debt settlement has to be submitted to the Family Insolvency Service which will forward it to the court.
If the parties fail to enter into a settlement agreement within 90 days from the receipt of application of the debtor by the Family Insolvency Service (or 120 days if multiple creditors are involved) or the debtor breaches the settlement agreement, then the Family Insolvency Service will have to initiate the court procedure.
Debt settlement procedure in court:
- The Family Administrator registers creditors’ claims;
- No setoff, no termination of loan due to the debt settlement procedure and no enforcement of security are possible;
- The debtor may have only one payment account over which only the Family Administrator may dispose;
- The Family Administrator prepares the draft settlement agreement with the cooperation of the debtor;
- The creditors adopt the settlement arrangements by a simple majority vote (calculation of votes is not the same for each class of creditors), but the debtor and the main creditor must support them;
- The arrangements must be approved by the court but the arrangement may only be rejected if it is against the law. The Family Administrator must notify the court of any illegal or bad faith action which he/she became aware of during the procedure;
- The arrangements must be adhered to by all creditors but no differentiation is possible between the classes of creditor;
- Arrangements may be, among others, waivers, re-scheduling payment deadlines, sale of assets and conversion of loan from FX to HUF. The settlement agreement must contain the deadline by which the arrangements have to be enforced;
- If the court refuses to approve the settlement arrangements, the Family Administrator will attempt again to find an agreement which can be entered into by the parties. However, in this case, the settlement negotiations must close within 45 days;
- If the settlement agreement is not entered into within 150 days from the notice of the Family Administrator (which started the settlement negotiations), the procedure will turn to another type of debt settlement the aim of which will be the “forced” repayment of the debts. In this procedure, the Family Administrator has to prepare a plan which regulates the sale of certain assets and the terms and conditions of the distribution of the purchase price and the debtor’s income among the creditors.
Notwithstanding that the new law will come into force on 1 September 2015, until 30 September 2016, only certain debtors will be entitled to request proceedings for personal insolvency.