The Hungarian Parliament has adopted a new legal regime setting out debt settlement procedures for private individuals. The act will enter into force on 1 September 2015, and will have a huge impact on the business of banks and financial undertakings in Hungary.
The new regime is mainly aimed at non-performing housing loans; however, it does not exclude any kind of debt that is owed by a private individual who is a Hungarian tax resident. The private individual debtor may initiate the debt settlement procedure under the following conditions: (i) the aggregate amount of the debtor's outstanding debts exceeds HUF 2 million (approx EUR 6,600), but does not exceed HUF 60 million (approx EUR 200,000), (ii) the debts exceed the value of the debtor's assets (including the aggregate income expected in the upcoming 5 years), but do not exceed double the value thereof, (iii) at least 80% of the debts are acknowledged or undisputed by the debtor, (iv) at least one debt is overdue over 90 days, and the amount of such debt exceeds HUF 500,000 (approx EUR 1,650), (v) there are not more than 5 subordinated debts (i.e. the creditor is (x) the co-debtor or the security provider, (y) a close relative of the debtor or (z) a company in which the debtor or the co-debtor is an executive officer or has at least 5% interest), (vi) the debts include at least one consumer loan debt, or a loan that relates to the debtor's private business, and (vii) none of the debts stems from an enforceable court decision whereby the liability of the debtor was based on 'piercing the corporate veil'.
The debtor may initiate debt settlement both outside and within the scope of a court procedure. If a financial institution (as main creditor) has provided a housing loan to the debtor (by way of mortgage backed loan or financial leasing), the debtor must first initiate out of court procedures by delivering a written notice to the main creditor. The out of court procedure is coordinated by the main creditor. The procedure aims at reaching a debt settlement arrangement. The main creditor must prepare the draft of the arrangement together with the debtor, and the debtor delivers the draft to the other creditors and obligors (if any). All creditors must agree on the debt settlement arrangement within 120 days from the receipt of the application (90 days if only the main creditor is concerned as creditor). During the procedure, creditors may enforce their claims only within the debt settlement procedure, and may not terminate the loan agreement. Nevertheless, the creditors do not have to keep the loan facilities available or to disburse loans.
For the sake of the court procedure, a new authority, the Family Bankruptcy Service, will be set up. The debtor must apply for debt settlement at the Family Bankruptcy Service which will forward the application to the court. The Family Bankruptcy Service will appoint a family administrator who will be in charge of the procedure. The family administrator will have certain powers over the assets of the debtor (e.g. the debtor may have only one bank account, and only the family administrator will have powers of disposal over such account). The family administrator prepares the debt settlement arrangement (together with the debtor), over which the creditors decide by voting. A simple majority is required; however (i) the creditors are classified and each class has a different voting multiplier (e.g. a privileged creditor is allocated 20 votes after each HUF 20,000 claim (i.e. a HUF 1 million privileged claim gets 1,000 votes), whereas subordinated creditors receive only 1 vote per HUF 20,000 (i.e. a HUF 1 million subordinated claim gets only 50 votes)) and, (ii) the debtor, the co-debtor and the main creditor have veto rights. The debt settlement arrangement must then be approved by the court, and it is binding on all creditors. If no agreement is reached within 150 days, the family administrator will start to prepare the 'debt settlement plan', which aims at the liquidation of certain assets of the debtor and distribution of the proceeds among the creditors.
Although the act enters into force on 1 September 2015, the debt settlement procedure will be available only to certain debtors (mostly those having FX-based housing loans). Hungarian financial institutions will have to adapt their internal procedures with haste in order to perform the tasks under the new regime.