Since 1 September 2015 natural persons in Hungary have a way to settle debts under the law. The procedure is advantageous for persons and families who have financial problems and want to escape the debt trap and restore their liquidity, while protecting themselves from creditors. The aim of the new regulation is to help such people settle their debts within a legal framework by using their assets and income.
Who is eligible for debt settlement under the new law?
Only natural persons can initiate a procedure, i.e. private persons, entrepreneurs and primary producers.
Additional eligibility criteria for private insolvency include: the complete amount of debt (one or two debts combined along with interest and other duties) amounting to between 2 million and 60 million HUF. Total debts must exceed the debtor's assets but cannot amount to more than 200% (double amount) of all assets within Hungary. In addition, the Act sets forth eligibility criteria in connection with the number of claims allowed per family as well as the acceptance of claims by the debtor.
Private insolvency is not an appropriate tool for persons who have a larger than average amount of assets with great value (for example the debt is great but the debtor used to have coverage) or who are have an excessive ratio of asset and debts, where the debts are much greater.
- All creditors must enforce their claims within the debt restructuring procedure and their claims shall be satisfied within the limits of the procedure;
- No enforcement initiatives may be undertaken against the debtor (or against the mortgage obligor or the surety if participating in the procedure), any ongoing enforcement initiatives and sale of mortgaged property must be suspended;
- Contracts on basic common utility services cannot be terminated;
- Debtor receives partial moratorium for repayment of accumulated debts (as a grace period);
- Debtor may request that mortgaged property be separated, and, in case the creditor allows separation, along with it, a grace period for repayment of the debt in instalments be granted;
- If the debtor fulfils his/her obligations under the settlement plan he/she is discharged from the remaining debts at the end of this period and may not file claims later;
- The settlement period can last up to five years, and can be extended by two additional years in exceptional cases, however the restructured maturity of the debt contracts may be longer.
The law enables natural persons who have excess debts to initiate out-of-court debt settlement proceedings. During which time, the creditor and the debtor can agree on payment facilitator solutions, payment discounts, and a restructuring of the debt contract. The debtor may receive a more favourable payment plan, be released from the payment obligation of default interest, and part of the debt may even be cancelled.
If an agreement between the debtor and all creditors cannot be reached or the debtor does not fulfil his/her obligations, the court proceeding continues. Hungarian courts first try to facilitate an agreement between the debtor and the majority of his/her creditors. Should this attempt fail, the court adopts a debt settlement plan. This decision of the court dictates the debtor's obligation to repay the debt and orders the sale of all the debtor's assets that are not essential for the subsistence of the debtor and the family. The sold assets are then divided between the creditors.
A new public body called Family Insolvency Service has been established to assist the courts with expert knowledge on insolvency during the above proceeding, to help debtors and to supervise the procedure. An appointed professional from the Family Insolvency Service shall assist debtors with expert knowledge and supervise settlement procedures in order to help debtors fulfil obligations.
Debt settlement procedures will be registered in a national registry set up to record these procedures.
Besides its numerous advantages, debtors are also obliged to fulfil many administrative obligations. The procedure can be initiated by completing a form, and all documents as well as a complete inventory of goods have to be attached. The debtor has to make dozens of declarations. If the form or its attachments do not meet the requirements prescribed by law, even after request, the debtor cannot re-file for private insolvency for ten years following termination of the procedure. Therefore, persons who wish to use this option for debt settlement are strongly advised to seek professional help when filing a claim.
The Act contains strict rules in order to prevent abuse. If the debtor hides his/her assets or income from the creditors or intentionally misleads the other parties in the proceeding, he/she will be excluded from private insolvency.
Protection granted through the procedure will cease if the debtor breaches obligations, such as the obligation to cooperate, or if the debtor fails to meet deadlines, or abuses the procedure and its rules. In such cases, the debtor is also barred from filing for debt settlement under the procedure for ten years.
During the initial phase of implementation of the Act (lasting until 31 September 2016) only debtors who own a dwelling which would be subject to enforcement and sale in the absence of a stay are qualified to file for debt settlement under the procedure. Beginning on 1 October 2016, other over-indebted persons will also be eligible to apply for private insolvency.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.