On 31 June 2015 the Hungarian Parliament adopted the Act on the debt settlement of natural persons (personal insolvency act or Act). The Act introduces a new legal framework into Hungarian law in order to address the issue of personal over-indebtedness and to protect the home of indebted persons from enforcement. The Act entered into force on 1 September 2015.
Personal insolvency frameworks exist in most EU member states. The OECD Economic Survey on Hungary (2014) recommends the introduction of personal insolvency framework. The Survey declares that legislating a personal insolvency framework may reduce the time needed for debt discharge, and therefore favour entrepreneurship and risk-taking. Also, it may ease negotiations between banks and debtors.
In its Economic Survey on Hungary in 2014 , OECD recommended the introduction of a personal insolvency framework in order to reduce the time needed for debt discharge and therefore favour entrepreneurship and risk-taking.
The introduction of private insolvency in Hungary follows these international legal trends and the OECD recommendation. It also complements the general policy measures of the Hungarian government which aim at lessening the burden of natural persons whose loans and instalments have increased significantly due to exchange rate fluctuations and at protecting the home of these people.
The Act can help, in particular, those debtors who have a certain regular income and who are able to pay a reasonably reduced monthly instalment to their creditors. As in Hungary most families own the property which they live in and consequently the rental market for housing is limited and expensive, this is an important opportunity for indebted families with a regular income.
A new public body called Family Insolvency Service is set up in order to assist the courts with specialized knowledge on insolvency during the above proceeding, to help debtors and to supervise the procedure.
The law enables over indebted natural persons initiating out of court debt settlement proceedings, under the coordination of the main creditor (first rank mortgage creditor), with the participation of the Family Insolvency Service. If agreement between the debtor and all creditors (unanimity) cannot be reached in the out of court debt settlement proceeding, the proceeding continues as in-court. The Hungarian courts first try to forge an agreement between the debtor and the majority of his/her creditors. Should this attempt fail, the court adopts a debt settlement plan on the basis of detailed rules contained in the Act.
During the settlement period, a stay of individual enforcement actions and of any measure related to the realisation of their assets including the dwelling which serves as their primary residence is granted to the debtor. The debtor is required to respect the terms of the plan, and in particular, to service the debt according to the reduced monthly instalments, throughout the five-year settlement period. The debtor may only be discharged from the remaining debts at the end of the successful settlement period.
During the first phase of application of the Act, from 1 September 2015 to 31 September 2016, only those debtors may file a request for personal insolvency proceeding whose dwelling would be subject to enforcement and sale in the absence of the stay. After this initial first year, as from 1 October 2016 other over-indebted persons will also be able to apply for private insolvency. This rule aims to avoid an unmanageable number of requests after the introduction of the new legal framework by focusing first on those indebted individuals who are most in need of help: those who risk losing their home.
The other main eligibility criteria for personal insolvency are the following: the amount of debt is between 2 million and 60 million HUF and the assets of the debtor do not cover the debts while they do amount to at least half of the debts. It is presumed that personal insolvency is not an appropriate tool for persons with a larger amount of debt or a worse asset/debts ratio.
The first phase of the procedure: out of court agreement between the debtor and the creditors
As a general rule, a debtor wishing to file for personal insolvency needs to first contact his/her main creditor i.e. the bank or other financial institution holding a security over the debtor’s dwelling ranked first in priority.
In the first phase, the main creditor will coordinate the negotiations between the debtor and all other creditors in order to reach an agreement on a settlement plan. The parties enjoy a wide discretion both on procedural aspects and on the content of the settlement plan. The Act contains few rules in this respect and the role of the Family Insolvency Service is limited to verifying the admissibility of the request, to registration and other administrative tasks.
The main creditor is obliged to carry out the above task only if all the debts of the applicant (secured and unsecured debts) are owed to this financial institution and/or other companies of the same group. However, if the debtor has other creditors (e.g. utility companies, private persons or banks from a different group) the main creditor has a choice: it can decide to coordinate the negotiations or it can refuse this task and in this case the proceeding will continue as in-court.
If the parties reach an agreement in this phase, the settlement plan is registered at the Family Insolvency Service. In this case the debt settlement is carried out on the basis of the agreement without close state supervision (e.g. important expenses of the debtor do not require prior authorisation by the Family Insolvency Service). In case of non-compliance, creditors may file a request for annulment of the settlement to the Hungarian courts.
If no consensus is reached in this phase or if the main creditor refuses to coordinate the negotiations, the procedure continues as in-court.
The primary objective of the in-court procedure is to reach an agreement between the debtor and the majority of the creditors with the support of the Family Insolvency Service. As this agreement is not based on a full consensus of the parties, the Act contains detailed rules on how to classify the creditors’ claims and how to weigh and calculate their votes.
If no agreement is reached, the court distributes the assets and revenues of the debtor for the creditors. It is important to note, that assets necessary for the continuation of the entrepreneurs’ economic activity cannot be distributed, so that the entrepreneur may continue honouring its debts from the revenues.
If the debtor has respected the terms of the proceeding during the 5 years debt settlement period, and the creditors’ claims are honoured up the level required by the law and the court decision, remaining debts are cancelled by the court discharge decision. In case of entrepreneurs, this discharge opens the second chance, as their solvency is restored, and they can continue exercising their economic activity.
If the required majority cannot be reached, the court will define the conditions of the settlement in its decision on the basis of detailed rules in the Act: it will rule on the distribution of the assets and income of the debtor between creditors, on the assets and revenues excluded from distribution in order to cover his/her basic needs (modest accommodation, overhead, daily needs etc).
During the settlement procedure, debtors can keep the ownership of the dwelling which serves as their principal residence provided that the apartment or house does not exceed a reasonable size and value.
During the in-court procedure, the Family Insolvency Service has an important role in assisting the courts with specialized knowledge and supervising the settlement procedure. In particular, the Service prepares and submits the settlement plan for adoption by the court, supervises the spending of the debtor during the settlement period, initiates the appropriate procedures in case the debtor breaches his/her obligations, registers the claims of the creditors, sells the assets of the debtor and distributes the revenue among creditors.
The Act contains strict rules in order to prevent abuse during the procedure. If the debtor hides his/her assets or income from the creditors or intentionally misleads the other parties in the proceeding, he/she gets excluded from the personal insolvency and may also face criminal charges. If the debtor receives an important income during the settlement period (through heritage, donation or a prize), he/she is obliged to use this to repay his/her debts. The debtor cannot file again for personal insolvency for ten years from the termination of the procedure. If he/she gets excluded from personal insolvency procedure for abuse, the ten-year period runs from this decision.
During the personal insolvency proceeding, a stay of individual enforcement actions and of any measure related to the realisation of their assets including the dwelling which serves as their primary residence is granted to the debtor.
The debtor is required to service a reduced monthly instalment on the loan secured by mortgage from the initiation of the procedure. After a settlement plan is in force (either by agreement or by a court ruling), the debtor is required to service the monthly instalments as prescribed in the plan. The debtor cannot chose to pay back any of the debts to the detriment of the other creditors.
The settlement period can be up to five years and in exceptional cases seven years. 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.
The Act and its implementing decrees have entered into force and the Family Insolvency Service has been set up in the capital and in the main cities of the 20 counties of Hungary.