The framework of insolvency and the general idea behind it

Posted on 30 Oct 2015, by Savvas Savvides

Statements support that the adoption of a new and quite complicated legislation affects thousands of people in regards of the lack of protection both to the debtors and guarantors and especially in relation to vulnerable citizens. In particular, the legislation determines the process of restructuring of sustainable borrowers as well as the provisions for the exemption of debts.

Analyzing and evaluating the real reasons upon which such voting was deemed to be necessary, it is straightforward that undoubtedly there are pros and cons behind this excess which are deserved to be analyzed.

Is the involvement of banks still necessary? At this stage the citizens are no longer exclusively dependent on the bank in order to aim to the restructuring of their loans, but these proposals will be prepared by independent directors of insolvency based not only on the real abilities of the debtors but also on their livable needs. As a result, all the obligations that directly and unconventionally were imposed by the banks are extinguished without the requirement to take legal actions, unless such proposals are not acceptable by the bank and thus leading in a sustainable and fair modification.

Therefore, it must be highlighted that there are two stages on that point. Firstly, the decision of the restructuring plan and secondly the acceptance or the rejection of that proposal on behalf of the creditor. As it is stressed, the discharge of debts for up to €25.000 was deemed to be enforceable under the framework of insolvency. The majority of citizens hope that such a provision will be effective. But, whether it will help a satisfactory proportion of citizens is something that has not been considered yet and which raises some doubts.

Particularly, a citizen to whom the sum of debt does not exceed the above amount, they can proceed to an application form for the debts to be discharged given that the appropriate requirements are fulfilled. The question which is appeared on that stage is whether this does apply to debtors to whom the sum of debt does exceed the given amount even if the appropriate requirements are fulfilled. Can such a debt be discharged in that case? It is generally accepted that in case where there is such a discharge and as has been mentioned the borrowers meet all the criteria, then the insolvency service should be in a position to follow this process for a period of two years. It sounds clear and straightforward, but in fact it is a fairly strict procedure.

Following that, where the debtor has voluntarily incorporated within the repayment framework then it is compulsory for their advisor to prepare a prospectus of their economic situation which can be accepted or rejected accordingly depending on the fulfillment of the appropriate requirements. Where an acceptance takes place, then an application should be submitted in order to protect the debtor from any unexpected actions. Confirming the ‘’insolvent’’ status of the debtor, the Court’s approval is taking place and from then on such a framework is in force.

It deserves to be stressed that while it seems to be a quite quick procedure leading to positive results, in fact there would be a time delay because of the separate deliberation and research of each case particularly in calculating the reasonable costs of living based on the facts of each case until such a framework is agreed between the parties. Therefore, it can be a great and lengthy process where the enactment of the new legislation is not considerably assistive to the citizens without the Court’s involvement.

On the other hand, it must also be mentioned that there is a possibility of rejection of the framework by the creditors even if the appropriate requirements are met. On that case, the debtor can proceed with an application from the Court, requiring the framework to be implemented. Consequently, such a situation becomes binding both to the creditor and the debtor either by accepting it or rejecting it. In other words, the involvement of the Courts is still necessary under this procedure.

Another crucial alteration of the insolvency framework regards the advantageous position of the guarantors protecting them from fraud. To put it another way, if while the debtors are unable to cover their debts and where they still owe to the creditors, proceed on any sale or donation of any immovable property, then the guarantor acquires the absolute right to apply to the Court the termination of any relating actions and thus preventing the debtor from any alienation of their assets. The guarantor has also the right to request the registration of the estate on the name of the debtor.

Last but not least, what must also be highlighted on that point is the guarantor’s position in the case of pending debts of the debtor to the creditors. How far does the guarantor affected? Generally speaking, the obligation of the guarantor to settle such a debt is limited only to the remaining unpaid sum but on the other hand that’s not always the case once the debtor can be required to clear the full amount. Particularly, the obligation of the guarantor in relation to the loan of the principal will be equivalent to the amount of the difference between the value of the mortgage collateral and the fixed amount of the loan. It should not be omitted that the debtors are fully discharged from any liabilities in the case where the remaining balance of the debt is comparatively smaller than the value of that mortgage. Moreover, after the deadline period of 2 years of the application of the repayment plan, neither there is a right on behalf of the creditors to take legal actions against the debtors, nor to take legal actions against them in case where the total value of their immovable property does not exceed the amount of 75.000 given that the debtor has given responsibility of guarantee up to 25.000.

Taking everything into account and especially including the concerns of the citizens, it is concluded that the requirement for advice and appropriate information to the debtors in regards to their obligations as well as the renewal of the relations between creditors and debtors in relation to the debts are deemed necessary. However, whether the proposed arrangements will satisfy their aim or whether will lead to the detriment of citizens is something that cannot clearly be clarified and which simultaneously creates some doubts. Having said that, there may be a risk of concerning these reforms as a motivation which prevents the development of those actions instead of moving forward and consequently affecting the transactions as well as the economy in general.

For further information, please contact Mr. Savvas Savvides.