6+1 PRACTICAL GUIDELINES FOR LOAN SETTLEMENT WITH THE FUND

By SOLVDEBT Articles September 10, 2023

How can you get a really advantageous arrangement for your red loans?

This is a key question that concerns thousands of borrowers who are facing problems with their overdue loans and are at risk of forced legal action (foreclosure, auction).

Although we have written a recent article on the negotiation of a debtor with the Bank – Fund/Servicer entitled “NEGOTIATION WITH FUND (Dovalue,Intrum,Cepal,Qquant)”, the purpose of this article is to present practical guidelines for a realistic negotiation with the creditor.

The following are six (6) basic practical guidelines in negotiating with the bank or servicer-fund.

1. Who is involved in the debts:

Each debt may concern other persons (natural or legal) than the debtor, such as co-debtors, guarantors, in the capacity of owners, managers, legal representatives, legal entities, relatives or third parties.

2. Do all stakeholders wish to regulate?

It is not always easy to coordinate all the parties involved (debtor, co-debtor, guarantor) to seek the adjustment of their loans. There are instances of disagreement between the parties involved as to how to handle the negotiation with the Fund-Servicer, or they may even have stopped communicating with each other.

In these cases, it is possible for the debtor or the guarantor individually to seek the adjustment or repayment of his “red” loans with the Bank or the Fund-Servicer, but he must settle the entire debt. That is, the debt cannot be divided or “broken up” between the debtor, co-debtor or guarantor and each can pay off a portion of the debt. All are jointly and severally liable.

What can be done, however, is to consider the release of a guarantor by paying an amount (in a lump sum or in instalments) depending on his/her financial situation and income, but without writing off the balance of the loan or exempting other debtors and guarantors.

3. What are the debts?

A prerequisite for the adjustment of a loan debt is that the debtor knows what it consists of.

The principal – debt service, is the amount that the debtor borrowed initially.
Interest is the amount that results from the imposition of interest on the principal.
Late payment interest is the additional interest charged on overdue debts. The interest on late payments is equal to 2.5%.
Miscellaneous expenses
Off-balance sheet interest. Interest that is usually calculated after the loan is terminated.

Knowing the individual elements of the debt, the debtor can negotiate their partial or total cancellation. For example, the write-off of off-balance sheet or even default interest is a more achievable goal than the write-off of contractual interest or even principal.

4. What is the financial situation of the parties involved?

The assets are not only the real estate of the parties involved, but also movable assets (deposits, bonds, vehicles, shares, boats, valuables, etc.)

A key factor for the Bank or the Servicer-Fund to decide which arrangement to propose to the debtor is to have knowledge of the recent commercial value of the debtor’s and the other parties’ (debtor, co-debtor, guarantor) assets.

The market value of the real estate is estimated by the creditor’s cooperating appraisers and their values are considered up-to-date and recent when the appraisal was carried out up to 1 year ago.

The purpose of this procedure for the creditor is to know what the value of the real estate securing the loan is (e.g., lien, mortgage) and whether there are unencumbered properties (of the parties involved), on which he could “write” a lien to further secure the loan debt (when the loan is not fully secured).

5. What will the Bank – Servicer – Fund receive in case of forced liquidation of the property?

For the creditor, the answer to this question will probably determine his attitude towards the debtor and the other parties involved.

When we say forced liquidation of property, we mean the auction of real estate and movable assets. It should be noted that we are not only talking about existing collateral (mortgages, pledges) but also other assets of the debtor or guarantors, which, although they are not collateral for the loan, the creditor can “write off” a forced charge (pledge or mortgage) through the issuance of a payment order and seek their auction, after the imposition of a seizure.

The first thing the bank or the Servicer-Fund will do before talking to the debtor about the loan arrangement is to calculate the amount it will receive in case of liquidation of the loan collateral (e.g. real estate with a lien or mortgage) and how many years it is expected to take.

If the amount that the creditor will receive in case of an auction is close to the amount of the debt (e.g. the loan is fully secured by a property of high commercial value) then it is expected to take a “tough” stance in the negotiation for a consensual arrangement, as the option of enforcement actions and auction may be more advantageous.

It is no coincidence that similar cases submitted through the Extra-Judicial Mechanism are rejected by the Banks-Funds, as it is not in their interest to agree to an arrangement of up to 35 years without advance payment (as provided for by the Extra-Judicial Mechanism) when they can collect in 1 or 2 years (ideally) a large part of the debt through the auction of real estate and movable assets.

But in the opposite case, when the expected recovery from the forced liquidation of property is “low” in relation to the amount of the debt, the creditor’s attitude is usually more flexible.

For example, if for a loan of € 1 million the expected collection from the forced legal actions (auction) is € 300 thousand without the possibility of further security (e.g. new mortgage on a property or seizure of a bank account), then the Bank or the Servicer/Fund will seriously consider agreeing to an arrangement that includes a “haircut” of the debt as long as the overall arrangement ensures a collection of at least € 300 thousand.

6. Auction of property

In the case of a property auction, the Bank/Servicer-Fund does not receive the full amount of the property sold.

For example, if a mortgaged property is auctioned for €105,000 the amount will be distributed as follows:

€ 5k to cover the costs of the auction (notary’s fees, etc.)
65% (i.e. € 65 thousand) will be distributed to the mortgage creditors (i.e. Banks, Funds or natural persons, legal entities) who have registered a mortgage/ mortgage lien on real estate),
25% is distributed to the public and employees (without mortgages),
10% to other creditors.

Therefore, the bank or fund will receive 65% of the bidding price, not 100%. However, in the case where the debtor does not owe any money to AADE and EFKA, then the collection rate may reach 90% or even 100% (if the debtor does not owe any money to other non-mortgage creditors either).

7. What loan arrangement can I get?

There are different types of arrangements that a debtor and a creditor can jointly agree on to settle the overdue loan.

Conventional Setting

The classic way to settle with a down payment at the beginning is to repay a loan in instalments.

The duration of the arrangement varies, as it depends on the value of the collateral (in a high commercial property, the Bank or the Fund may offer a short duration and push for its sale) and on the age of the debtor and the guarantors (adding a young guarantor may allow for a multi-year arrangement).

In addition, the interest rate is equally important, which can be increased in case of debt adjustment. However, the agreed rate of interest for a settlement is usually finalised after negotiation between the two parties.

Other types of loan arrangement

In addition to the familiar type of loan arrangement, there are variations that add flexibility for the debtor to pay the amount, and facilitate the agreement between the two parties. For example, there is the possibility of a grace period, interest-only payment for a period, interest freeze, staggered payment, balloon payment, etc.

Voluntary assignment of property

If the financial data of the debtor company or the income of the private debtor cannot support a long-term arrangement and the mortgage is of high commercial value, then a voluntary assignment of the property or a “consensual” auction can be agreed upon, so that the debtor can obtain a “haircut” of his debts and a definitive discharge.

Instead of epilogue

The arrangement of a loan can prove to be a complex affair which depends on several factors, some of which we have discussed above.

Negotiating with the bank or the Servicer-Fund can be a real “battle” as each side will make sure to gain the negotiating advantage to “drag” the other side to the settlement agreement they want.

In this “battle”, you can get the best possible support from former bank executives who have worked on the creditor’s side and know how to help you achieve a truly advantageous arrangement.