The Extra-Judicial Mechanism promises debt write-offs and debt adjustment up to 240 instalments for the State and insurance funds and up to 420 instalments for debts to Banks and Loan Administrators.
Every beginning and difficult…
Although the procedure of the Extra-Judicial Mechanism has been operating since1 June 2023, during the first period of its operation it faced serious problems and delays as well as the distrust of debtors, however, it seems that recently this procedure is beginning to gain the trust of debtors, whether they are businesses, freelancers or individuals.
The official figures of the Special Secretariat for Private Debt Management for the month of July are indicative of the turnaround, as they speak of 931 new successful arrangements corresponding to €0.3 billion, while the total number of successful arrangements reaches 7,257, corresponding to €2.65 billion of debt.
But what are the recent changes that promise to improve the process and results of the Extra-Judicial Mechanism of Law 4738/2020?
The new changes to the Extrajudicial Mechanism Procedure of Law 4738/2020, which aim to make it more attractive to debtors, were established by Law 5024/2023 (Articles 39 to 43) and by Ministerial Decisions No. 40953 & 40992.
Obligation for the Funding Agencies to state the reasons for rejecting the application.
Until recently, financial institutions were not required to state the reason for rejecting an application for adjustment when they rejected an application for cases where the proposed adjustment by the law’s calculation tool did not favour them.
For example, for a loan that is partially or fully secured by a property of good commercial value, the Bank or the Loan Manager will prefer to liquidate the property through an auction and collect its value today, rather than agreeing to a solution of up to 420 instalments (35 years) with all that this implies in terms of the risk of default for the Bank or the Loan Manager.
On the other hand, the creditor’s refusal to consent to a debt adjustment can be an argument for the debtor in court to claim abusive behaviour by the creditor and at the same time to argue that he is bona fide (i.e. not a strategic defaulter) and that he wishes to find a solution for the repayment of his debts, always based on his financial capacity.
Some of the most frequent reasons for rejection are “Sufficient financial capacity and/or property for the repayment of the debts”, “Insufficient financial capacity of the parties involved/objective inability to service the requested arrangement”, “Non-participation of all parties involved (co-debtors and/or guarantors)”, etc.
Finally, it should be noted that a tab has been added to the debtor’s application, entitled “vote”, which shows the reason for rejection for each creditor.
Reduction of the interest rate for debt arrangements with the State and Social Security institutions.
A particularly important change that has to do with the interest charge that the debtor will be required to pay during the period of the arrangement, is the reduction of the interest rate for the arrangements with the State and the Social Security Institutions, on the basis of Ministerial Decisions 40953 and 40992.
In particular, the debtor will now be charged a fixed interest rate of 3%, when until recently the interest rate was variable equal to Euribor 3-month + 5% margin, i.e. a final interest rate close to 9% (!!!) today.
It is noted that this change leads to a significant reduction in the interest that will result from the regulation, while it will also apply to regulations that have already been approved – implemented through the platform of the Extra-Judicial Mechanism.
Discount on all outstanding interest in case of full discounting of the arrangement with public bodies
In addition to the reduction of the interest rate for the settlement of debts to the Public Sector, the possibility of interest deduction in case of full discounting of the settlement is added.
For example, if a debtor has entered into a 20-year arrangement with the State, he can in the 5 years of the arrangement (or in any other year during the period) discount the entire debt, “saving” the interest he would have paid from the 5th to the 20th year of the arrangement.
This possibility will also be given for the arrangements of debtors that have already been implemented through the platform.
Possibility to exempt regulated loans
An equally important change, which has already been implemented, is the possibility for the debtor to exclude from the application procedure of the Extra-Judicial System, loans that have already been settled.
Until recently, the following absurdity was happening. The debtor was asked to accept the proposed arrangement of the Out-of-Court Mechanism platform, which applied to both regulated and unregulated loans. Thus, there were cases where the debtor was obliged to accept the substitution of the arrangements proposed by the Extra-Judicial Mechanism platform for already regulated loans (whose regulation was being respected) on less favourable terms, in order to be able to settle the rest of his debts, both to financial institutions and to the State and Social Security institutions.
However, in order for the debtor to be able to exclude an already regulated loan, the instalment resulting from the platform’s calculation tool in relation to the instalment paid in the existing regulation must not deviate by more than 15%.
Of course, if one takes into account that the calculation tool proposes solutions without a grace period or an interest freeze for a specific period of time, unlike many of the arrangements proposed and implemented by the Banks and Servicers outside the Out-of-Court procedure, then one can understand that the deviation of more than 15% will be frequent, with the result that many times, the regulated loans cannot be exempted.
It remains to be seen in practice how this measure is implemented and any corrective steps taken along the way to improve it.
Possibility to adjust debts in favour of third parties
Until recently, debtors could only settle debts in favour of Financial Institutions, the State and Social Security Institutions.
In addition, it is now also possible to regulate debts owed to third parties that are established and collected by the State (e.g. debts to municipalities).
Include also the debts corresponding to a single Financial Institution
Previously, a debtor who owed more than 90% of total debts to Financial Institutions, the State and Insurance Funds to a single financial institution could not apply to the Extra-Judicial Mechanism. Now, this restriction does not apply and the debtor can settle his debts only if they exceed €10,000.
Movable assets will be valued by a certified appraiser of the Ministry of Finance if they exceed the value of €50,000 from the previous €10,000.
A significant change related to the cost to the debtor, as an appraisal by a certified appraiser from the Ministry of Finance is costly.
With this amendment, the debtor is “spared” with a simple affidavit the obligation to provide a valuation by a certified valuer for movable property up to €50,000 (from €10,000 previously). In practice, the value declared in the affidavit is not checked by creditors, unless it is an “eye-catching” case.
The only category of debtors that is limited in terms of declaring the value of movable assets are companies that keep double-entry books (category C) (e.g. limited liability companies, limited liability companies, limited liability companies, limited liability companies, etc.), as their balance sheets show whether the value of their movable assets exceeds the limit of € 50,000.
Possibility of debt adjustment from inheritance
Previously, the procedure of the Extra-Judicial Mechanism excluded the settlement of debts to the State and Social Security Institutions arising from inheritance because the debts . For example, debts inherited by a son or daughter from a deceased father or mother could not be settled even though they were owed. Now, although he can now settle them with a long-term arrangement (up to 240 instalments) with the possibility of write-offs, instead of a short-term arrangement (24 instalments) which he would receive if he settled them directly with the tax office or the EFKA.
Ability to adjust established debts to the State of a legal person that has been dissolved or liquidated
It is now also possible to adjust confirmed debts to the State of companies in liquidation or in liquidation.
Until recently, the possibility to settle the debts of companies in liquidation or dissolution through the Extrajudicial System (with all that this implies in terms of the duration of the settlement) was not possible. The only alternative available was to reinstate the legal entity so that the company could then apply as an active company.
In addition, the application may be submitted by a third person who is jointly and severally liable for the debts of the person being wound up, such as the general partner of a limited liability company or a limited liability company or a member of the Board of Directors, etc.