Carrot and stick for more debt settlements

Carrot and stick for more debt settlements

The government is using a carrot-and-stick approach to increase debt settlements through the out-of-court mechanism: It is tightening penalties in cases of noncompliance through provisions to be included in a bill to be tabled in Parliament around end-September.

The aim is to limit the defaults of the arrangements that exceed 30% in the case of management companies (the default rate for banks is limited to 15%), a phenomenon that counteracts the effectiveness of the mechanism, through which it is sought to deal with a significant part of private debt.

Noncompliance with the arrangement a few months after the conclusion of the agreement is attributed to the mistrust that exists on the part of the debtors as to whether the agreed solution is advantageous, but also to the fact that the withdrawal from the agreement is not accompanied by penalties.

A basic misunderstanding that characterizes the disposition of debtors for the regulation of their debts is the fact that they consider that the proposal resulting from the algorithm – and therefore the installments they will have to pay – only takes their incomes into account. 

That is not true. The settlement proposal is based on their entire property and therefore the resulting installment is made up of both their incomes and the value of the property the debtor has. This rule is based on the principle that after the arrangement, the creditor cannot find himself in a more difficult position than he would have been in the event of an auction. This element is thought to discourage debtors and for this reason the General Secretariat of the Financial Sector and Private Debt Management is launching regulations that will lead to greater debt haircuts, so as to motivate debtors to comply with the regulation.

As part of the amendments, the possibility of a debtor repaying a part of the debt through an advance payment, achieving a better arrangement, is also considered, something that is not foreseen by the out-of-court algorithm to date.

As a stick, the bill will provide that the extrajudicial settlement agreement can be an enforceable title for carrying out acts of forced execution, that is for auctions. 

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