September 1 is not just the beginning of another school year in Hungary. It’s also the beginning for a new institution: private bankruptcy. Whether the legislative initiative, which is interpreted by many only as a PR experiment of the small coalition partner KDNP, will help larger groups within society remains unsure – for the moment even the rules for implementation are missing.
At present the new legal institution is applicable to mortgage borrowers only. This makes it clear what the Christian Democratic KDNP is aiming for with its initiative in Parliament: to save as many families as possible who are facing the foreclosure of their homes.
About 130,000 private households in Hungary seem to be unable to pay the monthly instalments on their loans, while their homes are burdened by a bank mortgage. In 2010 the Orbán government introduced its exchange rate and debt consolidation law, which put an end to the former liberal practice that allowed the banks to accrue all the belongings of debtors.
Loans were distributed to anyone who wanted them without any braking or control mechanism after 2002, making use of the policies meant to revive the economy of the social-liberal governments of Medgyessy and Gyurcsány, and especially in the boom period just before the outbreak of the global economic crisis.
Since Hungary was practically bankrupt from 2006, the Socialists were putting a lot of financial pressure on the population. This happened long before the International Monetary Fund and the European Union appeared at the end of 2008 to hand over a rescue loan of EUR 20 billion.
In those years several hundred thousand families, who believed that they had a firm financial background, were knocked off their feet from one day to the other. A struggle for survival began, when the families buried in debt were surviving from one monthly instalment to the next.
It’s always the common people who have to pay
However, the banks have remained on the safe side: First they pressed out everything from the borrowers what they could – long-term analyses have shown in black and white by today that credit institutes demanded clearly higher repayments from Hungarian borrowers than from Polish borrowers.
This is even worse in the case of the foreign currency-based loans (which were handed out primarily based on Swiss francs and euros), since despite all the demagogic assertions the politicians have been trying to make, Hungarian citizens made a much worse deal with the Swiss franc loans than if they had remained loyal to the domestic currency right from the beginning.
Sure, this has a lot to do with the fact that Fidesz burdened the banks with several measures after 2010, upon which they quietly passed on as much of their losses as possible to the customers who were still able to pay their instalments.
Hungary turned off the wrong path that had been followed in the past few years by converting the foreign currency-based loans to forints in the beginning of 2015; since the affront to the banks, which Orbán needed to boost economic growth, could no longer be kept up, the borrowers had to accept the exchange at a brutally weak forint rate.
So now the problem with the foreign currencies is solved but the problem of the private households eaten up by debt remains. The cost of failed economic policies always has to be worn by the common people.
Plenty of conditions to fulfil
KDNP just remembered their Christian virtues and demanded the introduction of personal bankruptcy in Hungary. The law was cobbled together in a couple of months; they needed to hurry because a process lasting for long years would have allowed the banks to complete a larger number of foreclosures.
It might be true that the same process, which is called debt settlement in Austria and insolvency proceedings in Germany, is also quite complicated, but the Hungarian lawmakers meticulously prescribed so many conditions to fulfil that we might just end up with spilling the kid along with the bathwater.
Basically, the disciplined debtor will get a chance during the process to be relieved from the residual debt. As a condition a good-behaviour period of 5-7 years is demanded, which is high if compared to the three years in Germany. The suggestion of KDNP, which they hurriedly passed through the Parliament and quickly entered in force on September 1, technically relies on the Western European examples. Thus the process is started by attempting to settle the case out of court; judicial debt settlement will only be an option once that first attempt fails.
However, this is the end of the similarities, and at this point we come to the extravagant points of the Hungarian lawmakers. In the first phase (until October 2016) the new law is only applicable for mortgage borrowers, thus other loans will not be considered for the moment.
This limitation is understandable if we consider that the government’s approach is to begin helping in those cases where the situation is most grave. Private bankruptcy can only be requested by those debtors who are already in that sort of payment delay where the bank cancelled their mortgage.
The law also says that the gross debt (including interest and compound interest) has to be more than HUF 2 million but not higher than HUF 60 million. The debt needs to exceed the value of realisable assets but needs to be lower than double the entrusted assets value plus the expected repayment instalments from the current income in the next five years. In addition, there must be at least HUF 500,000 overdue for at least 90 days.
Enforcements suspended for five years
The short deadline for applying also seems to be overly strict: If someone converted their foreign exchange loan to forint during the beginning of the year until the end of April, they must file their application to be part of the proceedings by the end of October.
Those people whose loan conversion is still going on have 60 days to apply after receiving the notification letter. Whoever would like to be part of the credit settlement process must be able to present a repayment instalment that accounts for 7.8% of the current value of the real estate at the time of handing out the loan. In the case of real estate worth HUF 10 million, this would still amount to HUF 65,000 per month.
Furthermore the debtor needs to co-operate closely with the family bankruptcy protection service and of course with the creditor bank, which may also include, besides a particularly strict supervision of his finances, the sale of some of the individual assets from the household.
The strict screening of the family budget means that the debtor may only spend one and a half times the value of the current minimum pension amount (currently HUF 28,500) freely. In return, the debtor is saved from enforcements and the compulsory sale of his home during the timeframe of the process, so at least for five years.
However, if the original living space is considered unnecessarily large, it needs to be vacated. Another government decree will regulate what counts as inappropriate – many of the details will only be clarified after the law is implemented. Only a fraction of them are available at the moment.
Who will pay the remaining debt?
The intention of the lawmaker in applying all these conditions was probably to keep any rush to use the new protection within limits. The Bankers Association – which by the way judged the initiative immature and rash – anticipates that not more than 40,000 private households will be able to benefit from the construction.
So when someone sticks strictly to the debt settlement plan for 5-7 years and keeps paying the instalments agreed by “mutual consent”, they may hope at the end of this long procedure that the rest of the debt will be relieved. The decree refers to the part of the loan above the value of the real estate, from which at the end a part between two-thirds and 95% does not need to be paid back.
At the moment every sixth loan owned by private people is “foul” and the trend is going slightly upward – the conversion to HUF at the beginning of the year was only enough to give households overburdened by debt a short break to catch their breath; especially since most of the loans that are not being paid back properly are not the much-blamed foreign currency loans at all but rather forint-based loans to buy cars, with a total failure rate amounting to 51%.
For those people who cannot be helped by the institution of private bankruptcy, the only beacon of hope remains the state. The National Property Managers have already taken over almost 25,000 homes from families unable to pay, who can continue to live in their confiscated homes by paying a monthly rent.
It speaks volumes about how much the banks trust in this latest initiative that they have proposed the number of homes included in the National Real Estate Management construction be raised to 50,000, which is double the current amount.