The Hungarian Parliament recently enacted Act CV of 2015 on Personal Bankruptcy (the “Act”). The Act will become effective on September 1, 2015 and fill the gap of the country’s bankruptcy law, Act XLIX of 1991, as amended, on Bankruptcy Proceedings and Liquidation Proceedings also known as the Bankruptcy Act that did not allow private individuals to file for bankruptcy, or using the terminology of the Act, debt settlement petitions.
The Act fills an important gap in the Hungarian legal system concerning the availability of debt settlement proceedings for private residents of Hungary. Proper implementation of the Act should create an efficient personal bankruptcy system that is able to provide the long-sought relief for qualifying debtors and at the same time honor the rightful interest of their creditors.
Main Provisions of the Act
Individual debtors will now have the legal opportunity to settle their debts through an agreement made with the creditor(s). Debtors successfully petitioning debt settlement proceedings enjoy various privileges during the quasi moratorium, including exemption from judicial enforcement procedures, avoidance of losing their pledged real and tangible properties and the possibility to avoid eviction.
Who May Be a Debtor
Persons residing in Hungary with combined assets and income less in value than their total outstanding liabilities may be debtors under the Act.
The Act sets forth the basic eligibility requirements for the petitioning of a debt settlement proceeding as follows:
- total debts must be more than HUF 2,000,000 but less than HUF 60,000,000;
- total debts must exceed the value of the debtor’s combined assets and income, including income expected for the next five years but may not exceed twice (200%) that amount;
- 80% of the outstanding debt has to be accepted or unchallenged by the debtor;
- one of the debts must be for HUF 500,000 or more and outstanding for at least 90 days;
- the debtor may not have more than 5 subordinated claims;
- one of the debts must be from a consumer loan agreement or an agreement financing the debtor’s private business; and
- none of the debts are from secondary liability for the debts of a business.
Debtors who participated in any prior unsuccessful debt settlement proceedings as a debtor or additional debtor are not eligible to file another debt settlement petition within 10 years following final conclusion of the prior proceeding.
Other Participants in Debt Settlement Proceedings
The debt settlement proceeding was construed to provide breathing room not only to the individual debtor but his/her immediate family members who got caught in the debt trap. Persons who have joint and several liability for the debtors’ debts and live in the same household with the debtor, or a marital community, will qualify as additional debtors and entitled to the same rights and subject to the same obligations as the debtor.
It is also assumed that under specific circumstances certain debts may be repaid by persons other than the debtor, for example the holder of a lien or surety. Under the Act judicial enforcement procedures may not be initiated and pending proceedings will be stayed against these persons if they join the debtor in the debt settlement proceeding as co-debtors, and undertake similar payment obligations in case the debtor, as the primary payor, would fail to pay the debt agreed and accepted under the payment settlement plan or any other binding document conceived within the proceeding.
Property of the Estate of the Debtor
The commencement of a case under the Act creates an estate. The estate is comprised of all the assets and income of the debtor and additional debtor, including any assets or income acquired during the debt settlement proceeding. There will be an exemption for assets and income required for basic personal needs, the amount to be set by implementing regulations.
Family Bankruptcy Service
The Family Bankruptcy Service will be established to employ a family trustee and maintain the debt settlement register. The Family Bankruptcy Service will assist the court during the judicial debt settlement proceeding. The family trustee will act as the executive authority in the implementation of the court’s decisions.
Debt Settlement Register
The debt settlement register will be the official register to contain the data of those who underwent any personal debt settlement proceeding including (i) information on the initiation of the debt settlement proceeding; (ii) the stages of the proceeding; and (iii) the resolution rendered on the merits at the conclusion of the proceeding. In addition, commencement of a debt settlement proceeding shall also be entered into the Central Credit Information System.
The Debt Settlement Proceeding
The Act stipulates the following three phases of the debt settlement proceeding:
- A) Out-of-court Negotiation
At the outset and following the filing of the debt settlement petition, the debtor and the creditor(s) shall attempt to enter into a debt settlement agreement. The debtor must state in writing, addressed to the main creditor, that s/he requests a debt settlement proceeding. The statement must include the following:
- personal data of the debtor and his/her creditor(s);
- property of the estate of the debtor;
- composition and amounts of debts and the obligations assumed for their repayment; and
- list of close relatives and civil partners living in the same household of the debtor and their regular incomes and expenses.
The main creditor of the debtor may be from among banks, credit institutions and financial enterprises that hold a lien on the property of the estate, or lessors under a financial leasing agreement. In both cases the property of the estate used by the debtor for his/her own primary housing purposes, or the housing purposes of his/her close relative(s), must be subject to the aforementioned lien/leasing contract. The main creditor must participate in the out-of-court debt settlement procedure. If the debtor does not have a main creditor, the petition must be filed with the court through the Family Insolvency Service.
Following submission of the petition, the Family Bankruptcy Service should verify compliance with all legal and financial prerequisites, and then simultaneously issue a certificate on the petition and publish an individual public notice electronically on its website to unlisted and unknown creditor(s) inviting them to file their claim(s) within 15 days. The publication will remain on the website of the Family Bankruptcy Service until the out-of-court negotiation was successful or is registered in the Debt Settlement Register.
After the initiation of the proceeding, creditor(s) may only pursue their claims within the framework of the debt settlement proceeding. During the proceeding, the debtor must make his/her assets and income available – excluding the assets and income required for everyday living expenses – and may neither pledge nor willfully diminish the value of the estate to be used for the satisfaction of the creditor(s) claims.
It is the main creditor who is charged with the coordination, negotiations and preparation of the debt settlement agreement. The debt settlement agreement is concluded when the creditor(s), debtor, additional debtor(s) and codebtor(s) make a valid statement accepting the terms of the agreement, and return the statement to the main creditor and the debtor. A debt settlement agreement is valid only if 100% of the participants in the debt settlement proceeding has approved it. Out-of-court debt settlement agreements do not require court approval, but they must be entered into the debt settlement register.
- B) Judicial Proceeding
Although more costly because of the filing and debt management fee, a judicial proceeding may be initiated if the parties
- fail to enter into an out-of-court agreement within 90 days from the receipt of the Family Bankruptcy Service’s certification (120 days if there are multiple creditors);
- there is no main creditor able to coordinate the negotiations; or
- the debtor does not comply with the provisions of the executed debt settlement agreement within 30 days following receipt of the notice to comply.
Judicial debt settlement proceedings follow the rules of civil, non-litigious procedures and are intended to make the debtor and the creditor(s) reach an agreement on payment facilities. At the commencement of the proceeding, a notice is published on the website of the Family Bankruptcy Service inviting creditor(s) to the judicial proceeding within 30 days. The family trustee, with the cooperation of the debtor, compiles the list of creditors and additional debtors, and the details of the creditors’ claims within 30 days upon expiration of the deadline open for creditors to file their claims.
In this phase of the proceeding, claims must be classified in categories, such as:
- claims accepted or unchallenged by the debtor;
- claims challenged by the debtor;
- secured claims;
- unsecured claims;
- priority claims;
- claims of privileged creditors (holding claims for alimony, child support, unpaid public utility charges, public debts); and
- subordinated debts (e.g. claims of close relatives, civil partners, partner companies).
Afterwards, the family trustee prepares the debt settlement plan proposal together with the debtor and sends it to the creditor(s), who have 30 days to accept the proposal or request its amendment. As part of the settlement, the debtor may agree with the creditor(s) on the conditions of the debt settlement regarding payment facilities, payment rescheduling, potential conversion of debt from foreign currencies to HUF, the relevant exchange rate, the joint risk pertaining to the foreign exchange rate and the allocation of amounts collected within the scope of a prior enforcement procedure.
In order to become effective, the settlement plan requires the approval of the debtor, the main creditor, and the simple majority of all other creditors. Although a successful plan does not require 100% consensus, this phase accords all creditors the right to present proposals on the merits of the plan and the subsequent agreement.
The Family Bankruptcy Service assists the court during the judicial debt settlement proceeding and supports the debtors in performing their obligations and exercising their rights.
If the content of the plan complies with all applicable legal provisions and has the required consents, the court approves it in a resolution. The court approved agreement will be binding on all creditors regardless of their participation or position in the plan approval vote.
Execution of the agreement should be supervised by the family trustee, who can inspect the debtor’s financial management at any time.
The court may amend the agreement twice at the debtor’s request if there is a substantial negative change in the debtor’s financial situation. In both cases, the amended agreement will be put to a vote among the creditors not yet satisfied.
Once the settlement is concluded, the family trustee will prepare a closing account statement with the assistance of the debtor.
- C) Debt Repayment Procedure
The court shall initiate a debt repayment procedure if the
- parties could not come to an agreement in the judicial proceeding;
- the debtor did not pay all of his/her debts in accordance with the settlement agreement; or
- the settlement agreement requires an amendment due to an unanticipated deterioration of the debtor’s financial position or any unanticipated and significant income, but the parties fail to reach an agreement on the amendment.
If any of these happen, the court adopts a debt repayment resolution, which includes the allocation and sale of the debtor’s estate within the scope of a repayment plan.
The family trustee will prepare the debt repayment plan for the court’s approval. Additionally, the family trustee should suggest solutions to ensure housing and necessary expenses for the everyday life of the debtor and his/her close relatives living in the same household.
If the financial position of the debtor substantially deteriorates, the debt repayment resolution may be amended twice upon the debtor’s request.
The debt repayment procedure period is five years, which may be extended by the court only once, for a maximum of two additional years. Upon the conclusion of the debt repayment procedure the family trustee, with the cooperation of the debtor, shall prepare a final closing account statement.
Termination of the Debt Settlement Proceeding
The court may terminate the debt settlement proceedings if the debtors do not comply with their obligations during the procedure. Termination of the debt settlement procedure will end all the benefits and protections that the debtors enjoyed while the case was pending, and creditors may continue to pursue and enforce their claims in accordance with the general rules of civil, civil procedure, and judicial enforcement laws.
Post Debt Settlement Agreement Rights of Creditors
The following rights are available to creditors if debtors fail to comply with their obligations undertaken in the debt settlement agreement or the court’s resolution:
- If the debtor removes or conceals any property of the estate, or gives preference to certain creditors by breaching relevant statutory provisions or provisions of the debt settlement agreement, creditors participating in the proceeding may, in case of out-of-court negotiations, request the termination of the debt settlement agreement, or in case of judicial proceeding, request the court to repeal its release resolution.
- If the term of a contract or the conditions of repayment was defined in a way that exceeds the term of the agreement in the release resolution and the debtor has not fulfilled his/her payment obligations during this period, creditors participating in the judicial proceeding may request the termination of the debt settlement agreement.
Miscellaneous Provisions of the Act
The general procedural rules of the judicial debt settlement proceedings will be provided by the Hungarian Code of Civil Procedure with certain derogations related to electronic communication and the broader powers of court officers. A complaint may be submitted against the family trustee for any irregularities, negligence or if his/her acts infringe the rights and rightful interests of the debtor and/or the creditor(s). For the appeal of the orders of the court rendered during the proceedings, the Act includes specific rules that differ from the general provisions of the Hungarian Code of Civil Procedure.
In the debt settlement proceedings creditor(s) have to pay a registration fee and a claim management fee. Debtors are obliged to pay a one-time fee of HUF 30,000 in case a main creditor can be engaged in the out of court proceeding.
Following its entry into force and until September 30, 2016,only those debtors may file a debt settlement petition whose residence or the residence of their close relative(s) are threatened by judicial enforcement or auction sale.
 Article 7 of the Act
 Approximately EUR 64,500 based on EUR 1.00/HUF310 exchange rate.
 Article 8 of the Act
 Articles 11-15 of the Act
 Article 16 of the Act
 Articles 17-31 of the Act
 Articles 32-68 of the Act
 Articles 69-82 of the Act
 Article 93 of the Act
 Articles 95-96 of the Act
 Article 94 of the Act
 Article 36-38 of the Act
 Articles 97-99 of the Act
 Articles 100-102 of the Act
 Article 88 of the Act
This article was first published in Insolvency Restructuring International, Vol 9 No 2, September 2015, and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.