Effects of the Debt Discharge Law

The widely debated bill on debt discharge has been signed into law by President Klaus Iohannis and will take effect on May 13.

Daniela Budu, 04.05.2016, 12:45

The President of
Romania Klaus Johannis has promulgated the debt discharge law, which, in a
first stage, he had sent back to Parliament for review. Under the new law,
people with mortgage loans under 250,000 euros who can prove they can no longer
pay their due instalments may request banks to take over their home and erase
the debt. Tens of thousands of Romanians have outstanding payments for their
house loans and many of them are already subject to foreclosure. Adding to
these are people who took out personal loans and pledged their homes as
collateral.

The latest data
made public by the National Bank of Romania indicate that 300,000 families have
taken mortgage loans in Romania. Only half of them borrowed the money directly
in order to buy a home, whereas the others used their homes as security for
their personal loans. Regardless of the case, the debt discharge law enables
them to give up the loan in exchange for the house, as long as they can prove
they can no longer afford to pay the loan instalments. However, this is not the
case for the people who have bought homes under the First Home programme,
because the provision in this respect was scrapped by Parliament.

The retroactive
application of the law has given rise to many ambiguities. There are people
whose homes have already been repossessed, but who still owe banks the balance
to the credit amount. They too may request a settlement in court. A growing
number of banks have announced, in response to a law they have opposed, that
they will increase the down payment for granting mortgage loans, and one bank
has already introduced a separate offer, with smaller down payments for credits
over 250,000 euros, the ceiling up to which the debt discharge law is
applicable.

Although lending
is recovering in Romania, against the backdrop of low interest rates, the
European Commission warns that uncertainty might backfire, with the most
significant risks identified in relation to the uncertainties triggered by the
debt discharge law. The Commission says the law may have a substantial negative
impact on investor confidence, as well as on long-term lending prospects.

The
controversial law has already been published in the Official Journal of
Romania, which means that as of May 13 debtors may show up in bank offices to
hand out their home keys, in exchange for having their debt settled.