By Angelos Anastasiou
The guarantor’s obligation to repay any amount outstanding after considering the value of any collateral posted by borrowers is included in the fifth and final insolvency bill, which was approved by the cabinet on Friday.
The set of laws is designed to protect insolvent borrowers.
According to the Cyprus News Agency, the bill fleshes out three main topics – personal repayment schemes (consensual or imposed) which protect primary residences under conditions and designate the handling of guarantors, coordinated repayment schemes applicable both to individuals and micro-businesses, and the debt-relief order.
Consensual personal repayment schemes will be drafted by a licensed insolvency consultant on the borrower’s behalf. The consultant will – subject to conditions – apply for a 70-day execution proof court order, using the time to devise a personal repayment proposal. The borrower may not apply if over 25 per cent of the debt was incurred over the six months before the application.
Consensual repayment schemes – incumbent on the lender accepting the arrangement – may extend up to 60 months, and call for payments to be made after factoring in “reasonable living expenses”, which will be issue by the commerce ministry’s Insolvency Service.
This type of repayment scheme must necessarily maintain lenders in an equal or better position than they would be if they foreclosed on a property posted as collateral.
Primary residences in scope for protection under these provisions allow for total debt up to €300,000, with the value of the collateralised home up to €250,000. Other property assets, excluding the primary residence, must also not exceed €250,000. A further term is that the borrower must be able to demonstrate a loss of income of at least 25 per cent “for reasons beyond his control”, meaning as a result of the financial crisis.
In protecting the borrower’s primary residence, the insolvency consultant must consider four parameters – the cost of keeping the primary residence, including maintenance, taxes, and insurance; the borrower’s income; the ability of other individuals living in the house to contribute to repayment; and the cost of alternative housing arrangements.
Personal repayment schemes may be imposed on dissenting lenders by a court. Imposed repayment schemes will have a three-year effect and may be renewed upon expiry. But even with imposed schemes, lenders may not find themselves in a worse position than they would be in, had they foreclosed and auctioned off the property.
In this arrangement, the borrower’s income – over and above the “reasonable living expenses” – must go towards servicing the debt. Further, in protecting primary residences, every other asset belonging to the borrower, including liquid assets, must be considered. Liquid assets worth less than €35,000, as well as properties that generate income, are exempted from this provision.
The bill includes a lender’s right to engage any guarantors, but only to the extent that the amount in arrears exceeds the value of the collateral. Therefore, for a €100,000 loan going unserviced and backed by property valued at €80,000, the guarantor may find himself on the hook for the €20,000 difference. A lender may engage guarantor up to two years after a repayment scheme has been implemented. During this time, the guarantor may also take the borrower to court for the amount he may be called to repay.
Coordinated repayment schemes concern micro-businesses – employing less than 10 individuals – that fulfil the eligibility criteria set for personal repayment schemes, in which the owner has posted his primary residence as collateral for the company’s debt.
The procedure involves the appointment of an examiner, who would review the borrower’s finances and propose a coordinated settlement, which will be subject to court confirmation.
Small loans up to €15,000 may be written off via a debt-relief order following a request submitted to the Insolvency Service. Main eligibility criteria include the borrower’s demonstrable insolvency for at least two years after the application, income levels – over and above his “reasonable living expenses” – should not exceed €100, and assets protected during the bankruptcy procedure shouldn’t exceed €400.
Debt-relief orders will be issued for a two-year period – the ‘monitoring period’ – and upon expiry the borrower, as well as any guarantors, will be relieved of any obligation.