What shall the currency borrowers do when the moratorium is lifted?
The Ukrainian law which protects the interests of foreign currency borrowers is about to expire. After April 21, 2021, banks, financial institutions, and other creditors will have the right to recover mortgaged property under a foreign currency loan. What are the possible scenarios for foreign currency borrowers?
In general, we are talking about thousands of our citizens who were left alone with problem loans. Interestingly, neither the National Bank nor the Individual Deposit Guarantee Fund knows the exact number of such borrowers. Of course, many loans were sold to financial companies during bank liquidation procedures.
Will the moratorium be extended? This is unlikely, moreover, impractical. Any moratorium can be considered as an exceptional temporary measure which is adopted by the legislator to find an effective way to solve the problem. The moratorium has been in force for more than 6 years.
What is the way out then? The Bankruptcy Code of 2019 has introduced a new mechanism for insolvency of individuals, with special preferential terms for foreign currency borrowers that they may take advantage of until October 21, 2024. However, we have not seen a large number of bankruptcies of foreign currency borrowers. Why so?
- High cost of bankruptcy proceedings. The applicant must pay an advance payment for 3 months of work of an insolvency manager and pay the lawyer for legal support with the preparation of the necessary documents. On average, one may expect the cost of insolvency being at least UAH 50,000.
- Huge number of documents is required to apply.
- Complexity and length of the procedure. The average duration of the procedure is 7 months or more.
In an attempt to solve this problem, the Verkhovna Rada adopted draft Laws No.4398 and No.4399, which have already been forwarded to the President of Ukraine to sign them off. They provide for the mandatory restructuring of consumer loans that were given in foreign currency, provided that such loans are secured by property which a) is the debtor’s only home and is used by him as a permanent place of residence, or b) is still under construction while being or expected to become the borrower’s only home. Restructuring in this case means that the amount of debt is recalculated at the ‘average’ rate, i.e. as the average value between the rate set at the date of the contract and the rate set at the date of restructuring.
In essence, the debtor’s property must meet the same characteristics as the property covered by the above moratorium. It should also be noted that, at the time when the new law enters into force, the due date should not have come and as of January 1, 2014, there should be no debt on this loan.
If the above conditions are met, the person has the right to apply to the economic court to initiate insolvency proceedings. The procedure for filing such an application is governed by Ukrainian bankruptcy legislation. The above draft laws provide for the creation of a special type of proceedings, which will be slightly different from the general insolvency proceedings. Let us make an overview of the proposed novelties.
Thus, the first step would be to submit an application with annexes to the economic court: documents confirming the applicant’s and their relatives’ financial situation alongside other documents specified in Article 116 of the Bankruptcy Code of Ukraine, in particular, a debt restructuring plan shall be enclosed to the application. If the application meets all statutory requirements, and the outlined background is sufficient to initiate insolvency proceedings, then the court orders to open such proceedings. From this moment, the creditors’ claims fall under the moratorium, i.e. the fulfillment of obligations shall be suspended and penalties shall not be imposed for a period of 120 days.
As a result of the opening of such proceedings, the individual’s debts of the person are subject to restructuring, i.e. changing the terms of fulfillment of obligations, paying by installments, or forgiving the debt. The draft laws state that the insolvency manager should not participate in such proceedings, as different from the general proceedings. This significantly reduces the cost of the procedure.
After the proceedings are opened, the debtor must agree a restructuring plan with the creditor. If such a plan is agreed, the commercial court shall approve it. In addition, at the request of the debtor, the court may set a minimum amount of monthly execution of the restructuring plan.
After having approved the restructuring plan, all enforcement proceedings for the recovery of property on the loan (if any) shall be suspended.
If the restructuring is not approved or not implemented, the debtor shall be declared bankrupt all his debts shall be written off, and the property shall be sold. Such property must be evaluated by an independent expert and sold at an online auction. Anyone can buy such property by offering the highest price.
Thus, a foreign currency loan is converted into hryvnia; the creditor receives at least part of their money, and the debtor becomes able to repay the debt. The creditor receives real money, and the debtor gets the opportunity to start a new financial life.