5 ways to dispose of a troublesome debt effectively
In our Guide, we usually focus on the problems of the entrepreneurs. The entrepreneurs are our clients and by publishing various contents, we try to facilitate their life as far as possible. On the other hand, the entrepreneurs are also people and – contrary to some institutions – we are aware of this fact. It is about the fact that some of them also have credits in franc and among them there are also the ones that have problems with their repayment. So if we have spoken about this issue in the media, we will share our advice also here.
At the beginning, we would like to calm you down: a change of the creditor does not have to be bad news for the debtor. Everything depends on our attitude and on the creditor. We write why and for how much the banks sell the credits, how to negotiate with the new creditor to sell the real estate directly and how to negotiate cancellation of a part of the debt or repayment in instalments.
Why do the banks sell bad credits?
Reason 1. They sell them because of the fact that when there is a problem with timely payment of receivables, the transaction stops being profitable and debt collection is a time-consuming process, which does not constitute the core of the business of the bank. Moreover, thanks to the sale, the bank avoids the problems connected with administration or auction of the seized real estates.
Reason 2. Sale of irregular mortgage credits allows the banks to use the tax shields and – apart from the sale price – obtain an additional financial benefit, improve their results and the balance sheet as well as avoid the necessity to create provisions.
For how much have they actually bought me?
The fact that we have read in the press that the banks sell the portfolios of irregular mortgage credits for 15% of the nominal value does not mean that the new creditor will be eager to cancel the remaining debt after payment of a minor amount. Why?
Mortgage debt is usually non-uniform – its LTV (relationship between the debt and the value of the real estate) is different, the amount of interest is different, the collaterals and the situations of the debtors are different. Our debt could have cost both 80% and 5%.
What to do when it relates to me?
Do not bury your head in the sand. The evasion strategy will most probably lead to bailiff auction which is always the worst solution. Depending on the success of the auction, the real estate will be sold for 66-75% of the formal valuation of the real estate. The recovery of the debtor will be decreased by the court and enforcement costs while the remaining amount will be pursued from the income and other assets of the passive debtor.
It results therefrom that it is worth talking to the creditor since it also cares about amicable settlement of the issue. Of course, the creditor will strive for obtaining of the solutions that is the most beneficial to it, so we should not be afraid of proposing of the solutions that are beneficial from our perspective.
Below, we present 5 ways to get out of the problems connected with the mortgage
Way 1: Direct sale
If the situation allows us to live for some time with our relatives or to rent a smaller flat, sale of the real estate will be the most beneficial and definite solution of the problem.
Variant 1: low LTV
If we have only one creditor and low LTV, we are on the winning position. Obtaining a promise for the sale of the flat, we can sell it in any way. The excess from the obtained amount, exceeding the value of the debt, will flow to our account and this is what our problems with the unpaid mortgage credit will end with.
Variant 2: high LTV
If the LTV is high, i.e. our real estate is worth less than the debt, the situation is worse but we may still reach an agreement with the creditor and obtain the sale promise.
Variant 3: several mortgage creditors
When we have several mortgage creditors, we have to obtain the consent and the promise of each of them and we must divide the amount obtained from the sale proportionally.
Obtaining of the promise and sale of the real estate directly is the best solution since it does not result in any additional costs and both parties strive for obtaining of the highest price possible for the flat.
What can we negotiate with the creditor:
A win-win solution is easy here. If thanks to us the creditor recovers the money from the sale of the real estate quickly and perhaps obtains a positive return on investment, it may be eager to negotiate the relief from the remaining part of the debt or – in the worst case – its spreading into instalments.
Way 2: Refinancing
If it is not possible to move out from the real estate encumbered with a mortgage, we may consider incurring of a credit for repayment of the liability. If our creditworthiness is already limited, the bank may grant a credit for the purchase of the same real estate to one of our intimates. If the determined price of the real estate and thus the repayment amount does not differ from the market one, the creditor may grant consent to such solution.
What can we negotiate with the creditor:
The creditor may relieve us from the remaining part of the debt and we will pay new lower liabilities towards a new creditor.
Way 3: Cancellation of a part of the debt
This solution is available for the debtors that are able to organise bigger cash and partially satisfy the claims of the new creditor. They have a chance e.g. for cancellation of a part of the debt or for a relief therefrom. However, making of excessive demands is still inadvisable. Our proposal will be attractive if it stays correlated with the real value of the real estate or the amount that is recoverable in the course of bailiff enforcement. Shortening of the time of waiting for the payment and lack of costs connected with pursuing of the claim in court will be an incentive for the creditor.
Please note: the cancellation gives rise to a fiscal obligation in the form of income tax – consult the lawyer or the tax advisor.
Way 4: Repurchase of the receivable
The creditors often put the debt of their debtors on the debt exchange. It is much better when we manage to find a new creditor ourselves among the friendly persons or the ones interested in the takeover of the real estate, who will finance the purchase of the receivable and with whom we are able to reach an agreement in relation to the repayments.
Please note: some banks ban assignment or further resale of the receivable in the agreements or impose grace periods. Do not treat this proposal ultimately and accept indirect solutions.
Way 5: Repayment in instalments
It is reasonable if we still want to keep the real estate. When we have permanent source of income or prospects for improvement of the financial situation, we can negotiate repayment of the debt in lower instalments than the ones that we were paying to the bank with the creditor. While paying higher amounts, we may negotiate a decrease of interest or its complete freezing. If our proposal is attractive for the creditor and we agree on crediting of the payments toward the capital, we will manage with the debt quickly.
Remember: Your proposal must be credible and your arguments – convincing. A restructuring agreement or entry in an arrangement may be connected with examination of your financial situation.
Published on: 20 February 2015