Is debt settlement faltering?

One in every three debtors who apply for out-of-court debt settlement reject the terms they are offered resulting from the platform’s algorithm. Most of them claim that the terms are too harsh, while a significant number estimate that it is not in their interest, so the government is understood to be considering new interventions.

The data on the course of the requests of the extrajudicial mechanism in June, the first month that debtors were asked to explain the reason why they rejected the arrangement, showed that 18.45% of those who rejected the adjustment proposal estimate that they would be unable to keep up with it.

The option of rejecting the algorithm-based arrangement resulting from the out-of-court platform is provided to both debtors and creditors, and according to the data of the General Secretariat of the Financial Sector and Private Debt Management, the rejection rate remains high on the part of debtors. In June, it rose to 32% for applications for debt settlement at banks and funds, while the percentage of rejections for bilateral settlements – i.e. those concerning the state – rose to 19%. Although the majority of debtors did not explain their decision to reject the proposal, among those who did, 18.45% put forward their “inability to serve the proposal for regulation” as the first main reason, followed by the rejection of the regulation as an “unprofitable proposal” at a rate of 10.87%.

Behind many of the rejections is the misconception that the settlement offer through the automated process of the extrajudicial mechanism is formulated based on income alone. However, the algorithm also takes into account the debtors’ property assets.

This discourages debtors and for this reason the improvements to the out-of-court mechanism the Ministry of National Economy and Finance is considering include also offering the option of a larger debt reduction when the value of the property is smaller than the value of the loan.