## IMF Working Paper — Mortgage Distress and Personal Insolvency in Europe (wpiea2023092-print-pdf)

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### Household debt trends and mortgage distress
- Household indebtedness increased in most European countries in the years leading up to the crisis; the debt to financial buffers ratio of most households also increased.
- Underlying collateral values (typically primary residence) declined in many countries due to the economic downturn and, in some cases, exchange rate adjustments.
- Non-performing loans (NPLs) from household debt became a drag on banks’ balance sheets; mortgage debt was the main macroeconomic source of household debt distress.
- Consumer debt has severe microeconomic consequences for households and individuals.

### Definitions and scope of household debt distress
- Household debt distress: households experience difficulties servicing their debt; related concepts include over-indebtedness and insolvency.
- Over-indebtedness: consumers not able to meet financial obligations in the near future; may lead to social exclusion, higher cost of living, reduced participation in economic development.
- Insolvency: state in which the individual can no longer pay debts as they fall due.
- Elements mapped in Europe for over-indebtedness include extent of commitments; payment capacity; structural duration; reference to standard of living; lack of liquidity.

### Legal and institutional challenges in addressing household over-indebtedness
- Consumer insolvency frameworks are relatively modern and less standardized internationally than enterprise insolvency frameworks.
- High case volumes (many individuals with relatively small debts) create critical process and institutional capacity issues.
- Comprehensive resolution strategy components:
  - supervisory oversight of banks; prudential norms;
  - legal and institutional frameworks for debt enforcement and insolvency;
  - market for distressed debt;
  - supporting measures: communications, information sharing, debt counseling.
- Government roles: create enabling frameworks for workouts; provide incentives/remove impediments; intervene via across-the-board relief, guarantees, subsidies, or bank recapitalization.
- Interim measures during crises can complement debt resolution without undermining conventional proceedings.

### Policy objectives of consumer insolvency regimes
- Objectives:
  - allocate risks among parties fairly;
  - provide a fresh start through discharge promptly or after a period;
  - establish appropriate filing criteria to ensure accessibility while minimizing abuse;
  - set repayment terms reflecting debtor capacity and ensuring effective fresh start.

### Legal responses and measures used during the European crisis (high-level)
- Reforms and measures varied across countries depending on distress extent, social protection, banking sector health, institutional capacity, and politics.
- Examples of legislative and institutional reforms:
  - Consumer insolvency regime reforms (new or reformed laws in Cyprus, Italy, Spain, Greece, Ireland).
  - Debt enforcement reforms (Portugal, Cyprus, Greece).
  - Institutional reforms: judge training (Portugal, Ireland, Cyprus); development of insolvency practitioner professions (Cyprus, Greece, Ireland, Portugal).
  - Standardization: simplified forms in Ireland, Cyprus, Greece.
  - Support measures: improved real estate registries (Greece, Cyprus); debtor counseling (Ireland, Cyprus, Greece, Portugal).
- Direct interim government measures: moratoria on foreclosure; mandatory conversion of foreign-currency mortgages to domestic currency at historic rates; temporary debt relief and across-the-board mortgage reductions (Iceland).

### Selected country legislative reforms (high-level summaries and exact provisions)
- Cyprus:
  - Insolvency of Natural Persons (Personal Repayment Schemes and Debt Relief Order) Law (2015):
    - debt relief orders for small unsecured debt of up to €25,000;
    - personal repayment plans allowing return to solvency within five years;
  - Bankruptcy law amended in 2015 to shorten the discharge period to three years.
- Greece:
  - Law 3869 of 2010 (amended 2013 and 2015): protection of primary residences; 2013 extension of maturities with minimum payments for four years for vulnerable debtors; 2015 amendments introduced filters for strategic defaulters, short procedural deadlines, limited stay period of creditor actions, required minimum reasonable payments during stay, expanded discharge scope to include tax and social security debts, streamlined process for small indebtedness without mortgage debt, stricter criteria for primary residence protection, transitional provisions.
- Ireland:
  - Personal Insolvency Act (2012, amended 2015) introduced three procedures:
    - Debt Relief Notice: discharge up to €20,000 total unsecured debt, supervision period of three years;
    - Debt Settlement Arrangement: settlement of unsecured debt normally over a five year period;
    - Personal Insolvency Arrangement: settlement of secured debt up to €3 million and unsecured debt (no limit), over a six-to-seven year period;
  - Bankruptcy Act of 1988 amended: automatic discharge after three years (subject to conditions); court orders permitting income payments for up to five years during bankruptcy;
  - New Insolvency Service of Ireland established to operate non-judicial arrangements.
- Italy:
  - Law No. 3/2012, Decree Laws 179/2012 and 221/2012: framework for negotiated settlements including insolvency plan or liquidation of estate.
- Latvia:
  - Over-indebtedness procedure (2008); 2010 insolvency law: court-supervised repayment plan and liquidation of nonexempt assets; 2015 amendments fine-tuned the law.
- Portugal:
  - Code of Insolvency and Business Recovery: possible discharge of residual debts if conditions met; fast-track adoption of payment plan.
- Romania:
  - New personal insolvency law (2015): procedures for repayment plan and liquidation; largely administrative with some court adjudication.
- Spain:
  - 2013 insolvency law amendments: debt settlement agreements to promote “fresh start” for entrepreneurs and consumers;
  - 2015 Law of Second Chance extended discharge scope.

### Procedural frameworks for consumer insolvency — key features and design issues
- Objective: quickly assess debtor situation and provide low-cost exit alternatives.
- Common procedural features:
  - Stay of creditor actions at outset (may be limited regarding secured claims).
  - Majority voting and cram-down features replicate enterprise frameworks in some jurisdictions; trend to limit creditor decision power in consumer cases.
  - Repayment plans account for debtor disposable income while preserving reasonable living expenses (reference methods vary).
  - Length of repayment plans: Recommendation/Directive standards:
    - Maximum length for repayment plans for individual entrepreneurs should be three years (Recommendation 2014/135; Directive 2019/1023);
    - Some laws establish longer periods for consumer debt discharge; modifications to plans should generally be permitted.
  - Discharge (“fresh start”):
    - Earned discharge after liquidation, completion of payment plan, and behavioral conditions is typical.
    - Directive (EU) 2019/1023: maximum period for discharge is 3 years; may make full discharge contingent on partial repayment; applies to entrepreneurs but recitals recommend extension to consumers.
- Scope of discharge and secured debt:
  - Discharge should be broadly available with narrow exceptions (maintenance obligations, criminal sanctions, certain tort liabilities); tax debts treatment varies by country.
  - Many regimes restrict affecting secured debt without creditor consent; some jurisdictions allow mortgage modification without consent (Cyprus, Greece, Ireland).
- Good faith requirement:
  - Discharge typically requires debtor to have acted in “good faith” (no incurrence of debts to file, absence of fraud, cooperation).
- End-of-process mechanics:
  - In many countries discharge is automatic upon completion; some require court application (e.g., Romania).
  - Repeat access often restricted (some time limits, e.g., 10 years in some jurisdictions).

### Empirical effects, case volumes, and measurement gaps (exact figures preserved)
- Financial-sector effects: limited in most countries; consumer insolvency flows were low in Cyprus, Ireland, Italy, Spain; Greece was a major exception.
- Social effects poorly measured; number of insolvency cases is an imperfect metric for discharge.
- Case-volume examples (period considered):
  - England: around 100,000 cases a year
  - Germany: around 100,000 cases a year
  - France: around 200,000 cases a year
  - Spain: around 1,000 cases a year (actual number in 2017: 1,492)
- Portugal personal insolvency cases and discharges 2012–2017:
  - 2012: Preliminary decision 3,745; Final decision 188
  - 2013: Preliminary decision 7,975; Final decision 286
  - 2014: Preliminary decision 7,177; Final decision 209
  - 2015: Preliminary decision 7,661; Final decision 265
  - 2016: Preliminary decision 8,250; Final decision 608
  - 2017: Preliminary decision 9,220; Final decision 1,607
  - Note: preliminary decision starts period for final granting of discharge, which comes with final decision three years later.
- Ireland personal insolvency cases 2014–2017:
  - 2014: Bankruptcy 448; Adjudications 455; Arrangements (total) 455
  - 2015: Bankruptcy 479; Adjudications 1,170; Arrangements (total) 1,170
  - 2016: Bankruptcy 526; Adjudications 1,289; Arrangements (total) 1,289
  - 2017: Bankruptcy 473; Adjudications 1,115; Arrangements (total) 1,115
  - Note: individuals discharged three years after bankruptcy adjudication; arrangements include DRNs, DSAs, PIAs with varying surveillance and discharge periods.
- Comparative per-100,000-inhabitants figures (2017 data):
  - England: 172 cases per 100,000 inhabitants
  - Germany: 121 cases per 100,000 inhabitants
  - France: 307 cases per 100,000 inhabitants
  - Spain: 3.1 cases per 100,000 inhabitants (actual number 1,492)

### Simplified procedures for No Income, No Asset (NINA) cases — Box 3 (country-specific parameters and outcomes)
- Purpose: simplify resolution for debtors with no income and no assets; eliminate repayment plan/liquidation tasks.
- Ireland — Debt Relief Notice (DRN) introduced 2012:
  - eligibility: less than €60 free disposable income and less than €1000 personal assets;
  - unsecured debt eligibility up to €35,000 (revised after 2015 reform);
  - supervision period: 3 years; change-in-circumstances rule: if debtor pays 50% of debts during supervision, supervision ends and debtor is immediately discharged;
  - usage: total DRNs processed in Ireland is just one thousand cases (2015–2019).
- Cyprus — Debt Relief Order (DRO) system modeled after Irish system (introduced 2016):
  - eligibility thresholds: less than €200 disposable income, assets of no more than €1,00020, unsecured debts under €25,000 may apply;
  - supervision and discharge: discharged after a one-year supervision period;
  - usage: 613 confirmed DRN cases in Cyprus since reform until August 2019; Insolvency Service projects DRO applications will remain low.
- Preconditions and safeguards:
  - thresholds and disqualifications must be clearly stipulated;
  - anti-fraud and monitoring measures; surveillance periods and restrictions; fraud cancels benefits;
  - keep court involvement minimal; administrative approach preferred;
  - change-of-circumstances provisions required.
- Observed outcome: limited scale relative to broader mortgage-focused crisis; primary use of reforms was to address consumer debt though mortgage distress dominated the crisis.

### Out-of-court restructuring and mediation (role, design, country practices)
- Out-of-court mechanisms: market-driven, voluntary, flexible, low-cost alternatives to court proceedings; relieve pressure on formal systems.
- Typical restructuring menu: interest-only payments, maturity extensions, rate reductions, write-offs.
- Country practices: Iceland guidelines; Latvia principles; codes of conduct in Ireland, Cyprus, Greece.
- Special regimes for vulnerable debtors: Portugal extraordinary regime (84 concluded out of 1,318 petitions); Spain Code of Good Practices for qualifying low-income debtors.
- Non-standard options observed:
  - conversion of full recourse mortgage into nonrecourse for qualifying debtors (Portugal, Spain);
  - property exchange and mortgage-to-rent conversions (Portugal, Spain, Ireland).
- Mediation:
  - used out-of-court and within court processes (Cyprus, Portugal, Ireland, Iceland);
  - mandatory mediation introduced in Ireland, Cyprus, Spain, Greece (2010);
  - assessment: mandatory mediation may be ill-suited; optional mediation often preferable.

### Mortgage-specific provisions, compulsory restructuring, and foreclosure reforms
- Special insolvency provisions aim to preserve family home; trade-offs include potential distortions to credit availability and conflict with discharge objectives.
- Examples of mortgage protections and temporary reprieves:
  - Latvia: sale of primary residence may be put off by up to one year.
  - Cyprus: suspension of enforcement up to 6 months if difficulties result from crisis.
  - Iceland: debtors could remain in residence for up to 12 months following bankruptcy (temporary measure until 1 March 2010).
  - Italy: payment moratorium of up to one year proposed by debtor.
  - Greece (until 2015): court could impose zero payments for unsecured creditors pending hearing and enforce repayment plan reducing principal to 80 percent of tax value.
- Compulsory restructuring (Ireland, Cyprus, Greece 2015): court may impose a restructuring plan permitting debtor to keep residence if not economically less favorable to secured creditor than sale; eligibility restrictive and targeted; liquidation value used to gauge creditor recovery.
- Empirical observations and limitations:
  - Procedural capacity constraints cause backlogs (Greece example: hearing dates set eight years later; 2011–2016 only 5,000 reorganized out of over 100,000 petitions).
  - Valuation difficulties amid real estate shocks.
  - Banks resist restructuring due to balance-sheet losses (slow NPL reduction in Cyprus, Greece, Ireland where compulsory measures used).
  - Empirical data: Cyprus had only 53 confirmed non-consensual PIAs for June 2017–August 2019; Ireland 2017 annual review: 203 decisions on compulsory plans, only 65 approved despite creditor opposition, 6 appealed.
- Foreclosure reforms: streamlining sale procedures, e-auctions introduced in Spain, Italy, Greece, Latvia, Cyprus; social/political complexities and ECJ litigation (Aziz v Caixa d'Estalvis de Catalunya (2013) Case C-415/11).

### Extraordinary measures and social protection (Box 5 examples and consequences)
- Types of extraordinary measures:
  - moratoria on foreclosure (formal and informal; blanket or targeted; examples: Greece 2010, Ireland, Iceland, Cyprus 2014);
  - conversion of forex mortgages at historical rates by law (Romania, Croatia, Hungary, Poland);
  - conversion to non-recourse (datio in solutum) — Romania example with subsequent Constitutional Court restrictions;
  - across-the-board principal reductions (Iceland program equivalent to nearly 4.25 percent of GDP in 2014; benefitted nearly 80 percent of households);
  - state-mandated forgiveness in Hungary: banks required to forgive 25 percent of principal with estimated net transfer of over 1.5 percent of GDP to households (two thirds borne by banks and one-third by the state);
  - freezes on repayments, limits on penalty interest rates, mortgage-to-rent and other conversions.
- Other social protection measures:
  - rent benefits for evicted (Spain);
  - mortgage interest supplement scheme (Ireland);
  - mortgage payment subsidy schemes (Cyprus, Greece);
  - free or subsidized legal aid for low-income debtors (Ireland, Cyprus).
- Consequences and trade-offs:
  - Retroactive contractual modification imposed substantial bank losses and constitutional debates on expropriation.
  - Extraordinary measures often impose private creditor losses, create market distortions, undermine credit discipline, and can hurt future investment.
  - Targeting is crucial; over-inclusive criteria lead to high costs and inadequate burden-sharing (Greece example).

### Strategic default, moral hazard, and evidence
- Strategic default: voluntary default by debtors who can pay but choose not to; arises when gains from default outweigh sanctions.
- Jurisdictions adopted measures to limit moral hazard by restricting benefits to “good faith debtors”, assessing cooperation and capacity to repay; sanctions may apply.
- Evidence and studies:
  - Greek bank data study: 30 percent of defaults on primary home mortgages appeared strategic (Artavanis and Spyridopoulos, 2017).
  - US studies: Gerardi et al., 2018 estimate 38 percent strategic defaults in 2009–2013; revised estimates (Ganong and Noel, 2020) estimate 6 percent purely strategic.
  - Romania: 2016 reform allowing datio in solutum increased strategic defaults; Constitutional Court decision later restricted scope reducing incentives for strategic default.

### Conclusions, lessons, and forward-looking recommendations (paragraphs 73–79)
- Status of reforms:
  - Most crisis-affected European countries now have modern consumer insolvency laws and improved debt enforcement procedures, though implementation takes time.
- Consensus and system safeguards:
  - Broad consensus that personal insolvency law should include discharge after a short maximum three-year repayment period.
  - All disclosed debts should be dischargeable with narrow public-policy exceptions (child support, some tort liabilities, criminal fines/penalties).
  - Debtors must cooperate fully; asset-less debtors should not be excluded and could have simplified procedures.
- Areas to strengthen:
  - simplify and standardize procedures and forms to increase efficiency;
  - develop and promote out-of-court options coupled with independent debt counseling;
  - ensure debt counseling and legal aid availability (free or inexpensive);
  - robust data collection to assess reform impacts.
- Design considerations in crises:
  - Reforms should minimize strategic default and abuse while facilitating resolution for good-faith debtors.
  - Government intervention should, as far as possible, respect contractual terms and favor voluntary participation in schemes varying contractual terms.
  - If interventions alter contracts, they should: address underlying problems, be selective and target borrowers likely to restore repayability, be simple and transparent, consider burden-sharing and fiscal impacts, and avoid institutional bottlenecks.
- Role of personal insolvency for mortgage defaults:
  - Reliance on consumer insolvency to resolve mortgage loans was likely misplaced; insolvency better suited to unsecured debts.
  - Secured credit should generally remain outside consumer insolvency; special provisions must be weighed against credit availability impacts.
- Forward outlook:
  - As interim measures from pandemic and war in Ukraine wind down, some countries may face wide-scale household debt distress; potential necessary actions include:
    - reforms to personal insolvency to allow good-faith debtors a fresh start;
    - strengthening institutional capacity;
    - targeted social protection programs as temporary backstops;
    - separate legal mechanisms to address excessive mortgage debt.

*IMF Working Paper — Mortgage Distress and Personal Insolvency in Europe (wpiea2023092-print-pdf)*

### Introduction _____________________________________________________________________________________ 3

### Introduction

### Household debt trends and mortgage distress
- Household indebtedness increased in most European countries in the years leading up to the crisis; the debt to financial buffers ratio of most households also increased. (See Figure 1.)
- The value of underlying collateral (typically the debtor’s primary residence) declined in many countries due to the economic downturn and, in some cases, exchange rate adjustments.
- Non-performing loans (NPLs) arising from household debt became a drag on banks’ balance sheets and, in some countries, were so high as to raise macroeconomic concerns.
- From a macroeconomic perspective, the main source of household debt distress in the European crisis was mortgage debt. ECB information showed that the major source for distress in the crisis-affected countries was the real estate sector, including residential mortgages. The significance of other sources of consumer debt was limited in most countries.
- From a microeconomic perspective, consumer debt can result in severe economic consequences for thousands of households and individuals.

### Definitions and scope of household debt distress
- Household debt distress describes situations where households (or consumers) experience difficulties in servicing their debt; related concepts include over-indebtedness and insolvency.
- Over-indebtedness: consumers are not able to meet their financial obligations in the near future; it implies an overall deterioration of the household’s economic situation that may lead to social exclusion, higher cost of living, and reduced participation in economic development (Reifner et al., 2003).
- Insolvency: commonly defined as a state in which the individual can no longer pay his/her debts as they fall due.
- Elements mapped in Europe for household over-indebtedness (EC, 2008): extent of contracted financial commitments; payment capacity of the household; structural basis (situation extended over time); reference to standard of living (inability to meet commitments without reducing minimum standard of living expenses); lack of liquidity (unable to remedy by sale of assets or credit).

### Legal and institutional challenges in addressing household over-indebtedness
- Consumer insolvency is a relatively modern concept, correlated with extensive access to finance and consumer credit; limited international guidance exists compared with enterprise insolvency frameworks.
- Insolvency of individuals raises economic, social, and political considerations.
- Household debt typically affects very large numbers of individuals owing relatively small amounts; high potential case volumes create critical process and institutional capacity issues for debt resolution frameworks.
- Resolving systemic household debt distress requires a comprehensive strategy including: supervisory oversight of banks; prudential norms; legal and institutional frameworks for debt enforcement and insolvency; market for distressed debt; supporting measures (communications strategy, improved information sharing, debt counseling).
- Government roles may include: establishing legal/regulatory/institutional frameworks to support case-by-case workouts; providing incentives and removing impediments to workouts; intervening directly through across-the-board debt relief programs, guarantees, subsidies to debtors, or bank recapitalization.
- Interim (temporary) measures during crises can complement debt resolution systems without undermining conventional proceedings.

### The role of consumer insolvency and policy objectives
- Effective and efficient debt resolution regimes affect cost and availability of credit to households, foster growth through consumption, and support financial stability.
- Consumer insolvency regimes aim to:
  - Allocate risks among parties in a fair and equitable manner.
  - Provide a fresh start through discharge of financially responsible individuals from liabilities promptly or after a period.
  - Establish appropriate filing criteria to make insolvency procedures accessible while minimizing abuse.
  - Set repayment terms that reflect the debtor’s capacity to repay and ensure an effective fresh start.

### Legal responses and measures used during the European crisis
- Types of measures implemented varied with the extent of distress, social protection levels, banking sector health, institutional capacity, and political landscape.
- Examples of measures used:
  - Consumer insolvency regime reforms: Cyprus, Italy, Spain adopted new consumer insolvency laws; Greece and Ireland reformed existing regimes. Reforms included fast track procedures, out-of-court debt restructuring, and shorter discharge periods.
  - Debt enforcement reforms: Portugal, Cyprus, Greece introduced changes to foreclosure and enforcement processes.
  - Institutional reforms: training for judges (Portugal, Ireland, Cyprus); strengthening or creating insolvency practitioner professions (Cyprus, Greece, Ireland, Portugal); reliance on judiciary (Spain, Greece) versus administrative/mediator-based approaches (Cyprus, Portugal, Ireland).
  - Standardization: Ireland, Cyprus, Greece adopted standardized and simplified forms to facilitate filings.
  - Support measures: improvements in real estate registries (Greece, Cyprus); debtor counseling and financial planning services (Ireland, Cyprus, Greece, Portugal).
- Direct government interim measures used in some countries: moratoria on foreclosure; mandatory conversion of foreign currency mortgages into domestic currency at historic rates; temporary debt relief for “underwater” mortgages and across-the-board mortgage reductions (Iceland).

### Selected country legislative reforms (high-level summary from Table 1)
- Cyprus:
  - The Insolvency of Natural Persons (Personal Repayment Schemes and Debt Relief Order) Law (2015) introduced:
    - debt relief orders for small unsecured debt of up to €25,000 (speedy relief for debtors with little income or assets);
    - personal repayment plans allowing return to solvency within five years while permitting debtor to maintain reasonable standard of living and, where possible, keep primary residence.
  - Bankruptcy law amended in 2015 to shorten the discharge period to three years.
- Greece:
  - Law 3869 of 2010 aimed at protecting primary residences (amended 2013 and 2015).
  - 2013 amendment: extension of maturities for mortgages with minimum payments for four years for vulnerable debtors.
  - 2015 amendments: introduced filters for strategic defaulters; short deadlines for procedural steps; limited stay period of creditor actions; required minimum reasonable payments during stay; expanded discharge scope to include tax and social security debts; streamlined process for small indebtedness without mortgage debt; stricter criteria for primary residence protection; transitional provisions to migrate old cases.
- Ireland:
  - Personal Insolvency Act (2012, amended in 2015) introduced three procedures:
    - Debt Relief Notice: discharge of relatively small unsecured debt, up to €20,000 total, for persons with essentially no income or assets, subject to a supervision period of three years.
    - Debt Settlement Arrangement: settlement of unsecured debt (no monetary debt limit) normally over a five year period.
    - Personal Insolvency Arrangement: settlement of secured debt up to €3 million (limit may be increased by creditors) and unsecured debt (no limit), over a six-to-seven year period.
  - Bankruptcy Act of 1988 amended to provide for automatic discharge after three years (subject to conditions) and permit court orders requiring payments from income for up to five years in the bankruptcy process.
  - New Insolvency Service of Ireland established to operate new non-judicial insolvency arrangements.
- Italy:
  - Law No. 3/2012, Decree Laws 179/2012 and 221/2012 established a framework allowing debtors to restructure debt through negotiated settlement; options include an insolvency plan or liquidation of estate.
- Latvia:
  - Over-indebtedness procedure introduced in 2008; 2010 insolvency law established court-supervised repayment plan and liquidation of nonexempt assets followed by obligation settlement procedure; 2015 amendments fine-tuned the law.
- Portugal:
  - The Code of Insolvency and Business Recovery provided (i) possibility of discharge of residual debts if certain conditions met; (ii) fast-track adoption of a payment plan.
- Romania:
  - New personal insolvency law adopted in 2015 introduced procedures for adoption of a repayment plan and liquidation; designed as largely administrative processes with some court adjudication.
- Spain:
  - 2013 insolvency law amendments introduced debt settlement agreements to promote a “fresh start” for entrepreneurs and consumers.
  - 2015 Law of Second Chance extended scope of discharge.

### Box 1 — The Legal Response to Household Debt (elements highlighted)
- Three main elements:
  (i) Debt enforcement procedures (including foreclosure): essential to preserve payment discipline; should be speedy and cost-effective for enforcing unsecured and secured claims; must include safeguards against creditor abuse and higher scrutiny over creditor actions.
  (ii) Consumer insolvency: provides relief for “honest but unfortunate” debtors and a fresh start while minimizing creditor losses and maintaining credit discipline. Main features may include:
    - allocate risks fairly;
    - provide fresh start through discharge promptly or after a period;
    - appropriate filing criteria to ensure accessibility and minimize abuse;
    - repayment terms reflecting capacity to repay.
  (iii) Institutions implementing debt enforcement and consumer insolvency: judiciary, insolvency professionals, debt advisors, mediators, dedicated administrative authorities; supporting institutions include credit information systems, land and collateral registers, debt counseling services, and legal aid clinics.

### Lessons and forward-looking considerations
- A significant body of country experience exists in establishing legal frameworks for household debt distress; while no single standard approach exists for consumer insolvency, common tools have been used with varying success.
- For continued credit availability and financial stability, organized and transparent debt resolution processes that protect rights of all parties and yield equitable, predictable results are necessary.
- The importance of a proper personal insolvency framework and appropriate mechanisms to address mortgage debt is underscored by recent crises (European crisis, COVID-19 pandemic consequences, war in Ukraine), given heterogeneous household outcomes (some households reduced debt and increased savings; others experience debt distress).

*IMF Working Paper — Introduction (wpiea2023092-print-pdf)*

### 11.   The context of the crisis affecting households in European countries was different from the US

### 11.   The context of the crisis affecting households in European countries was different from the US

### Context and key contrasts with the US mortgage crisis
- European countries relied more on public health systems and welfare benefits for the unemployed; scope, volume and eligibility of public programs vary significantly across countries.
- Use of consumer credit in Europe has been traditionally less intensive than in the USA, although this trend has been changing in recent decades.
- Consumer bankruptcy’s prevalence in the US has been linked to the smaller role of the welfare state (see Sullivan, Warren, and Westbrook, 2000), whereas many European countries had different social safety nets (see Ramsay, 2007).

### Lack of modern consumer insolvency regimes in affected European countries
- Several countries lacked a modern consumer insolvency regime: Italy, Latvia, Romania had no regime for the insolvency of consumers; Cyprus, Greece, Ireland, Portugal, Spain had regimes that were not adequate.
- Consumer insolvency is designed to respond to problems created by consumer debt; prior research establishes a connection between rising consumer debt and use of the bankruptcy system (Gross, 1999; Moss and Johnson, 1999; Ambrasaite and Norkus, 2014).

### Overarching challenges to reform efforts after the crisis
- Main reform obstacles included:
  - (i) the issue of burden-sharing between the public and private sector;
  - (ii) in some countries, dealing with a large volume of cases;
  - (iii) lack of precise data on the nature and sources of over-indebtedness, which limited the ability of the authorities to design accurate legal measures to address household debt distress;
  - (iv) issues in the institutional framework; and
  - (v) fraud and moral hazard.

#### (i) Burden-sharing between public and private sectors
- Resolving debt overhang requires economy-wide cost bearing; allocation between stakeholders is a key policy choice (Laeven and Laryea, 2009).
- Fiscal constraints limit public absorption of losses; excessive private-sector burden can contribute to bank failure and deepen recession.
- Country examples and exact figures:
  - Iceland: across-the-board debt reduction of mortgage principal equivalent to nearly 4.25 percent of GDP in 2014 benefitted nearly 80 percent of households; cost absorbed by banks and their external creditors as well as the public housing fund (Andritzky, 2014).
  - Hungary: state-mandated conversion of foreign exchange mortgages to local currency at historical rates; banks required to forgive 25 percent of the principal but could deduct some losses from a bank levy; estimated net transfer of over 1.5 percent of GDP to households, of which two thirds was borne by the banks and one-third by the state (IMF, 2013b).
  - Greece: excessive state-mandated forbearance resulted in three rounds of bank recapitalization (IMF, 2017d).
  - Cyprus: bail-in impacted a large number of foreign depositors.
- High private-sector costs were often not borne domestically, potentially harming future foreign investment.

#### (ii) Volume of cases and institutional pressure
- Responses included simplified procedures and higher standardization to address increased caseloads (examples: Ireland, Cyprus, Romania).
- Standardization measures: clearly specified insolvency applications and supporting documentation; clear guidance on exempt assets and on ‘reasonable living expenses’; verified information about debtor’s assets and income; standardized creditor payment-plan menus.
- Simplified insolvency procedure for no income, no asset cases (NINAs) could help alleviate institutional pressure.
- Severe institutional overload example (Greece):
  - Theoretically, hearing should occur six months from application; in practice, hearing dates were set eight years later.
  - In the period 2011-2016, only 5000 individuals had their debts reorganized, out of more than 100,000 petitions (Mentis and Pantazatou, 2015).
- The study’s European countries did not consider introducing administrative bodies to replace courts for personal insolvency cases.

#### (iii) Lack of data on over-indebtedness
- Insufficient data on the number of affected households and causes of over-indebtedness hindered policy design.
- France devoted significant resources to understanding causes (Banque de France, 2014) but most countries lacked detailed information.
- Assessment of reform performance suffers from missing data; basic information often absent, including reports on the number of persons who have obtained a discharge (the main objective and performance indicator for a consumer insolvency regime).
- Some countries (Ireland and Portugal) made serious efforts to increase statistical information on personal insolvency proceedings.

#### (iv) Institutional framework limitations
- Limited institutional capacity and scarce public funds constrained strengthening of judiciary and supporting institutions.
- Country efforts: focus on strengthening the judiciary (Portugal, Greece); development of the insolvency practitioner profession (Cyprus, Ireland).
- Auxiliary institutions are important:
  - Debt counseling (public or non-profit) for prevention and treatment of over-indebtedness.
  - Affordable consumer insolvency process with access to free or low-cost legal and financial planning assistance.
  - Credit registers and public registries (real estate and collateral) necessary for asset/liability analysis and repayment-plan preparation.

#### (v) Concerns over fraud and moral hazard
- Modern consumer insolvency law favors discharge for good faith debtors while preventing avoidance by those who can pay.
- shift from punishment to rehabilitation and fresh-start policies; repressive frameworks harm consumption and entrepreneurship (IMF, 2012c; EC, 2003; 2011).
- Law should not shield debtors who can pay; debtors need funds for reasonable minimum living expenses. Several countries adopted detailed guidance on ‘reasonable living expenses’ (Greece, Ireland, Cyprus).
- Strategic default defined: voluntary default by debtors who can afford to pay but choose not to pay.
  - Strategic default arises when gains from default outweigh perceived sanctions (IMF, 2017a).
  - Debtor exploits system inefficiencies (design flaws, no weeding procedures, weak enforcement, delays, high volumes, lack of asset information).
- Evidence and studies:
  - Some studies suggest strategic default was significant in Greece where extraordinary measures became the norm, damaging payment culture (IMF, 2017a).
  - A study using data from a large Greek bank concluded that 30% of the defaults on primary home mortgages appeared to be strategic (Artavanis and Spyridopoulos, 2017).
  - US estimates during 2009-2013: Gerardi et al., 2018 estimate that 38 percent of defaults were strategic; revised methodologies (Ganong and Noel, 2020) estimate only 6 percent of defaults are purely strategic.
  - Romania: 2016 legal reform introducing retroactive extinguishment of mortgage debt by relinquishing collateral (datio in solutum) increased strategic defaults (Andries et al., 2021); scope was later restricted by the Constitutional Court decision a few months after the law entered into force, reducing incentives for strategic default (Andries et al., 2021).
- Most jurisdictions attempted to limit moral hazard by restricting benefits to “good faith debtors” and by assessing debtor cooperation and capacity to repay; sanctions may apply for lack of good faith.

### Selected legal issues and design of consumer insolvency laws
- Common features across countries focused on technical design, discharge of residual unpaid debts, and treatment of distressed residential mortgages.
- Mortgage debt distress was far more important in European countries than over-indebtedness caused by consumer debt.

A. Design of Consumer Insolvency Laws
- (i) Eligibility
  - Regime typically covers noncommercial debts of individuals: mortgages, credit card debts, personal loans.
  - Could cover a limited segment of small entrepreneurs (as in Cyprus, Italy, Greece).
  - Policy tension: whether owners of unincorporated small businesses belong in consumer or enterprise insolvency regimes; enterprise insolvency regimes are often costly and complex.
  - Main policy concern: avoid gaps in coverage.
- (ii) Access
  - Debtor must be insolvent to access the regime; no universal definition for individuals.
  - Common test mirrors enterprise insolvency: “unable to pay debts as they fall due” and that inability will continue for the foreseeable future.
  - Personal insolvency focuses on durable difficulty to make payments while maintaining basic living standards.
  - Some countries require over-indebtedness caused by reasons outside debtor’s control (Cyprus) or evidence of good faith (Greece, Cyprus); trend is toward a general insolvency/over-indebtedness standard without extra requirements.
  - Complexity in access requirements is not recommended; preferred approach: simple eligibility tests and then restrict availability of discharge.
- (iii) Procedure
  - (Procedure discussion begins in source and continues beyond the provided excerpt.)

*Source: IMF Working Paper — Mortgage Distress and Personal Insolvency in Europe, Section 11.*

### 30.   European countries have designed different procedural frameworks for consumer insolvency,

### 30–42. European consumer insolvency: procedural frameworks, discharge, and effects

### Overview
- European countries have designed different procedural frameworks for consumer insolvency, based on their own legal traditions.
- Main objective: quickly assess the situation of the debtor, providing different alternatives for exit from the insolvency process, at minimal cost.
- Numerous laws combine liquidation of non-exempt assets with a repayment plan for a specified period; more complex systems include retaining ownership of the primary residence by restructuring the mortgage loan (see Section I.B).

### Key procedural features
- Stay of creditor actions
  - A stay on creditor action at the outset is typical for all types of insolvency proceedings.
  - Stays stop enforcement of debts and informal collection efforts; they could apply to all creditor actions or be limited (e.g., not all jurisdictions stay enforcement of secured claims).
- Majority voting and cram-down for repayment plans
  - Enterprise insolvency: repayment plans typically agreed by a majority of creditors by value, subject to safeguards (e.g., ‘best interest of creditors’ test and court approval).
  - Cram-down procedures address creditor-class holdouts.
  - Consumer insolvency laws often replicate enterprise frameworks but with a trend to limit decision power of creditors; repayment plans in many personal cases provide little meaningful payments and function to subject debtors to a monitoring period to earn discharge.
- Disposable income and minimum standard of living in repayment plan design
  - Under a repayment plan, the debtor’s disposable income is paid to creditors for an agreed period while allowing the debtor to retain reasonable living expenses (calculated by different methods, for instance using levels of welfare assistance as a reference).
- Length of repayment plans
  - The maximum length for repayment plans for individual entrepreneurs should be three years (Recommendation 2014/135; Directive 2019/1023), though variations exist in how the three-year period is calculated.
  - Some European laws establish longer periods for discharge of consumer debt.
  - Modifications of repayment plans to respond to unanticipated changes to the debtor’s income or assets should generally be permitted.
  - Notes: Some countries (Czech Republic, Latvia, Romania, or Germany) link discharge to paying a minimum percentage of the debt; Austria has reduced or eliminated such requirements. The EU Directive 2019/1023 recognizes linking time for discharge to payments for entrepreneur insolvency.

### Debt discharge and the “fresh start”
- Purpose and economic rationale
  - A discharge of unpaid residual debts provides individuals with a fresh start, promoting entrepreneurship and renewed productive activity.
  - Without discharge, over-indebted individuals may continue to be pursued by creditors and face hurdles to re-enter productive life.
- Earned discharge as the norm
  - Consumer insolvency laws in the countries studied include a discharge, typically an “earned discharge” after relinquishment and liquidation of assets, satisfactory completion of a payment plan, and fulfillment of behavioral conditions.
  - Anglo-Saxon jurisdictions contrast by providing discharge upon conclusion of bankruptcy with full liquidation and without requirement to complete a payment plan (subject to brief objection period for fraud).
- Directive (EU) 2019/1023 (Box 2)
  - Includes the concept of a “fresh start” or “second chance” for insolvent entrepreneurs; multiple implementation options.
  - EU members may make full debt discharge contingent on partial repayment, consider individual circumstances, and may require cessation of business/professional activity.
  - The maximum period for discharge is 3 years; Directive includes rules for calculation of that period.
  - Directive applies to entrepreneurs only but recitals allow and recommend extending “second chance” to over-indebted consumers.
  - Guiding principles useful for consumer cases:
    - Member states may exclude certain debts from discharge (e.g., family maintenance obligations).
    - Possibility of longer discharge periods when main residence is safeguarded by protective measures approved by judicial/administrative authority; in practice, restructuring a mortgage loan will likely imply a longer repayment period for that loan (the longer period should apply to the restructured mortgage loan, not to the rest of liabilities).

### Debts dischargeable and treatment of secured debt
- Scope and exceptions
  - Discharge should be available for the widest possible range of debts for effective rehabilitation.
  - Common exceptions: maintenance obligations (alimony, child support), criminal sanctions, certain tort liabilities; tax and government claims have often been exempt but there is a trend toward allowing discharge of tax debts in some countries (Ireland, Austria, France, Norway, UK), while others restrict it (Spain).
- Mortgages and secured creditors
  - Many regimes preclude affecting secured debt without secured creditor consent; some (Netherlands, Finland) allow enforcement of collateral despite insolvency.
  - In the countries analyzed, mortgage creditors are affected by the stay of creditor actions, but modification without their consent is possible only in some (Cyprus, Greece, Ireland).
  - Mortgage treatment—especially over family homes—has been a critical point of contention in reforms.

### Good faith and eligibility
- Integral requirement for discharge is that the debtor has acted in “good faith” (no purpose of incurring debts to file for bankruptcy, absence of fraud, cooperation with proceedings).
- Balance required: reduce fraudulent filings without raising entry barriers unnecessarily when creditors challenge good faith.

### End of process, rehabilitation, and repeat access
- End of process and discharge mechanics
  - In most countries surveyed, upon successful completion of the payment period, the debtor is automatically discharged without further court intervention; creditors must write off residual unpaid debts.
  - Some jurisdictions (e.g., Romania) require the debtor to request discharge by court application after completing the plan.
  - Under automatic discharge, onus is on creditors to act to prevent discharge if debtor failed to perform.
- Rehabilitation and access to financial and social services
  - Debtors’ rehabilitation requires they are not indefinitely excluded from credit markets; a credit history record should not overly restrict access to financial services, housing, employment, or starting a business.
- Repeat access
  - Consumer regimes vary on whether an individual can access insolvency more than once; some countries include a time restriction (e.g., at least 10 years after discharge) to prevent abuse while recognizing possible multiple bankruptcies.

### Empirical effects and statistics
- Financial-sector effects
  - Financial effects of consumer insolvency reforms were limited in almost all cases; flow of consumer insolvency cases was limited in most countries studied (Cyprus, Ireland, Italy, Spain). Greece was a major exception.
  - Limited social effect in terms of numbers of individuals discharged, given low proportion of consumer debt within total problem loans and full provisioning for unsecured consumer loans.
- Social effects and measurement gaps
  - Social effects of discharge policy are not adequately measured; available data largely on number of insolvency cases, an imperfect metric that does not equal discharge rates.
  - Examples of case volumes (period considered in the paper):
    - England: around 100,000 cases a year
    - Germany: around 100,000 cases a year
    - France: around 200,000 cases per year
    - Spain: around 1,000 cases per year (actual number in 2017: 1,492)
  - Greece: extremely high number of consumer insolvency cases, but number of discharged persons unknown and could be very low due to prolonged processes and dismissals.
- Country-specific figures (from figures in the source)
  - Portugal personal insolvency cases and discharges 2012–2017 (Source: Ministry of Justice)
    - 2012: Preliminary decision 3,745; Final decision 188
    - 2013: Preliminary decision 7,975; Final decision 286
    - 2014: Preliminary decision 7,177; Final decision 209
    - 2015: Preliminary decision 7,661; Final decision 265
    - 2016: Preliminary decision 8,250; Final decision 608
    - 2017: Preliminary decision 9,220; Final decision 1,607
    - Note: The preliminary decision starts the period for the final granting of discharge, which comes with the final decision three years later.
  - Ireland personal insolvency cases 2014–2017 (Source: Insolvency Service)
    - 2014: Bankruptcy 448; Adjudications 455; Arrangements (total) 455
    - 2015: Bankruptcy 479; Adjudications 1,170; Arrangements (total) 1,170
    - 2016: Bankruptcy 526; Adjudications 1,289; Arrangements (total) 1,289
    - 2017: Bankruptcy 473; Adjudications 1,115; Arrangements (total) 1,115
    - Note: Individuals are discharged three years after the bankruptcy adjudication. Arrangements include a variety of procedures that result in the full discharge with a 3-year surveillance period (DRNs), discharge of debt after 5 years (DSAs) and discharge of unsecured debt after 3 years, with restructuring of secured debt (PIAs).
  - Comparative per-100,000-inhabitants figures (2017 data, period considered)
    - England: 172 cases per 100,000 inhabitants
    - Germany: 121 cases per 100,000 inhabitants
    - France: 307 cases per 100,000 inhabitants
    - Spain: 3.1 cases per 100,000 inhabitants (actual number of personal insolvencies in Spain in 2017 was 1,492)

### Simplified processes for individuals with no income and no assets (NINAs)
- Ireland and Cyprus introduced simplified processes for individuals with no assets and no income.
- Rationale: many cases remain unresolved due to lack of means to commence insolvency; full procedures would tie up institutional capacity.
- These procedures are exceptions to “earned discharge” on pragmatic grounds: beneficiaries have no substantial assets, no regular income, and only unsecured debts up to a limited amount.
- Typical costs of the procedure are borne by the state (cost of application, provision of advice by professionals).

*IMF WORKING PAPERS, Mortgage Distress and Personal Insolvency in Europe (excerpts).*

### Box 3. Simplified Processes for No Income, No Asset Cases

### Box 3. Simplified Processes for No Income, No Asset Cases

### Overview
- Purpose: provide a simple solution to cases of consumer over-indebtedness without judicial intervention or reducing judicial intervention to a minimum for debtors with no income and no assets (so-called NINAs).
- Rationale: NINAs eliminate the need for the elaboration of a repayment plan and also the liquidation tasks.

### Country examples and mechanism design
- Ireland:
  - Introduced the Debt Relief Notice (DRN) in 2012.
  - Target population: debtors with virtually no income (less than €60 free disposable income) and no assets (less than €1000 personal assets).
  - Debt eligibility: unsecured debt of up to €35,000 (amounts as revised after the 2015 reform).
  - Process: application reviewed by the Insolvency Service; final decision made by the court.
  - Post-grant effects: debtor’s name included in a registry; creditors may not pursue the debtor for any unpaid debts.
  - Supervision and discharge: “supervision period” of 3 years, after which the debtor is discharged.
  - Change-in-circumstances rule: if the debtor pays 50% of his/her debts during the supervision period, the supervision period terminates and the debtor is immediately discharged.
  - Usage: Since implementation, the total of DRNs processed in Ireland is just one thousand cases (data collected by the Irish Insolvency Service for the period 2015-2019).
- Cyprus:
  - Introduced a system modeled after the Irish system in 2016.
  - Eligibility thresholds: less than €200 of disposable income, assets of no more than €1,00020, and unsecured debts under €25,000 euros may apply for a Debt Relief Order (DRO).
  - Process: applications are prepared with the assistance of an insolvency practitioner, reviewed by the Insolvency Service, and result in a court order granting the relief.
  - Supervision and discharge: debtors are discharged after a one-year supervision period.
  - Usage: There have been 613 confirmed DRN cases in Cyprus since the reform was adopted and until August 2019.
  - Projection: The Insolvency Service of Cyprus projects that the number of DRO applications will remain low.

### Preconditions and safeguards for implementing simplified NINA procedures
- Key precondition:
  - Consider establishing these procedures when there is a high number of individuals with no assets and no income; these procedures are not applicable where debtors typically hold properties.
- Thresholds and disqualifications:
  - Relevant thresholds for access (amount of unsecured debt; amount of assets; amount of disposable income) should be clearly stipulated, in line with economic circumstances.
  - Possible disqualifications include: having used the same procedure before; failure to provide accurate information or cooperate with creditors; having been convicted of financial crimes.
- Anti-fraud and monitoring measures:
  - Systems must provide safeguards against fraud.
  - Typically, discharge takes place after a specified surveillance period; the debtor is subject to monitoring and certain restrictions (e.g., a prohibition to incur substantial debts).
  - Fraudulent conduct, either before the procedure or during the course of the procedure, should result in the cancellation of all benefits to the debtor.
  - An alternative approach: “zero plans” under the regular insolvency procedure—debtor does not make any payments but remains subject to restrictions until the discharge period concludes.
- Role of courts and professionals:
  - While court involvement may be necessary in certain legal systems, it is desirable to keep intervention to a minimum and design the procedure to be largely administrative, supported by a robust insolvency profession.
- Change-of-circumstances provision:
  - Procedures should provide for situations where the debtor’s circumstances change (e.g., debtor finds new sources of income or acquires assets).

### Observed outcomes and usage in crisis context
- Use of special procedures was introduced in some European countries affected by the crisis to address consumer over-indebtedness.
- Evidence of limited scale:
  - Ireland: total processed DRNs equals one thousand cases (2015-2019).
  - Cyprus: 613 confirmed DRN cases up to August 2019; projected to remain low.
- Assessment: Reforms created possibilities for discharge and a fresh start for over-indebted households and set foundations for future treatment of debt distress; however, in the context of the European crisis, reforms had a limited effect because personal insolvency regimes were mainly deployed to fight mortgage debt distress while their primary use is treatment of consumer debt.

*IMF Working Paper — Box 3. Simplified Processes for No Income, No Asset Cases*

### 57.   Voluntary out-of-court restructuring mechanisms can be a valuable complement to the formal

### Voluntary out-of-court restructuring mechanisms can be a valuable complement to the formal insolvency law framework.

### Out-of-court restructuring: role and design
- Provide market-driven, case-by-case, customized solutions voluntarily agreed between debtor and creditor.
- Offer a speedy, flexible, low-cost alternative to court-supervised insolvency proceedings.
- Can relieve pressure on formal insolvency and foreclosure institutions where debt distress is widespread by circumscribing excessive creditor leverage.

### Country practices promoting out-of-court restructuring
- Promotion approaches: adopting guidelines/principles or encouraging banks to adopt a code of conduct.
- Typical menu of restructuring options: interest only payments, maturity extensions, reduction of interest rate, write-offs, etc.
- Examples:
  - Iceland: temporary guidelines on voluntary debt restructuring for individuals.
  - Latvia: principles and guidelines for out-of-court consumer mortgage workouts.
  - Countries adopting codes of conduct: Ireland, Cyprus, Greece.

### Special regimes for economically vulnerable debtors
- Targeted special guidance to protect vulnerable debtors in voluntary workouts.
- Examples and outcomes:
  - Portugal: extraordinary regime for protection of housing loan borrowers in economic difficulties; only 84 cases out of 1318 petitions were concluded.
  - Spain: mortgage debt of debtors below a certain economic threshold could be restructured under the Code of Good Practices.
- Main implementation challenge: difficulty in complying with all conditions for access to the procedure.

### Non-standard restructuring options observed
- Conversion of full recourse mortgage into nonrecourse mortgage for qualifying debtors:
  - Portugal: debtor could deliver the property to the credit institution or the real estate investment fund for complete elimination of the debt provided at least the principal amount was covered.
  - Spain: conversion at option of the debtor after performing under a restructuring plan for a year.
- Property exchange options:
  - Debtors could exchange their property for one of lower value owned by the bank or a third party, reducing the principal (Portugal).
  - Mortgage-to-rent conversion options (Spain, Ireland).

### Mediation as a restructuring tool
- Used both out-of-court and integrated into court-supervised procedures.
- Countries introducing mediation: Cyprus, Portugal, Ireland, Iceland.
- Roles of mediation:
  - Debt restructuring facilitation.
  - Debt counseling (Portugal, Iceland).
  - Function performed by insolvency administrator (Ireland).
- Mandatory mediation introduced in court processes in: Ireland, Cyprus, Spain, Greece (2010).
- Assessment:
  - Mandatory mediation may be ill-suited to consumer insolvency; optional mediation at parties’ instance may be preferable to avoid delay and expense.

### Reforms of Consumer Insolvency Law: mortgage-related provisions
- Some countries incorporated special provisions for residential mortgages in consumer insolvency laws, typically requiring debtor insolvency under the legal system.
- Common objective: preservation of the family home.
- Potential trade-offs: may be distortionary short-term and impact mortgage availability and cost medium to long term; may conflict with discharge objectives and financial sector stability.

Key features and examples:
- Temporary reprieve from sale of family home:
  - Latvia: sale of primary residence may be put off by up to one year.
  - Cyprus: suspension of enforcement or foreclosure for up to 6 months if difficulties result from the crisis.
  - Iceland: debtors could remain in residence for up to 12 months following declaration of bankruptcy (temporary measure available until 1 March 2010).
- Payment moratorium and mortgage reductions:
  - Italy: debtor may propose a payment moratorium for up to one year.
  - Greece (until 2015): court could establish zero payment installments for non-secured creditors pending a final hearing and impose a repayment plan reducing principal to 80 percent of the tax value of the property.
- Enhanced debtor rights following foreclosure:
  - Cyprus: debtor has preferential right to purchase mortgaged property at a price equal to the highest bid at auction.
  - Ireland: if home not sold within 3 years, it could revert to the debtor subject to any mortgage unless refused by debtor.
- Other protections (Cyprus): insolvency practitioner must consider debtor’s wish to retain family home; properties of buyers who paid at least 80 percent of purchase price shielded from foreclosure; banks prevented from foreclosing on family home of a guarantor to satisfy primary debtor liabilities.
- Compulsory restructuring in consumer insolvency (Ireland, Cyprus, Greece (2015)):
  - Court may impose a restructuring plan permitting debtor to keep residence if not economically less favorable to secured creditor than selling the home.
  - Applies where market value is lower than a legal ceiling and debtor meets eligibility criteria.
  - Considerations:
    - Liquidation value used to gauge creditor recovery; remainder becomes unsecured claim with likely low recovery.
    - Debtors with negative equity need principal reduction incentives to cooperate.
    - Iceland agreement included measure where consumers would pay 110 percent of liquidation value to preserve ownership.
    - Capacity to repay is taken into account; debtors unable to repay minimum of liquidation value would not be protected.

- Eligibility criteria: typically restrictive and targeted at vulnerable debtors with low-value primary residences.
- Claw-back provisions: law may permit creditors to share in upside if property is later sold above liquidation value.

### Limitations and lessons from compulsory mortgage restructuring within insolvency
- Procedural capacity constraints:
  - Without capable, well-resourced courts, compulsory restructuring causes procedural complexity and massive case backlogs (Greece).
- Valuation difficulties:
  - Valuation of collateral proved extremely difficult amid shocks to real estate markets.
- Bank incentives:
  - Banks resist restructuring that causes balance sheet losses, delaying resolutions (Ireland, Cyprus).
  - Empirical examples:
    - Cyprus: only 53 cases of confirmed non-consensual personal insolvency arrangements (PIAs) for June 2017-August 2019.
    - Ireland: 2017 annual review showed 203 decisions on compulsory plans in 2017– and only in 65 of these cases the plan was approved despite creditor opposition; 6 of those cases were appealed by creditors.

- Empirical outcome: countries adopting compulsory mortgage modification (Cyprus, Greece, Ireland) saw much slower reduction of mortgage NPLs than countries combining foreclosures with informal restructurings (Portugal, Spain).
- Policy question: whether mortgage debt should be resolved through consumer insolvency procedures.
  - France, Germany, UK: mortgage debt excluded from consumer insolvency, which targets unsecured debt and discharge.
  - Inclusion of mortgage restructuring in insolvency can impede speedy discharge and financial stability, and may not provide fresh start or effectively reduce NPLs.
  - Insolvency is collective and stigmatizing; unilateral use to impose losses on banks is resisted and procedurally contested.
  - Judicial modification of mortgages may succeed only where strong bankruptcy regimes and experienced courts exist; inexperienced regimes struggled.

### Reforms to foreclosure laws
- Revisions addressed delays and inefficiencies: sale price, type of auction, procedures for failed auctions; required Civil Procedure reforms (Ireland, Greece, Cyprus, Portugal, Italy, Spain).
- E-auction systems introduced in several countries: Spain, Italy, Greece, Latvia, Cyprus, among others.
- Social and political complexities: streamlining foreclosures seen as favoring financial institutions; ECJ intervention in Spain required reforms for stronger consumer protection (Aziz v Caixa d'Estalvis de Catalunya (2013) Case C-415/11).

### Extraordinary measures: direct government interventions and trade-offs
- Many measures were temporary, targeted vulnerable debtors, and overrode contractual terms; often did not require debtor insolvency.
- Types of measures:
  - Across-the-board principal reductions (Iceland):
    - Program encouraging time-bound offers to write down qualifying mortgages to 110% of collateral value for deeply underwater debtors.
    - Later program: 13% write down of inflation indexed mortgages financed by a bank levy and an offer for tax free reallocation of voluntary pension contribution towards mortgage repayments.
  - Limits on penalty interest rates (Spain, Cyprus).
  - Freezes on repayments (Iceland).
  - Moratoria on enforcement or evictions.
  - Conversion of foreign exchange loans into local currency at historical rates.
  - Conversion of mortgages to non-recourse.
- Targeting and implementation challenges:
  - Eligibility criteria often over-inclusive, leading to high costs and inadequate burden-sharing (Greece example: tax-value based cap too historical and broad).
  - FX-to-local conversions in Romania and other countries (Croatia, Hungary, Poland) had overly generous criteria and insufficient burden-sharing.
- Fiscal and market consequences:
  - If not fiscally funded, extraordinary measures impose losses on private creditors and cause market distortions.
  - Such interference undermines credit discipline, can hurt future investment, and tends to be costly and administratively burdensome.

*IMF Working Paper excerpt.*

### Box 5. Examples of Extraordinary Measures

### Box 5. Examples of Extraordinary Measures

### Moratorium on foreclosure of residential mortgages over the family home
- Described as a suspension of foreclosure and a form of extreme forbearance.
- Implementations and variants:
  - Formal moratoria: Greece 2010, Ireland, Iceland.
  - Informal moratoria: Cyprus, Greece 2014.
  - Blanket moratoria: Iceland, Greece 2014.
  - Targeted moratoria: applicable to low-value family homes of low-income households (Ireland, Greece 2010).
  - Automatic moratorium: Iceland.
  - Application-based moratorium: Greece.
  - Spain variant: a special law permitted vulnerable mortgage debtors to remain in their homes for two years following foreclosure, provided they could pay a minimal rent.
- Main drawback:
  - Do not address underlying debt problems and, if not part of a comprehensive strategy for crisis resolution, can create uncertainty and lead to widespread strategic default.

### Conversion of forex-denominated mortgages at historical rates by operation of law
- In countries where exchange rates moved unfavorably against debtors with foreign-currency mortgages, loans were converted into local currency at historical rates by operation of law.
- Countries referenced: Romania, Croatia, Hungary, Poland.
- Consequences:
  - Retroactive modification of contractual terms by statute resulted in substantial losses for banks where such lending was widespread.
  - Raised constitutional debate on whether such measures could be considered expropriation by the state.

### Conversion of existing mortgages to non-recourse (datio in solutum)
- Description:
  - Delivery of real estate collateral in exchange for extinction of the loan is generally recognized as a debtor-creditor-agreed solution but not as a mandatory solution.
- Romanian example:
  - Romania adopted a law permitting debtors to discharge their existing loans in entirety through transfer of the collateral to creditors (see Macovei, 2019).
  - If proceeds from sale of collateral were inadequate to satisfy outstanding loan, contrary to general mortgage principles, creditor would have no further recourse against the debtor.
- Problems identified:
  - Transferred downside risk of real estate ownership to banks.
  - Could leave banks holding property for long periods if housing market did not recover.
  - The Constitutional Court set more stringent conditions for the use of this option, resulting in reduced use by debtors.

### (vii) Other Social Protection Measures (paragraph 72)
- Given the magnitude of the crisis, a few countries enhanced social protection measures funded from the fiscal envelope.
- Examples:
  - Rent benefits provided to those who are evicted (Spain).
  - Mortgage interest supplement scheme (Ireland).
  - Mortgage payment subsidy scheme covering a percentage of loan payments (Cyprus, Greece).
  - Free or subsidized legal aid services for low-income debtors facing foreclosure (Ireland, Cyprus).
- Note:
  - State-supported mortgage modification has emerged as a tool to resolve residential market crises, but its use in Europe was limited due to lack of fiscal space and competition law concerns.

### Conclusions and Main Lessons for the Way Forward (paragraphs 73–79)
- Legal and institutional reforms:
  - Most European countries affected by the crisis now have modern consumer insolvency laws and improved debt enforcement procedures, including foreclosure.
  - Reforms aimed to develop more robust insolvency institutions; legislative measures can be quickly adopted but implementation takes time.
- Consensus on discharge provisions (paragraph 74):
  - Broad consensus that personal insolvency law should include provisions for discharge of the debtor from any unpaid liabilities after a short (maximum three-year) repayment period.
  - All disclosed debts should be dischargeable with narrow exceptions for public policy reasons (e.g., child support, some tort liabilities, criminal fines, and penalties).
  - System safeguards: require debtors to cooperate fully with creditors and make complete disclosures, updated as needed.
  - Asset-less debtors should not be excluded; a special, simplified procedure could be considered.
  - Personal insolvency remains the primary tool to address excessive consumer debt.
- Areas for further strengthening personal insolvency frameworks (paragraph 75):
  - Further simplify and standardize procedures:
    - Consumer insolvency cases are typically straightforward; standardization increases efficiency and ease of use.
    - Consider increased standardization of application forms and disclosure schedules.
  - Develop and promote out-of-court options for debt resolution:
    - Cheaper, faster, more efficient; can include administrative authority procedures.
    - When coupled with independent debtor counseling, can complement formal insolvency frameworks.
    - Work best when the formal system functions well and offers predictable results.
  - Debt counseling services and legal aid should be available:
    - Free or inexpensive debt counseling to navigate insolvency system and avoid future over-indebtedness.
    - Could be part of legal aid clinics or provided independently.
    - Use of technology (apps that track spending and design budgets) could be helpful.
  - Robust data collection:
    - Detailed data collection helps understand reform impacts and inform future evolution of consumer insolvency systems (Garrido and others, 2019).
- Design considerations for legal reforms (paragraph 76):
  - Reforms should be part of a clear overarching strategy that minimizes strategic default and abuse while facilitating resolution for good faith debtors.
  - In times of crisis, government intervention may be necessary but should, as far as possible, allow contractual terms to be respected and participation in schemes varying contractual terms to be voluntary.
  - If government actions directly affect contractual relationships, interventions should:
    - Address the underlying problem (turn troubled loans into performing loans).
    - Be selective and target borrowers whose ability to restructure debt is likely to be restored.
    - Be simple and transparent.
  - Consider burden-sharing between private and public sectors, fiscal envelope, long-term impact on future credit and the financial sector.
  - Institutional capacity should be a key consideration; prioritize solutions that prevent the institutional framework becoming a bottleneck.
- On the role of personal insolvency for mortgage defaults (paragraphs 77–78):
  - Reliance on consumer insolvency law to resolve mortgage loans was possibly misplaced during the crisis.
  - Personal insolvency is best suited to unsecured debts; mortgage loans are traditionally dealt with outside insolvency through efficient enforcement mechanisms.
  - Disadvantages of using insolvency for restructuring mortgage debt:
    - Attaches stigma, creates a litigious environment, may be contested by banks, may delay NPL resolution due to institutional capacity limits.
  - Recommendation:
    - Country’s social safety net and/or social measures (not insolvency law) should safeguard the most vulnerable.
    - Secured credit should generally remain outside the purview of consumer insolvency (see IMF, 2019).
    - Any special provisions must be weighed against economic impact on credit availability going forward.
- Forward-looking insights (paragraph 79):
  - In contrast with austerity responses to previous crises, countries are using fiscal buffers to provide extensive fiscal and monetary support during the pandemic and the war in Ukraine.
  - As interim measures wind down, some countries may experience wide-scale household debt distress for which existing insolvency and debt resolution frameworks may be inadequate.
  - Potential necessary actions:
    - Reforms to personal insolvency to allow good faith debtors a fresh start.
    - Strengthening institutional structures to enhance capacity.
    - Special measures (ideally social protection programs) targeted at the most vulnerable to offer temporary backstops.
    - Designing separate legal mechanisms to address excessive mortgage debt.

*Source: wpiea2023092-print-pdf - Box 5. Examples of Extraordinary Measures*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023092-print-pdf.pdf_