Banks are entitled to write-off unrecoverable mortgage debts unilaterally
On 9 July, 2020 Saeima (the Parliament of the Republic of Latvia) approved amendments to the Law “On Credit Institutions” and the Law “On Personal Income Tax” that entitle credit institutions to unilaterally write off irrecoverable mortgage loans that had been taken before the economic crisis of 2008. The initial idea of the respective amendments was suggested by the Bank of Latvia and was strongly supported and promoted by credit institutions operating in Latvia.
The amendments apply to situations where:
- debtor has not been able to make the payment due to the economic crisis,
- the property has been sold in an auction, and the outstanding amount has not been paid back to the bank for more than ten years.
- the loan is no longer on the balance sheet of the creditor.
The same provision applies to guarantors’ obligations as regards such loans. Currently, there are about 13 thousand bank customers to whom this provision may apply, and the total amount of outstanding debt is estimated at up to 600 million euros.
Amendments apply not only to banks but also debt collection companies.
Rationale for the above-mentioned amendments: these debts essentially are irrecoverable and, therefore, should be written off. On-going management of these debts is burdensome with no reasonable ground for successful recovery. However, the Civil Law does not provide for a unilateral write-off of such debts, it is possible only on the basis of a bilateral agreement. In a situation when, since the crisis, many debtors had emigrated or have been otherwise unreachable or financially unable to cooperate, the bilateral agreement cannot often be achieved. Thus, to remove the current impediments for resolving outstanding financial obligations, fully or in part, a special legal provision whereby the creditor is entitled to carry out this action unilaterally was proposed in the Law “On Credit Institutions”. At the same time, amendments to the Law “On Personal Income Tax” provide tax relief for such debtors, i.e., the write-off shall not be considered as income and therefore shall not be subject to the capital gains tax.
It is important to emphasize that the amendments do not impose the write-off as legal obligation, but only confers the right to the creditor to pass a unilateral decision and provides exemption to the respective debtor from a tax payment. As the law applies only to loans that are no longer on the balance sheet, their write-off does not have any direct financial effect on the creditors.
Some credit institutions had implemented special programs to settle the debt by offering a write-off under a bilateral agreement between creditor and debtor. These programs unfortunately did not reach sufficient number of debtors. Therefore, the legislative intervention was necessary, justified and also welcomed by private sector.
Chief Legal Officer
Finance Latvia Association