banks write off loans

In the last year and especially after the pandemic, you have certainly heard something about the possibility of writing off part of the debts from a loan to the Bank, but it is not clear what applies and you will justifiably have questions.

Which Banks write off loans? Which loans are written off?

The golden rule is: Banks discuss writing off part of the loan (also known as haircut), ONLY when it is established that the debtor is unable to service the entire debt (principal + interest). In other words, the loan should be considered completely problematic.

Especially if you have an overdue loan, the best you can hope for is a favorable arrangement with favorable terms.

Let's look at the answers to the most frequently asked questions about loan cancellation:

Which Banks write off loans?

The truth is that no bank proceeds with a horizontal write-off of loans as in the vast majority of cases the above rule is followed and each loan is treated individually.

📌 If, however, you meet a series of conditions, all banks are likely to cancel part of the debt, with the aim of better servicing the loan.

📌 The aim of the banks is to reach an agreement with the borrower for the long-term arrangement of the loan, always based on specific criteria, such as income and property status.

In the past, several cases of debt write-offs of up to 80% have been recorded, but today more and more loans are being controlled by the funds.

What are the conditions for loan cancellation?

The criteria set by the funds and which determine which loans are written off are:

1. The borrower's income & assets

The borrower's ability to repay the loan is examined. Based on reasonable living expenses, income and family structure, the bank makes a proposal for debt settlement.

The unemployed and vulnerable population groups are the most common cases in which a partial loan write-off is offered.

2. The income & property status of the guarantor

In every loan with a guarantor, the same criteria apply to the guarantor as apply to the borrower. This means that before any proposal is made to write off a loan, all of the above are considered for the guarantor as well.

3. The balance of the debt in relation to the value of the property that has been marked down

In the event that the amount of the debt is greater than the value of the property, then the loan administrator may propose a partial write-off of the difference between the two.

Let's look at an example:

Suppose your total debt is 200,000 euros and the commercial value of the mortgaged property is 150,000 euros.

It is possible that the bank or the fund will offer you to write off part of the 50,000 euros.

However, if the debt is 150,000 euros and the value of the property is 200,000 euros, it is not expected that you will be offered a "haircut".

In short, even if a haircut is decided, this concerns a part of the debt and not a total write-off.

Generally

The following are more likely to be deleted:

  • A loan given without collateral. Most of them are consumer loans .
  • The creditor should also not be able, based on banking criteria, to service the loan.
  • Write-offs are rarer in mortgage loans since there is a pre-notification, while they concern a smaller percentage of the debt compared to consumer loans – unsecured.

What changes does the new Bankruptcy Code bring?

Starting from the new year of 2021, which loans will be written off will be linked to a more organized process, through which natural persons will also be given the opportunity to go bankrupt and make a new start.

Some of the notable features of the new framework are that:

  • Vulnerable households will be able to continue to live in their home for 12 years with state subsidized rent. After this period they will have the right to repurchase at the then commercial value.
  • Part of the bankrupt's income will be frozen. The lien will be for an amount in excess of reasonable living expenses.

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