Lawpractice

Out-of-Court Debt Settlement Mechanism

Following the financial crisis of the 2010s and the accumulation of significant debts by a large portion of the country’s population, a flexible framework has now been established for debt settlement through a dedicated electronic platform. This framework offers a crucial second chance to debtors, who may be either individuals or legal entities. The out-of-court mechanism now also applies to legal entities that do not pursue economic profit but engage in economic activity (non-profit legal entities). It is not, however, the appropriate tool for every case, as in other cases the ideal solution is restructuring (especially for large businesses), while in other cases this is true for insolvency (especially if the debtor does not have real estate or movable property, so he, or she, is not interested in protecting them).

It should be noted that the out-of-court debt settlement mechanism is considered worldwide as one of the best debt settlement tools (if not the best), but it should be used when debt settlement is truly desired, because by filing the application, banking and tax secrecy is lifted and if the application does not proceed, lenders/creditors will have the opportunity in any future legal dispute to use the information they will know after the lifting of tax and banking secrecy to the detriment of the debtor. Therefore, resorting to the out-of-court settlement mechanism is not recommended for those who do not truly wish to settle their debts, but are simply trying out the said tool for any reason other than settling their debts.

The out-of-court mechanism allows individuals to settle their outstanding balances with institutional creditors, the state, and social security funds, avoiding the time-consuming and costly judicial process. It even addresses situations where individuals have in a sense inherited verified debts to the public or social security funds from businesses that may no longer exist.

Through the out-of-court mechanism, debts to the state, social insurance organizations (e.g., EFKA), and financial institutions (e.g., credit or financial institutions, leasing companies, etc.) can be settled. However, other debts (e.g., to employees, suppliers, landlords) cannot be settled under this mechanism. Nonetheless, debtors can still disclose their obligations to third parties. Among the advantages of the out-of-court mechanism is that it covers all eligible debts mentioned above, while also providing a suspension of enforcement measures during the process.

Debts that can be settled through the out-of-court settlement mechanism may also concern debts owed to third parties, such as debts to municipalities, which are collected by the tax administration. The mechanism now also covers debtors with obligations exceeding €10,000 to financial institutions, such as those with a mortgage loan but no other debts.

However, individuals who have already submitted applications under previous debt settlement regulations (e.g., Katseli Law, Law 4605/2019, Law 4469/2017) are not eligible to apply, unless they first withdraw from those arrangements.

To submit an application under the out-of-court mechanism, the following key conditions must be met:

the total amount of debts must exceed €10,000; these debts may be overdue but can also be current or serviced;
the financial situation of the debtor must have deteriorated by at least 20%; this deterioration may result not only from income reduction but also from increased expenses;
no prior applications under the out-of-court mechanism of Law 4469/2017 or applications under Law 4605/2019 for the protection of primary residence should exist;
for legal entities, they must still be operational and not dissolved or under liquidation;
the applicant, whether an individual or a representative of a legal entity, must not have been convicted of felonies related to financial crimes.

The process begins with the submission of an application by the debtor via the dedicated electronic platform, which includes all necessary financial information, the debts, and proposed settlement plans for repayment.

The application must include, indicatively:

full details of the debtor (full name, company name, address, Tax Identification Number (TIN), Business Activity Code (BAC) if engaging in business activity or is a legal entity, telephone number, email address);
full details of the spouse or partner (these details are not required if marital or partnership cohabitation has been terminated and declared to the Tax Administration before submitting the application);
full details of dependent members of the debtor (full name, TIN, BAC if engaging in business activity, telephone number, email address); dependents include unmarried children up to 18 years old with a TIN, unmarried children up to 23 years old who are students or serving in the military, or unmarried children above 23 who are divorced or widowed with a physical or mental disability of at least 67%;
information on the debtor’s family income from any source;
reference to their turnover or income during the last fiscal year before submitting the application;
details of the debtor’s total liabilities to creditors;
a description of their activities, financial situation, reasons for financial hardship, and the prospects of their business;
a list of all individuals and entities with claims against the debtor (e.g., suppliers or employees) with full details, the amounts owed to each creditor, and the date on which each debt was calculated;
a list of movable and immovable assets owned by the debtor in Greece and abroad, including the estimated commercial value of the movable assets to determine the liquidation value of their property;.
for real estate in Greece, the taxable value used for ENFIA (property tax) calculation, as indicated in the latest tax determination document, is used; if no ENFIA value is available, the objective value is used; for properties abroad, the commercial value from an appraiser’s report or the objective value (if available) is used;
a detailed description of encumbrances and other securities (type of encumbrance or security, creditor, secured amount, order, public record) registered on the debtor’s assets;
a declaration of any transfer or encumbrance of the debtor’s assets made within the last five years before the application submission.

For legal entities, the application should include, among other details:

a declaration of any dividend payments by the debtor to shareholders or partners or other transactions beyond regular business operations within the last two years;
details of any legal entities affiliated with the debtor during the sixty months before the application submission;
full details of real estate or other assets transferred by the debtor to affiliated persons within the sixty months before the application submission;
financial statements for the last five fiscal periods, among others.

For low-value movable assets, i.e., those valued at less than €50,000, the value is considered to be the market value declared in the application. For high-value movable assets, i.e., those valued at €50,000 or more, the value is determined by a recent (within 12 months) report from a certified appraiser, the market value recorded in the books of the financial institution that has registered a collateral security, or the insured value as stated in an active insurance policy, if available.

The participation of guarantors is not always mandatory; however, their absence complicates the evaluation process for financial institutions. Nevertheless, guarantors are required to participate in cases of debts arising from loans or credits guaranteed by the Greek state, as well as when the participation of all co-owners of real estate is mandatory for the formulation of a settlement proposal.

If guarantors do not participate, they are excluded from the settlement, meaning that if the restructuring agreement includes a debt write-off, the creditor may seek the written-off amount from the non-participating guarantor.

It is noteworthy that this process does not provide protection for primary residences unless the debtor is classified as «vulnerable» under the law. Vulnerable debtors must meet specific and exceptionally low-income criteria, excluding the vast majority of debtors. Vulnerable debtors are further protected, as financial institutions are required to submit a proposal, and no advance payment is required in the event of an auction.

To qualify as a vulnerable debtor, the total household income must not exceed €7,000 for a single-person household, increasing by €3,500 for each additional household member. In single-parent families, an additional €3,500 is provided for the first minor member of the household. For households with unprotected child/children, an additional €3,500 is added for each unprotected child. In any case, the total income cannot exceed €21,000 annually, regardless of household composition. These limits are expected to increase.

Additionally, the total taxable value of the household’s real estate cannot exceed €120,000 for a single-person household, increasing by €15,000 for each additional member, up to a maximum of €180,000 regardless of household composition. Deposit limits for each type of household are set at €7,000 for single-person households, €10,500 for two-member households, €14,000 for three-member households, €17,500 for four-member households, and €21,000 for households of five or more members.

Vulnerable debtors also include individuals with a disability rate of at least 67%, provided they meet the aforementioned income and asset criteria at double the threshold (e.g., for such single-parent household, the income threshold is €14,000 instead of €7,000).

Debtors are not considered vulnerable if they fall under the provisions of the luxury living tax, declare expenses for yacht crew salaries, incur expenses exceeding €1,500 for private school tuition, or have expenses for domestic helpers, chauffeurs, tutors, and other staff.

Applicants who meet the above criteria must obtain a vulnerable debtor certificate from the corresponding gov.gr platform. At the time of the final submission of the application to the extrajudicial mechanism, the certificate must be issued and valid (it has a three-month validity period).

Creditors are notified of the application, evaluate the financial situation of the applicant, and may propose alternative solutions. Subsequently, a negotiation phase begins between the debtor and creditors, aiming to reach a mutual agreement. If the parties reach an agreement, it is signed, becomes binding, and is submitted for approval and validation by the competent authority, thereby making it officially enforceable. In case of failure to reach an agreement, the parties retain the right to pursue mediation or legal action.

The use of the extrajudicial mechanism offers several benefits, such as:

time and cost savings by avoiding lengthy and costly judicial procedures;
flexibility in settlements since the terms are tailored to the debtor’s financial capacity;
debt and interest write-offs, as it is possible to write off interest or even part of the principal depending on the case;
suspension of enforcement measures, meaning measures such as seizures and auctions are suspended during the process; however, it should be noted that the suspension does not cover auctions scheduled within three (3) months from the final submission date of the debtor’s application or any preparatory procedural actions for an auction by a secured creditor (including seizures);
preservation of relationships, as the process helps maintain commercial and personal relationships.

A voting process among creditors follows, during which they conduct all necessary checks. If errors are identified, a correction request is created. If no errors are found, the creditor/administrator proceeds to evaluate the application data and, based on the criteria, votes on all portfolios under their management. The evaluation by creditors involves two stages with a total management deadline of 20 days, and the creditor with the highest recovery amount among the others is designated as the coordinator. For a positive outcome of the application, a majority vote of more than 60% of the total debts and more than 40% of the secured debts is required. Once the majority of creditors approve, the application moves through various stages, and the debtor is informed of the solution generated by the platform’s algorithm, which they can either accept or reject.

The application may (indicatively and not exhaustively) be rejected by financial institutions if:

there is sufficient financial capacity and/or assets to repay the debts;
the financial capacity of the involved parties is deemed insufficient, and there is an objective inability to service the proposed settlement;
not all involved parties participate (e.g., co-debtors, guarantors);
previously agreed settlements have been breached;
the extrajudicial debt settlement mechanism is not deemed appropriate for the debt due to its amount and/or nature.

The amount of the monthly installment and the number of installments are determined by the debtor’s financial condition and the agreement with creditors. Installments may reach up to 240 for debts to the State (with a minimum installment amount of €50), while for debts to banks, the number of installments may be subject to negotiation. The interest rate is fixed at 3% throughout the settlement period (amortized installments), and social security contributions or withheld/passed-on taxes on the principal debt are not written off.

The deadline for the payment of the first installment is set as the last working day of the month following the successful completion of the application (for multilateral cases, where there are two or more creditors) or within 5 working days from the acceptance of the proposal (for bilateral cases, where there is only one creditor). Subsequent installments are due on the last working day of each following month.

If the debtor delays the payment of 3 or more installments to any creditor, the creditor may terminate the restructuring agreement. This right also applies if the debtor fails to pay more than 3% of the total amount owed to that specific creditor. Such a termination results in the loss of the arrangement concerning that creditor.

The arrangement may also be automatically forfeited if the debtor fails to submit the required Income Tax and Value Added Tax declarations within 3 months of the submission deadline or fails to settle or legally arrange overdue debts to the State, which became due before the signing of the bilateral agreement and are not included in it, either by suspension of collection, a legally established installment plan, a court decision, or a provisional order.

Our office undertakes the management of the entire extrajudicial mechanism process, offering full legal support from start to finish, ensuring that every case is thoroughly examined, and providing specialized advice tailored to the capabilities and needs of each client.