Is the absolute prescription apt to discharge the figure of the eternal debtor?
During the last year there have been active discussions about introducing the absolute prescription for obligations of natural persons. A new project for the amendment of the Obligations and Contracts Act was introduced. The project aims to solve a number of problems in the civil turnover:
• To terminate the long enforcement proceedings in which the creditor fails to recover their claims from the debtor who is left without property, whilst interests, as well as fees and costs, continue to pile up;
• To solve the problem with the so-called “eternal debtor” and to introduce an absolute prescription of 10 years for claims against natural persons as an alternative to the bankruptcy of individuals, which remains unknown to the Bulgarian legislation;
• To determine a clear and predictable time period after which the creditor can no longer have the opportunity to recover their claim against natural persons;
• To give the debtors an opportunity to return to the civil turnover and to start creating their family economy.
The new text in its current form, however, is unclear and incomplete, and is not capable of solving the above-mentioned problems. There are introduced restrictions regarding the field of application which, in fact, hinder the accomplishment of the set goals. According to the text the absolute prescription shall not be applicable to:
• Secured receivables against natural persons. The new provisions shall not apply to mortgage loans for the purchase of housing, consumer loans with guarantees and other secured receivables. Nowadays financial institutions seldom grant credits without collateral security which means that for the majority of citizens, who have obligations to commercial banks, the absolute prescription shall not apply.
• Adjourned and rescheduled obligations. Often creditors such as banks, household service providers and etc. offer their debtors to reschedule their debts. By doing this the due date is altered and the absolute prescription becomes inapplicable. It will not pose a problem for the creditors to take advantage of this possibility by convincing their debtors to adjourn or reschedule their debt. The latter, due to being poorly informed or due to other reasons, will typically give their consent and this way will restrict the application of the absolute prescription.
Generally, the absolute prescription should be considered as unconditional. What makes it absolute, if there are means to restrict its application? The composers of the text should be much more decisive, and if they believe that the absolute prescription could solve the above-mentioned problems, they should consider dropping the restrictions.
The prescription matter is a clash between the principle of justice and the necessity of renewing the civil and commercial relations. There are solid arguments on both sides of the dispute.
The civil turnover does not profit from “eternal debtors”
Debtors, who have no short-term prospect of repaying their debt, are neither convenient for the state’s economy, nor for the treasury. When a natural person is doomed to be a debtor for an unlimited time period, the individual becomes part of the economy – they receive labour income “under wraps”, they are not insured, they do not pay taxes, and they are deprived of business initiative. After a certain period of time such debtors ought to be rehabilitated in the civil turnover and to receive the chance to restart their family economy. The absolute prescription gives a way out of this dead end and “unclogs” the civil turnover’s system.
We should not assume that the absolute prescription favours the debtor and that the creditor is left with damages – after all, the creditor has had the opportunity to use all legal means for the recovery of their claim within a reasonable 10-year period. It is considered that in most cases in this time period it will become apparent whether a claim can be recovered or not. If it is not recovered, then what is the point of maintaining the possibilities for enforcement procedures?
There is also an opinion that the debtors shall patiently wait for the expiration of the 10 years and will again take loans without returning them. However, we forget to ask ourselves is there going to be anybody who can lend those loans? Probably not. For this purpose, it would be useful to create a register for such debtors. The introduction of a person’s credit history would have a positive effect on the civil and commercial turnover.
The absolute prescription would discipline the creditors
The existence of a deadline before which the creditors must recover their claims would have a disciplinary effect on them. Furthermore, the absolute prescription would motivate them to do better research on their debtors before lending them loans. The positive result of all of this would be the decrease in bad credits. This would give banks the opportunity to, for instance, offer better quality services which would stimulate the business initiative of citizens and would lead to the improvement of the overall economic climate in the state.
The project is unclear and imprecise
An essential problem with the project is the lack of clarity to which obligations will it be applied. According to the proposed Art. 112a all unsecured receivables against natural persons are cleared off with the expiration of a 10-year prescription from the 1st January of the year following the year in which the obligation became due. In this form of the text, two theses about the absolute prescription can be distinguished.
On one hand, if it is accepted, this amendment will come into force 6 months after being published and will be effective ex nunc (onwards). However, let us look at the following hypothesis. In September 2010 the debtor stops paying his loan instalments. Within the meaning of the suggested text, the 10-year prescription begins from 1st January 2011. But, the absolute prescription has not been introduced up to 2011 and the envisaged norm does not have backwards application (ex tunc). An internal contradiction is created which could lead to problems in the law enforcement. It is not clear whether the absolute prescription encompasses the overdue obligation from 2010 and form which moment does the 10-year prescription begin.
If we assume that the law will be applied for obligations which will become due in the future (i.e. after the amendment comes into force), then the possible positive consequences of this institute will show in 10 years at the earliest. This time period does not seem to be so close in view of the increasing public expectations for the elimination of the “eternal debtor” figure in recent time.
On the other hand, it could be accepted that the text arranges obligations which became due before the text is applicable. The expiration of the prescription is a legal fact. Let us turn this model and assume that the essential for the absolute prescription moment is not when the receivables have become due but when the 10-year prescription expires. From this point of view we can conclude that the expiration of the 10-year period is a new and separate legal fact. What follows afterwards is determined by the law in force at that time.
Let us look at an obligation which became due on 1st September 2004. If the legal amendments figuratively come into force on 1st July 2014, then the 10-year prescription for that obligation will expire on 1st January 2015 and on this date the creditors claim will be cleared off. In this event, we assume the so-called immediate effect of the law – i.e. the absolute prescription would be applicable to already existing cases.
It is not clearly regulated in the transitional and final provisions of the project which of these two hypotheses shall be applicable. The lack of certainty regarding the effect of the absolute prescription could lead to very serious problems in the law enforcement of this institute, as well as lead to blows in the civil turnover.
The institute of absolute prescription has its positive assets and deserves a serious and thorough discussion. However, the belief that the project does not achieve the set goals and that it even introduces ambiguities still remains. Such a project should be deprived of populism and should not be created in a hasty manner in order to serve a certain lobby. It is important that the project’s architects be led by the public interest and to propose solid arguments in favour of the absolute prescription in order to guarantee its longevity.
Link to the article on Investor.bg.
Proposed new texts in the Obligations and Contracts Act (OCA):