Dealing with repayment difficulties on home loans

Financial difficulties can strike anyone. An accident, redundancy or divorce can make it impossible to repay a mortgage. Fortunately, the law provides a number of mechanisms to help borrowers in difficulty. These schemes help to avoid spiralling debt and give a second chance to individuals facing temporary or longer-term problems. Understanding these solutions is essential if you are to react effectively.

Periods of grace granted by the judge

The first recourse for a borrower experiencing temporary difficulties is to apply to the judge for a period of grace. Article L. 314-20 of the Consumer Code refers to the provisions of article 1343-5 of the Civil Code, which allow a judge to grant a respite to a debtor acting in good faith.

In practical terms, the protection litigation judge (formerly a magistrates' judge) can :

• Defer or reschedule payment of sums due, for a maximum period of two years.
• Order that payments be charged first to capital.
• Suspend any enforcement procedures (seizures) initiated by the credit institution.
• Decide that the sums corresponding to the deferred instalments will bear interest at a reduced rate, which may not be less than the legal rate, or even that they will not bear interest.

This measure is granted taking into account the situation of the debtor and the needs of the creditor. The judge must set the term of this period in his decision. It is important to note that these grace periods are not cumulative with the specific measures provided for in the over-indebtedness procedure.

Dealing with excessive personal debt

When financial difficulties become more serious and long-lasting, over-indebtedness proceedings may be considered. It is aimed at individuals acting in good faith who find it "manifestly impossible to meet all their non-business debts due and payable", as defined in article L. 711-1 of the French Consumer Code.

One important point, clarified by law since 2010, is that "the mere fact of owning your main residence cannot be considered as preventing you from being in a situation of over-indebtedness". So owning a property does not automatically close the door to this procedure.

Case law has confirmed that over-indebtedness can be recognised even if the borrower has only one major debt, typically a property loan, which he can no longer repay (Cass. 1re civ., 24 March 1993, no. 92-04.079). Similarly, the mere burden represented by future repayments, if it is manifestly unbearable in relation to resources, may be sufficient to characterise over-indebtedness (Cass. 1re civ., 13 January 1993, no. 91-04.136). For a preventive analysis, find out more about solvency valuations as a preventive measure can be useful.

If an over-indebtedness application is lodged with the relevant departmental commission and the application is declared admissible, enforcement proceedings (seizures) against the debtor's assets are automatically suspended (article L. 722-2 of the French Consumer Code). The purpose of this suspension is to protect the debtor and allow his or her debts to be dealt with fairly.

The conventional debt reduction procedure

Once the case has been deemed admissible, the over-indebtedness commission first tries to find an amicable solution between the debtor and his main creditors. This conciliation phase may lead to the drawing up of a conventional recovery plan. This plan is a contract signed by the debtor and the creditors who accept it.

Article L. 732-2 of the Consumer Code details the measures that can be included in this plan:

• Deferment or rescheduling of debt payments.
• Partial remission of debts (the commission cannot impose a total remission at this stage).
• Reduction or elimination of the conventional interest rate.
• Credit consolidation.
• Creation or substitution of guarantees.

The implementation of these measures may be conditional on certain undertakings on the part of the debtor, such as the sale of his property if this is deemed necessary to clear a significant part of the debts (Cass. 1re civ., 24 February 1993, no. 91-04.140).

It is essential to note one point concerning guarantors. The Court of Cassation has ruled that the measures granted to the principal debtor under the agreed plan do not benefit the guarantor (Cass. 1re civ., 13 November 1996, no. 94-12.856). The creditor therefore retains the right to claim full payment from the guarantor, even if the principal debt has been restructured.

Debt reduction measures imposed

If the attempt at conciliation fails, the over-indebtedness commission may impose certain measures or recommend others to the judge. If these measures are contested by the debtor or a creditor, the judge in charge of protection disputes will decide and may impose a plan.

The measures that can be imposed (articles L. 733-1 and L. 733-4 of the Consumer Code) are similar to those of the conventional plan, but with stricter limits:

• Debt rescheduling of up to seven years (instead of eight years prior to the 2016 reform).
• Priority is given to capital payments.
• Reduction of the interest rate, which cannot be lower than the legal interest rate.

An important exception concerns property loans relating to the principal residence: the rescheduling period may exceed seven years if this makes it possible to avoid the sale of the property or if it enables the debtor to repay all his debts while keeping his principal residence (article L. 733-3 of the French Consumer Code).

Specific measure in the event of sale of the property

Article L. 733-7 of the French Consumer Code provides for a special measure when the sale (forced or amicable to avoid seizure) of the main home encumbered by a mortgage is not sufficient to repay the loan in full.

In this case, the commission may recommend (subject to approval by the judge) or the judge may impose a reduction in the balance of the loan outstanding after the sale. This reduction must be calculated in such a way that payment of the remaining balance, which may be rescheduled, is compatible with the debtor's resources and expenses.

Case law has interpreted this provision broadly, accepting that if the debtor's situation so requires, the reduction may go as far as the total cancellation of the outstanding balance (Cass. 1re civ., 31 March 1992, no. 91-04.039). The purpose of this measure is to prevent a debtor from continuing to repay a loan for a property that he or she has lost, while at the same time having to meet new housing costs.

Personal recovery: a solution for irremediably compromised situations

For the most serious situations, where the debtor is insolvent and has no realistic prospect of being able to repay his debts even with a plan, the personal recovery procedure may be considered. Inspired by bankruptcy law, this procedure was introduced by the "Borloo" law of 1 August 2003.

It is opened by the judge, on the recommendation of the commission and with the agreement of the debtor, when the situation is deemed to be "irremediably compromised". There are two variants:

1. Personal recovery without compulsory liquidation (articles L. 741-1 et seq.): Applicable when the debtor has no significant assets likely to be sold (mainly furniture necessary for day-to-day living or assets essential for professional activity). In this case, the judge will order the debts to be written off directly.
2. Personal recovery with compulsory liquidation (articles L. 742-1 et seq.): When the debtor has assets (including real estate) that can be sold, the judge opens liquidation proceedings. A liquidator is appointed to sell the assets. If the proceeds of the sale are not sufficient to pay all the debts, the judge declares the liquidation closed due to insufficient assets, which results in the remaining debts being written off.

In both cases, all non-business debts are written off, with the notable exception of :

• Maintenance debts.
• Criminal fines.
• Financial compensation awarded to victims following a criminal conviction.
• Debts paid by a guarantor or co-obligor in place of the debtor. The latter retain their right of recourse against the debtor, even after the other debts have been written off.

Practical advice for borrowers in difficulty

When faced with repayment difficulties, anticipation is your best ally. Don't wait until the situation worsens before taking action.

• Contact your bank: At the first sign of trouble, contact your bank advisor. Many banks prefer to find an amicable solution (deferment of repayment, temporary renegotiation) rather than launching lengthy and costly legal proceedings. Discuss your options for mortgage reform and your rights.
• Consider renegotiation: If your difficulties are linked to an interest rate that has become too high in relation to the market, or if an extension of the term could relieve your monthly payments, renegotiation (article L. 313-39 of the French Consumer Code) is an option. This is done by means of a simple amendment to the original contract.
• Early repayment : If, on the other hand, your financial situation improves (unexpected income, inheritance, etc.), you have the right to repay the loan early (in full or in part) (article L. 313-47). The bank may claim compensation for fixed-rate loans, but this is limited by law (article R. 313-25).
• Don't remain isolated: Financial difficulties can affect anyone. Shame or fear are bad advisers and often delay taking appropriate action. Don't hesitate to ask for help.
• Consult a professional: A lawyer can analyse your situation, check the legality of your loan contract (and any other legal issues) and advise you on the best course of action. penalties in the event of default by the lender), explain the various procedures (grace periods, over-indebtedness) and assist you in your dealings with the bank or the over-indebtedness commission.

Difficulties in repaying a mortgage are not inevitable. Solutions do exist, but they require a rapid and informed response. Our lawyers can advise you on mortgages to assess the options best suited to your particular case and defend your interests as effectively as possible.

Sources

• Consumer Code: articles L. 313-39, L. 314-20, L. 711-1 et seq, L. 722-2, L. 732-2, L. 733-3, L. 733-7, L. 741-1 et seq, L. 742-1 et seq, R. 313-25.
• Civil Code: article 1343-5.
• Cour de cassation, 1st civil chamber, 13 January 1993, no. 91-04.136.
• Cour de cassation, 1st civil chamber, 24 March 1993, no. 92-04.079.
• Court of Cassation, 1st Civil Division, 24 February 1993, no. 91-04.140.
• Cour de cassation, 1st civil chamber, 12 January 1994, no. 92-04.070.
• Court of Cassation, 1st Civil Chamber, 13 November 1996, no. 94-12.856.
• Court of Cassation, 1st Civil Division, 31 March 1992, no. 91-04.039.
• Law no. 2003-710 of 1 August 2003 on town planning and urban renewal.
• Order no. 2016-351 of 25 March 2016 on consumer credit agreements relating to immovable property for residential use.