Taking out a mortgage is a decisive step in the life of an individual or an entrepreneur. However, the ups and downs of life can turn this project into a financial burden, leading to over-indebtedness. Far from being a foregone conclusion, over-indebtedness linked to a property loan is governed by precise legal provisions, offering solutions for the borrower. dealing with mortgage repayment difficulties. These mechanisms, which are often little-known, are designed to protect debtors and enable them to start afresh on a sound footing. Understanding the legal framework of over-indebtedness and its legal solutions is therefore essential. Support from a expert lawyer in mortgage law ensures that all these safeguards are properly implemented.
Over-indebtedness of consumers of home loans
The over-indebtedness procedure is not open to everyone and has a strict definition. It is designed for individuals facing serious financial difficulties, including when a mortgage is involved. Acceptance of the application by the Commission de surendettement is the first stage, with immediate consequences such as the suspension of legal proceedings. It may be a good idea to find out about the risks of seizure despite an overindebtedness file to understand what's at stake.
Definition of over-indebtedness and the notion of "good faith
The legal definition of over-indebtedness is set out in article L. 711-1 of the French Consumer Code. It is characterised by "the debtor in good faith is clearly unable to meet all of his non-business debts that are due and payable".. Two fundamental elements stand out: manifest inability to pay and good faith on the part of the debtor. Good faith is an essential condition, assessed by the over-indebtedness commission and then by the judge. It implies that the debtor has not fraudulently or knowingly organised his insolvency. This is assessed on a case-by-case basis, where the debtor's transparency and honesty in his or her declarations are paramount.
Inclusion of the principal residence in the assessment of over-indebtedness
For a long time, there was a common misconception that owning your own home would prevent you from being recognised as being over-indebted. The legislator has clarified this point to protect borrowers. The law now explicitly states that the simple fact of owning one's main home cannot constitute grounds for rejecting an application. The value of the property is certainly an element of the debtor's assets, but it must not mask the inability to meet current expenses and monthly loan repayments. This clarification has enabled many homeowners in difficulty to access the procedures for dealing with over-indebtedness.
Not being able to afford the mortgage on your own
Over-indebtedness can occur even if the debtor has only one debt, namely their home loan. Case law has confirmed that individuals can be considered to be over-indebted simply because they are unable to repay the loan they took out to buy their home. This situation frequently arises following a life event (loss of employment, illness, separation) that drastically reduces household income. The single instalment on the property loan can then become a clearly unbearable burden, justifying the opening of a debt relief procedure.
Specific measures in the event of the sale of the main home
When it is no longer possible to stay in the home, the law provides for a specific mechanism to ensure that the sale of the property does not leave the debtor with a residual debt that cannot be repaid. This measure is one of the most protective in the system.
Reducing the balance of home loans after a forced or amicable sale
Article L. 733-7 of the French Consumer Code introduces a particularly powerful debt relief measure. In the event of a forced sale (property seizure) or amicable sale of the debtor's main home, the over-indebtedness commission can recommend a significant reduction in the outstanding capital on property loans. The aim is simple: to prevent debtors from losing their home and then having to repay a loan for years on a property they no longer own. The aim of this measure is to enable borrowers to make a fresh financial start, free of the main burden of their property debt.
Conditions for applying this measure (beneficiaries, main home, type of sale)
Strict conditions must be met in order to benefit from this measure. The debtor must be a natural person who was occupying the property sold as their principal residence at the time of the sale. This excludes rental investments or second homes. As for creditors, the measure applies to credit institutions that financed the purchase and have a guarantee on the property. The sale itself must be either a compulsory sale (auction) or an amicable sale conducted in agreement with the principal creditor, precisely in order to avoid the seizure procedure. A sale decided on for personal convenience, without pressure from the creditor, would not activate this mechanism.
The time limit for taking action and setting off the sale price against the capital
The debtor cannot wait indefinitely to apply for this measure. The law sets a deadline of two months from the date of the "summons to pay" the balance of the loan after the sale. It is therefore essential to act quickly. If the over-indebtedness commission is seized within this period, the right to request the measure is preserved. An important accounting rule is also laid down: the proceeds from the sale of the property must be applied first to the outstanding capital, and not to interest and penalties. By giving priority to these amounts, the debt base for any partial write-off can be reduced more effectively.
Reduction and partial cancellation procedures
The extent of the debt reduction is not left to the discretion of the commission or the judge. It is guided by a principle of economic realism and may, in the most extreme cases, result in the total elimination of the remaining debt.
The criterion of compatibility with the debtor's resources and liabilities
Case law is consistent on this point: the one and only criterion for determining the amount of debt reduction is "compatibility with the debtor's resources and expenses". The commission, and then the judge in the event of a dispute, must analyse the debtor's residual financial situation after the sale. They calculate the debtor's monthly repayment capacity and determine how much of the debt the debtor is realistically able to pay, often over a period of several years. The amount of the debt is then reduced so that the new monthly payments match this repayment capacity. Any part of the debt that exceeds this capacity is written off.
The possibility of completely eliminating capital debt
Taking the logic of protection to its logical conclusion, the Cour de cassation has accepted that the loan balance may be reduced or even cancelled altogether. If, after analysis, it turns out that the debtor has no or very little residual capacity to repay the loan, the judge may decide to write off the entire outstanding capital after the sale. This solution, although radical, is the direct consequence of the compatibility criterion: if the debtor's resources allow him to repay absolutely nothing, then the debt compatible with his situation is zero. Total write-off is the only measure that will ensure that the debtor is not trapped indefinitely in an unpayable debt.
Impact on guarantors and co-obligors
Reducing the indebtedness of the principal debtor is not without consequences for his guarantors. The legislature has had to strike a balance between protecting the over-indebted debtor and the rights of guarantors, who have undertaken to pay in the event of default.
The non-enforceability of debt relief measures against the guarantor
The principle is that debt relief measures, whether a conventional plan or imposed recommendations, are personal to the debtor. The guarantor cannot therefore use them to refuse to pay the creditor. More specifically, case law has established that the reduction in the balance of the mortgage loan following the sale of the main home cannot be invoked against the guarantor. The creditor therefore retains the right to sue the guarantor for the full amount of the original debt, as if the principal debtor had not had the balance written off. This solution, which is tough on the guarantor, preserves the effectiveness of the guarantee.
Recourse by the guarantor against the over-indebted debtor
A guarantor who has paid the creditor has personal recourse against the principal debtor. The question arose as to whether this recourse was itself affected by the partial write-off of the debt. The Court of Cassation answered in the negative: although the debtor's debt to the bank has been written off, he is still obliged to repay the guarantor. The guarantor can therefore claim back the sums it has paid to the creditor. This situation may seem paradoxical, as it revives a debt that has just been written off, threatening the precarious financial balance that the over-indebtedness procedure was designed to restore.
Personal recovery for irremediably compromised situations (focus on property)
For debtors whose situation has deteriorated to such an extent that no redevelopment measures can be envisaged, the law provides for an ultimate procedure: personal recovery, which can lead to the total cancellation of debts.
Opening conditions and role of the district court judge
Personal recovery, with or without judicial liquidation, is opened by the judge (now the judge for protection disputes) when the debtor's situation is qualified as "irremediably compromised". This concept means that the financial imbalance is so deep and structural that simple rescheduling, even over a long period, would clearly be insufficient. The procedure is generally initiated on the recommendation of the over-indebtedness commission, but always requires the agreement of the debtor. The judge plays a central role, checking that the application is well-founded and that the debtor is acting in good faith, and overseeing the entire procedure, which may include the sale of the debtor's assets.
Debt write-off and specific exceptions for guarantors
The purpose of personal recovery is to wipe out all the debtor's non-business debts at the end of the procedure. This is in return for the liquidation of the debtor's seizable assets. However, as with other measures, there is one major exception. Article L. 742-22 of the French Consumer Code specifies that the write-off does not apply to debts whose payment has been assumed by a guarantor or co-obligor. As a result, a guarantor who has paid on behalf of the debtor retains his or her right of recourse against the debtor, even after personal recovery. You can find further information on the personal recovery and debt cancellation in our dedicated article.
Over-indebtedness procedures for mortgages are complex and involve highly technical legal mechanisms. The involvement of a expert lawyer in mortgage law is often essential to assert your rights and ensure that the solution best suited to your personal situation is implemented.
Sources
- Consumer Code, in particular articles L. 711-1 et seq.
- Civil Code, in particular the provisions relating to surety bonds.
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