Romania is one of the few European countries without a personal bankruptcy law, which leaves individuals without any protection once they cannot pay their dues, found a recent report issued by London Economics for the European Commission. Romania, Spain and Hungary did not have a personal bankruptcy law in 2010, even if in all these countries the topic had been actively debated. A personal bankruptcy law in Romania would weaken the banking system, as well as he legal system, and would be fueled by the perceived higher level of criminality in the country, according to various sources cited in the report.

“However, Romania has made some steps to aid consumers, particularly by revising and refreshing regulation applying to lenders granting loans to individuals, which focus on attempting to ensure that over-indebtedness does not occur,” according to the report. However, the regulation recently put in place only applies to future loans, and does not solve the problem of existing over indebted borrowers.

In Romania, borrowers can refinance their loans, reschedule them or restructure them. “Studies from the National Bank of Romania have shown several times that restructuring models used by banks have not worked effectively as only small numbers of clients actually benefited from debt relief solutions, or have been discouraged by the NBR,” according to the report.

IN some cases, restructuring only offers temporarily relief, in the form of cutting interest rates for limited periods of time, where the lender can withdraw their offer at any time, moving to an increased interest rate, as compared to the original loan.

In 2010, a group of lawyers and senators proposed a personal bankruptcy law, but the National Banks Association strongly opposed it, fearing a higher level of provisions. The draft was approved in the Senate and several commissions of the Chamber of Deputies, but Parliament has not taken ‘into deliberation’ the draft as a number of voices strongly argued against passing this proposal into law.

According to Moody's, should the personal bankruptcy law have passed the Parliament, there would have been “significant negative consequences on the banking system in Romania, adding that credit institutions might need to supplement their capital by 10 per cent, in an optimistic scenario.” The Government too opposed the law, citing opposition from the International Monetary Fund, which is currently Romania's largest international financier, but the IMF denied it. In Hungary, the IMF actually asked for a personal bankruptcy law.

The study was made based on opinion expressed by central banks, governments, IMF, rating agencies, MPs, lawyers and NGOs, as well as respondents interviewed by London Economics. The full report is here.

editor@romania-insider.com