Legislators allowed writing off loans for war-destroyed property. Would every Ukrainian be able to use this right?

On December 1, the Verkhovna Rada adopted the bill No. 7441-1 in second reading, providing for the freezing of payments on private mortgage and car loans, as well as the complete write-off of such debts. The procedure will apply to those Ukrainians whose property that had been purchased on credit was damaged or destroyed in the course of the war.

Between February 24 and November 1, 2022, 136,000 residential properties and 188,000 private cars were damaged by the hostilities, according to the KSE Institute. Thus, the adoption of this law will at least partially mitigate the damage from the loss of assets for the citizens who bought housing and cars on credit. Zeroing the debt burden is especially important given that the mechanism of compensation for property damaged and destroyed due to the war has not yet been approved legislatively.

Mind figured out how the provisions of the bill No. 7441-1 will be applied in practice.

Who is covered by the loan write-off mechanism? The procedure for suspending loan payments, as well as debt write-off, applies only to those borrowers who purchased residential real estate and cars for personal use.

"Temporary suspension of (loan. – Mind) payments and debt forgiveness applies exclusively to real estate – new real estate, apartments, other living quarters in a building, construction in progress, as well as to movable property in the form of cars," explains Oleksiy Kharitonov, ILF law company partner.

The legislator, instead, offers borrowers options for debt settlement on loans secured by real estate or a car that were damaged, destroyed or are located in the temporarily occupied territories. "The options to resolve the issue will depend on the situation with the collateral. This may be particularly a temporary suspension of paying the liability under the loan or cancellation of the debt", explains Roman Rizunov, managing partner of Sabadash, Rizunov and Partners Law Firm.

Suspension or write-off of a loan: what are the differences? All and any borrowers will be able to apply for the freezing of bank loans if their property purchased on credit falls into the above category and meets at least one of the following conditions:

• real estate / car damaged by hostilities;
• real estate / car was destroyed by hostilities;
• real estate / car left in the temporarily occupied territory.

"The borrower is exempted from mandatory payments under the consumer loan agreement from the working day following the day the lender receives the application, for a period up to the 90th day inclusive following the day of termination or cancellation of martial law in Ukraine or until the day of submission of supporting documents," Roman Rizunov clarifies.

• their real estate destroyed in the war;
• the purpose of the loan was to purchase, reconstruct or construct real estate;
• the loan housing was the only place of residence of the borrower's family as of February 23, 2022;
• the loan was repaid on time, and  the borrower had no overdue debt by February 23, 2022.

For the bank to cancel a car loan, the following conditions must be met:

• the car was destroyed in the war;
• the lending car  was the only vehicle in the borrower's family as of February 23, 2022;
• the debt under the loan agreement for the purchase of a car did not exceed seven days by February 23, 2022.

In other words, if the loan property was damaged, remained in the occupied territory or destroyed, but the borrower does not meet the necessary criteria (violated the terms of the mortgage agreement, his family has several cars), he will only be able to apply for a temporary suspension of loan payments.

How to get your loan freezed or written off : the procedure. To temporarily stop payments on a mortgage or car loan, the borrower must apply to the bank that issued the loan with a appropriate application. "The borrower can apply to the bank during the martial law and within three months from the date it is terminated or cancelled," says lawyer Vitaliy Shaptala.

The application must be accompanied by documents confirming the damage or destruction of the property. Such documents are provided to the lender in original or notarized copies. The loan payments will be suspended within three business days.

If the property is located in the temporarily occupied territory or the territory where active hostilities are ongoing, only an application is enough to begin with. Documents proving damage or destruction can be submitted to the bank afterwards, but no later than 90 days after the end of martial law. "If such evidence is not provided, the loan obligations are renewed under the terms of the agreement," warns Oleksiy Kharіtonov.

To completely cancel the loan, the borrower also submits an application to the bank. "The deadline for submitting applications (for writing off the loan. – Mind) is the period of martial law in Ukraine plus three months from the date of its termination," says Yaroslav Zhelezniak, First Deputy Chairman of the Verkhovna Rada Finance, Taxation and Customs Policy Committee.

Along with the application, the borrower submits documents confirming the compliance of the loan property with the required criteria and proving the fact of complete destruction of his dwelling or vehicle. "The bank must process the debtor's application within 10 days and forgive him the entire debt," Vitaliy Shaptala says.

For how long can the loan agreement be suspended? The freezing of payments under the loan agreement will last until the borrower receives reimbursement from the government in accordance with the law (which has not yet been adopted. – Mind) for property damaged or destroyed by hostilities. That is, there are no clear dates. Only when the state pays reimbursement to the borrower, the bank will be able to demand that the borrower resume loan payments.

What will happen to the forgiven loans? The lending bank decides to write off (cancel) the entire loan debt – the principal amount of the loan, interest, charges and other payments. After that, the borrower will have no liabilities to the bank.

The shortcomings of the approved regulations and risks for borrowers. As the lawyers say, the procedure for suspension of payments on loans is not regulated clearly enough, as well as their write-off. Therefore, borrowers who suffered from military aggression may face some challenges. Namely:

• the draft law does not contain a specific exhaustive list of documents to be submitted to the bank together with the application. This allows lenders to determine the list of documents at their own, which is fraught with refusal to suspend/write off the loan because "...one more paper is missing";
• the adopted draft law lacks a specific and transparent mechanism that allows confirming the fact of the location of the movable property (car) that was destroyed or damaged in the occupied territory. This, again, may become an argument for the bank to refuse to freeze or forgive the loan;
• even if the bank approves the termination of the loan agreement or its cancellation, the flaws in the described procedures give it the chance to later demand debt collection through the court, which threatens borrowers with protracted and costly lawsuits.

What else could be included/specified in the law? In Roman Rizunov's opinion, some provisions of the act have greatly limited the borrowers' rights to suspend or cancel the loan. Among such "limiting factors" he names the following:

People whose real estate requires current (rather than capital) repairs are deprived of the right to have their monetary obligation suspended, although such repairs may also require significant funds from the borrower's family budget. Also, the interests of borrowers who suffered losses from the robbery of their dwelling, being the collateral, during the occupation by the russian military, were not considered at all. "The solution to this issue could be the appointment of an examination of current repair costs of the collateral and the suspension of the loan for the amount of such repairs," the lawyer suggests.

The borrower was limited in cancellation of debt under the consumer loan agreement by the condition that the collateral must be the only place of residence of the borrower's family. At the same time, the borrower may have other housing, but unsuitable for his family (for example, a room in a shared apartment, ½ or ¼ of an apartment, etc.)

Meanwhile, there are legally defined social norms of living area per person, and in this case it would be wise to apply the norms used for issuing soft loans at 3% or 7% (one person can pretend to buy a maximum of 52.5 sq. m. of housing. This limit can be increased by 21 sq. m. for each family member). That is, the borrower should not have other housing that would exceed these norms.

The condition for cancelling car loans is the absence of other cars in the borrower's family. However, it would be reasonable to proceed from the cost of such cars or the purpose of their use (one car is personal, the other is commercial for business, cargo transportation, etc.)

The legislator has determined the possibility of only cancelling the loan for the car in case of its complete destruction. However, there is no provision that would stop (as with real estate) paying money liabilities if the car was damaged by hostilities. "At the same time, repairing the car at their own expense is also an additional burden on the people who have already suffered from the war. The solution is again to assess the damage caused or provide documents confirming the cost of the car's full renovation and suspend the payment obligation for this amount," Roman Rizunov recommends.