The Saeima approved the insolvency bill with President Zatlers' requested revisions. Photo by the Saeima Chancellery.

RIGA — A law that will reform Latvia’s harsh bankruptcy laws, lessening the effects of insolvency on individuals was passed in the Saeima on Monday.

Citizens who had borrowed money they couldn’t afford to pay back found themselves up to their necks in repayments and debt after the crisis hit the country in 2008. The Insolvency Law, which comes into effect on Nov. 1 is a small reprieve for snowed-under Latvians who are looking to start again.

The law allows scheduling of debt write-offs for individuals that will depend on the person’s income and debt levels during the insolvency procedure. It means a way out for many who took out loans on hideously overpriced pieces of real estate whose value has since collapsed.

Latvian banks are not happy with the new law, arguing that it will prolong the credit crisis in the fledgling economy by making loans more risky for lenders.

“The new insolvency law significantly strengthens the position of debtors relative to creditors and basically means that debtors are only liable to pay back what the market value of the collateral is rather than the actual loan,” Danske Bank said in a statement to the press. “This is obviously bad news and quite negative for the Latvian banking sector. In that regard it should be noted that overdue loans in Latvia by the end of June rose to 28.6 percent of all loans. The credit crisis is hence far from over in Latvia.”

The law means that if the loan is simply too big for a debtor to pay off, it will be expunged and the banks will have to absorb the losses. Though it may be a relief to individuals in the short term, it will be harder to get loans in future.

In the case a borrower’s income being enough to cover at least 50 percent of total liabilities remaining after the bankruptcy procedure — in most cases the sale of a mortgaged property — the person’s liabilities will be written off after a year.

The law also says that if a borrower is unable, for reasons beyond their control, to pay the remaining debts, but the borrower’s income is sufficient to cover at least 35 percent of their total liabilities after the bankruptcy procedure, the borrower will be given two years to settle their liabilities.

After declaring bankruptcy, debtors that can cover at least 20 percent of their liabilities will be given three years to settle their remaining debts.

For small debts under 100,000 lats (€143,000), an insolvent person will have one-third of their income taken to cover their liabilities. The lowest earners will have to pay the minimum amount of one third of the minimum monthly wage, even if they don’t earn that much.

Banks will need to cover their own administration fees too as the law allows insolvent parties to just pay the principal amount of the loan as well as interest calculated from the day they declared insolvency. The interest on this part of the loan is capped at 6 percent, however. Any other fees must be waived.

Earlier in the year, President Valdis Zatlers vetoed the law, which was passed on June 17 because it didn’t distinguish between people who had taken loans for their own and only property, where they live, and for people who took loans for investment properties.

The law was passed with support from both sides. Ninety votes sealed the bills change into law.

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