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Debt protection act – creditors' fears coming true? On 5 April 2011, the Estonian Debt Restructuring and Debt Protection Act (DPA) (Est: võlgade ümberkujundamise ja võlakaitse seadus) will come into force in spite of the comprehensive resistance it met last year.

The need for such an act arose due to the crisis, or to be more exact, the need to avoid a new crisis in the future. As this law applies to all natural persons, it is of crucial importance to be aware of how the amendments will change the possibilities to protect creditors' interests when giving loans or making investments in Estonia.

Kaimo Räppo and Kaido Künnapas at MAQS Law Firm, Tallinn, make an analysis of the new act:

The DPA stipulates new court proceedings which allows a natural person (the debtor) having solvency problems to restructure his or her debts by extending the deadline for performing the obligations, allowing repayment by installments or by reducing the obligations. The general idea of such "re-socializing" proceeding can be found in the American Chapter 11 mixed with a European "debt plan" ideology. Although the proceeding is similar to the debt restructuring treatment for legal persons, this can be seen as more favourable to the debtors. The court holds the key role – it is decided by the judge if proceedings are to be initiated or not, taking into account a debt restructuring plan and the prior behavior of the debtor. An advisor can be also be assigned under the court's discretion.

It must be noted that it is possible to restructure also debts that have arisen before the DPA came into force.

How should the creditor (banks and investment companies) act before and after proceedings have been initiated?

It will be essential for creditors to draw more attention to the securities as the debt restructuring proceeding does not restrain the creditor's rights to realize the security (for example a mortgage). Furthermore, approval of a restructuring plan will not release the person bearing joint liability for the debtor's obligation from performing his or her obligations.

Therefore, it is highly recommended to secure a loan with a pledge and/or with joint liability. To put it simple, it is advisable to involve a third party who is severally liable to the debtor and is obliged to fulfill the same obligations as the debtor (that is to pay back all the money lent and on time).

Pledges are always a safer way to go. However, according to the amendments of the Estonian Law of Property Act (Est: asjaõigusseadus), a credit institution cannot request an additional security or a partial repayment of the debt just because the value of immovable property decreases due to the changing property market situation, if the immovable property serves as the residence of the natural person being the debtor. This is a buffer regulation for protecting consumers from additional demands from the banks in a time of financial crisis.

The banks need to inform themselves about the new debt restructuring proceedings. For instance, the right of presenting an opinion and the possibility to draw the court's attention to circumstances under which it is not allowed to start restructuring proceedings, is granted to the creditor. A creditor can submit arguments to the court under which the threat of insolvency can be overcome by other means, such as selling the property, or that it is unlikely to successfully perform the restructuring plan. This can be done by referring to the debtor's solvency situation over the previous three years, or the debtor's inability to have a sustainable income based on age, profession and/or education.

When starting proceedings, the court will provide the creditors with a debtor's plan. The creditors have the right to state their position on whether they accept the value of the claims and securities, to confirm the data on the debtor's property and agree with the method of restructuring debts, or not. If a creditor does not agree with the debt restructuring measures petitioned for by the debtor, then the creditor shall let the court know whether it would agree to other debt restructuring measures. It must be noted that it is not possible to reduce a claim if it has arisen from a willful and unlawful act of the debtor.

In conclusion, if the creditors demand sufficient pledges or other security, involve jointly liable third parties and are ready to agree on additional payment schedules, the DPA should not significantly change the position of the creditors. However, the idea with this law is that it should motivate the banks and other credit institutions to review their lending policies to prevent a crisis similar to the one we just experienced.

Kaimo Räppo
Vandeadvokaat (member of the Estonian Bar Association)
MAQS Law Firm Advokaadibüroo in Tallinn
Tel: (+372) 667 6450
E-mail: kaimo.rappo[at]

Kaido Künnapas
MAQS Law Firm Advokaadibüroo in Tallinn
Tel: (+372) 667 6456
E-mail: kaido.kunnapas[at]