7 – Mastering Debt Collection in Hungary

Mastering Debt Collection in Hungary: Proven Strategies for Quick and Secure Recovery

Debt collection in Hungary is a strictly regulated legal process that enables creditors to recover debts owed by debtors. This document provides a detailed overview of the legal framework for debt collection, the various methods of enforcement, and best practices for successful debt recovery.

1. Legal Framework for Debt Collection in Hungary

Debt collection in Hungary is governed by several laws, which ensure the protection of both creditors’ and debtors’ rights:

1.1. The Civil Code (Act V of 2013)

The Civil Code regulates contractual relationships, including payment obligations and the enforcement of claims. It defines the ways in which claims can arise, the statute of limitations (generally 5 years), and the circumstances under which a claim can be legally enforced. The proper formulation of contracts, the setting of payment deadlines, and the determination of legal actions in case of breach are crucial in the relationship between the debtor and creditor.

1.2. Act LIII of 1994 on Judicial Enforcement

This law regulates enforcement procedures, through which a creditor can seize and liquidate a debtor’s assets based on a final court decision or a payment order issued by a notary. It details various enforcement actions, the powers of bailiffs, and the measures creditors can take to secure payment, including:

• Wage garnishment,
• Seizure of real estate or movable property,
• Bank account freezing,
• Forced sale.

The law also ensures debtor protection, such as limiting the amount of income that can be garnished and providing certain appeal options for debtors.

1.3. Civil Procedure Code (Act CXXX of 2016)
This law defines the civil and non-civil procedures for enforcing claims. Two main types of legal proceedings are distinguished:

• Payment Order Procedure: An expedited non-litigious procedure managed by a notary, suitable for claims where the debtor does not dispute the debt.
• Litigious Procedure: If the debtor contests the claim, the creditor must initiate a civil lawsuit. This process is longer and more costly, involving court hearings and evidence submission.
  The law regulates the procedure, the conditions for enforcing claims, and the rights and obligations of the parties involved.

1.4. Act CLIX of 2012 on Debt Collection Activities
This law defines the framework for debt collection companies in Hungary. Debt collection companies are financial institutions or service providers that enforce claims on behalf of creditors or pursue claims they have purchased. The law includes provisions such as:

• Licensing requirements: Debt collection activities in Hungary are subject to notification or licensing by the Hungarian National Bank (MNB).
• Debtor protection: Debt collectors are prohibited from using coercive or unethical collection methods, such as threats or misleading communications.
• Transparency of contract terms: Debt collectors must clearly inform debtors about the legal basis of the debt, the due amount, and their legal options.
• Regulatory oversight: The MNB and other authorities regularly monitor debt collection companies to ensure compliance with legal standards.

The goal of the law is to balance the protection of creditors’ legitimate interests with fair treatment of debtors, while minimizing abuses in the debt collection sector.

2. The Debt Collection Process

The debt collection process can be divided into several stages aimed at ensuring the debtor meets their payment obligations. These stages include amicable collection, legal action, and enforcement procedures.

2.1. Amicable Collection (Pre-litigation Phase)

Before legal action is taken, it is advisable to attempt debt recovery amicably, which can be a quicker and more cost-effective solution. The goal of this phase is to ensure the debtor fulfills their obligations without court proceedings.
Steps in the amicable collection phase include:

• Sending reminder letters – Official notification of the debt is sent to the debtor. The reminder includes the amount owed, the payment deadline, and the potential legal consequences. The reminder can be sent by post, email, or SMS.
• Mediation and negotiation – There is an opportunity to reschedule the debt or agree on installment payments. A mutual agreement between the debtor and creditor can help with partial repayments.
• Involving debt collection companies – In some cases, a third party, such as a debt collection company, can assist. These companies have experience in debt recovery and work within legal frameworks.

2.2. Legal Collection (Litigation)

If the initial negotiations fail, legal action becomes necessary. In this phase, the claim is enforced through legal means.

• Payment Order Procedure
  • Managed by the Hungarian National Chamber of Notaries (MOKK).
  • A simplified method for debt recovery, applicable for claims up to 3 million HUF.
  • If the debtor does not contest the claim within 15 days, the procedure becomes final and enforceable.

• Litigious Procedure
  • If the debtor contests the claim or if the debt exceeds 3 million HUF, a civil lawsuit is initiated.
  • The court holds hearings where evidence is presented.
  • A final judgment is made, which can be enforced if the debtor does not settle their obligations.

2.3. Enforcement Procedure

If the debtor still fails to pay after a court decision or payment order, the enforcement procedure can begin. The following methods may be applied during enforcement:

• Involvement of a court bailiff – The court appoints an official bailiff to manage the debt recovery.
• Garnishment of wages – The bailiff can automatically deduct the debt from the debtor’s wages.
• Seizure of property – The debtor’s assets can be seized and auctioned to cover the debt.
• Bank account freezing – The bailiff can initiate direct deductions from the debtor’s bank account.

3. Statutes of Limitations and Deadlines

General Statute of Limitations

In Hungarian law, the general statute of limitations for enforcing a claim is 5 years. This means that a claim must be enforced within this period, starting from when the debt becomes due.

Special Statutes of Limitations

In some cases, the law establishes shorter statute of limitations. For example, utility bills have a statute of limitations of 2 years. It is important to note that special statutes of limitations are always shorter than the general 5-year period.

Suspension of Statute of Limitations

The statute of limitations can be interrupted, meaning that the time already passed does not count, and the period resets. The most common cause of interruption is the initiation of litigation. If the creditor files a lawsuit against the debtor, the statute of limitations is interrupted and restarts after the court procedure concludes.

Effects of Statute of Limitations

The expiration of the statute of limitations does not mean that the claim no longer exists. It simply means that the claim cannot be enforced in court. However, if the debtor voluntarily pays an expired claim, it is not considered unjust enrichment.

4. Debt Collection for Foreign Creditors in Hungary

Foreign creditors also have the option to enforce their claims in Hungary. They can choose from several methods, which are outlined below:

• Hiring Local Lawyers or Debt Collection Companies
  The most straightforward solution for foreign creditors is to hire a Hungarian lawyer or debt collection company. They have the necessary legal expertise and local experience to effectively represent the creditor’s interests.
  Advantages include expertise: Lawyers and debt collectors are familiar with the Hungarian legal environment and can handle claims efficiently. They know local practices, which can be beneficial in the debt collection process. This option saves time and effort for the creditor, who does not have to deal with the debt collection process themselves.
  However, the downside is the cost, as legal or collection fees can be significant.

• European Payment Order
  The European Payment Order (EPO) is an efficient tool for cross-border debt collection within the EU. It is a quick and simple procedure that allows creditors to enforce claims without needing to appear in court.
  Advantages include speed: The EPO process is generally faster than traditional court proceedings. It is also simple and formal, making it easier for creditors to submit their claims. Furthermore, it is cost-effective compared to traditional litigation.
  Limitations include: The EPO procedure can only be applied to certain claims, and if the debtor contests the claim, the case will be transferred to traditional court proceedings.

5. Execution of Foreign Judgments in Hungary

If a foreign creditor already has a foreign court judgment, it can be enforced in Hungary. The creditor must seek recognition of the foreign judgment from a Hungarian court and initiate an enforcement procedure.
Advantages include legal certainty: Recognizing a foreign judgment provides legal certainty for the creditor.
Disadvantages include the time-consuming process of recognition and enforcement, which may take longer compared to domestic procedures.

Additional Important Information

• Legal Harmonization: In the EU, legal harmonization facilitates cross-border debt collection.
• International Agreements: Hungary has signed several international agreements related to debt collection, making it easier for foreign creditors to enforce their claims.
• Expert Assistance: Foreign creditors are advised to seek expert assistance during the debt collection process.

6. Effective Debt Collection Strategies

• Well-drafted contracts and invoicing systems.
• Timely reminders and notices.
• Involving professional debt collectors or legal advisors.
• Strict adherence to applicable laws.

Conclusion

Debt collection in Hungary is a well-regulated process that involves pre-litigation, litigation, and enforcement stages. By adhering to the proper legal framework and employing effective collection strategies, creditors can significantly increase their chances of successfully recovering debts.

How debt collection works at FirmaX Hungary? 

At FirmaX Hungary, debt collection services are structured around the legal framework in Hungary and the company’s expertise in managing financial and legal matters for international clients. Here’s an overview of how the debt collection process works at FirmaX Hungary:

1. Initial Assessment

When a client (creditor) contacts FirmaX Hungary for debt collection, the first step is a thorough assessment of the debt. This includes:

Reviewing the details of the debt, including the amount owed, the debtor’s identity, and the nature of the agreement.

Determining the type of debt (e.g., commercial, contractual, etc.) and whether there is a valid legal claim.

Analyzing the debtor’s payment history and financial situation (if available).

2. Pre-Litigation Phase (Amicable Collection)

FirmaX Hungary strives to resolve debts without resorting to court action. In this phase:

Formal Reminder Letters: FirmaX Hungary sends official reminder letters to the debtor, outlining the outstanding debt and requesting immediate payment.

Negotiations: FirmaX Hungary’s experts engage in negotiations with the debtor to discuss payment arrangements, such as installment plans or partial payments, aiming to reach an amicable resolution.

Debt Collection Agreements: If an agreement is reached, FirmaX Hungary drafts clear and legally binding agreements to formalize the repayment plan.

3. Legal Action (Litigation)

If the debtor fails to respond to the amicable collection phase, FirmaX Hungary can initiate legal action:

Payment Order: FirmaX Hungary may initiate the Payment Order Procedure through a notary (if applicable), which is a quicker, non-litigious way of recovering debts.

Litigious Procedure: If the debt is contested, or the Payment Order Procedure is not applicable, FirmaX Hungary can file a lawsuit on behalf of the creditor. This involves presenting evidence in court to obtain a judgment.

4. Enforcement

If the debtor still fails to pay after a court decision or payment order, FirmaX Hungary can proceed with enforcement:

Court Bailiff: FirmaX Hungary coordinates with a bailiff to enforce the court judgment. The bailiff can carry out actions such as freezing the debtor’s bank accounts, garnishing wages, or seizing property.

Asset Seizure and Auction: If necessary, FirmaX Hungary can arrange for the seizure and auction of the debtor’s assets to recover the debt.

5. Foreign Debt Collection

For international clients, FirmaX Hungary offers debt collection services for foreign creditors with debtors located in Hungary:

Legal Representation: FirmaX Hungary acts as a legal representative for foreign creditors, navigating the Hungarian legal system on their behalf.

European Payment Order: For EU-based creditors, FirmaX Hungary utilizes the European Payment Order (EPO) procedure, which facilitates cross-border debt collection within the EU.

International Agreements: FirmaX Hungary also handles the recognition and enforcement of foreign judgments in Hungary, ensuring that international creditors can recover debts efficiently.

6. Ongoing Client Communication and Reporting

FirmaX Hungary maintains regular communication with the client throughout the entire debt collection process. Clients are kept informed of the progress, any responses from the debtor, and all legal steps taken. This transparency ensures that clients are always aware of the status of their claims.

7. Tailored Solutions

FirmaX Hungary understands that each debt case is unique. Therefore, the team tailors solutions based on the specific needs and circumstances of the client. Whether it’s a high-value commercial debt or a smaller, personal debt, FirmaX Hungary approaches each case with a custom strategy to maximize recovery.