Relief for debtors related to COVID-19
In order to mitigate the negative consequences of the outbreak of COVID-19, the legislators have adopted further measures aimed to protect the weaker parties to selected contractual relations. This newsletter focuses on temporary changes in credit relations published in the Collection of Laws on 17th April 2020.
Instalment deferral on loans and credits
In order to make it easier for debtors to cope with the difficult situation linked to COVID-19, the legislators have guaranteed the right to defer or modify loan instalments. Debtors are entitled to notify the creditors in writing of temporary deferral on loans and credits (moratorium on credit repayment), by three months (until 31 July 2020) or by six months (until 31 October 2020). Debtors may request deferrals of instalments on a voluntary basis, the request being not subject to any charges and not resulting in any negative entry in a register.
Debt payment deferral applies to consumer and business credits agreed and used before 26 March 2020 and to mortgages agreed before 26 March 2020. The possibility of postponing the payment of instalments shall not be applicable to other types of loans and credits.
In particular, the moratorium does not apply to credit agreements concluded after this date, credit cards, overdraft credits, revolving credits, operating leasing or credits related to capital market transactions. Furthermore, no payment deferral is possible if the debtor was in delay for more than 30 days on 26 March 2020.
Debt payment deferral (“period of protection”) applies to the principal, and, in the case of natural persons, also to the interest. During the period of protection, the creditor continues to have the right to the interest. Entrepreneurs shall pay the interest in the agreed amount. With consumer credits, there is an interest rate cap amounting to the repo rate announced by the Czech National Bank, increased by 8 percentage points. As the current amount of the repo rate is 1 % p.a., the amount of consumer credit interest should not exceed 9 % p.a.
During the period of protection, legal entities shall refrain from disposing of their property that could serve to satisfy creditors.
Amendment to the Customer Credit Act
As already mentioned, the position of debtors in connection with the COVID-19 pandemic will be also strengthened by the Customer Credit Act.
Under the previously applicable wording of the Act, there is a cap on penalties for late payments. Henceforth, a special provision has been added to govern cases where debtors are in a delay exceeding 90 days. In such cases, the creditor is only entitled to receive interest corresponding to the repo rate announced by the Czech National Bank, increased by 8 percentage points (see above) unless a lower interest was agreed. Creditors should not require any further penalties.
This provision is applicable not only to consumers but, from now on, to any natural persons, i.e. also to self-employed people who use the credit to fund their businesses. With private individuals, the total maximum amount of contractual penalties should not exceed CZK 200,000 or one half of the principal; for individuals engaged in business, the contractual penalty is capped at half of the principal.