Debt mitigation

What is debt mitigation?

• A measure for individuals experiencing serious payment and debt problems.
• The measure entails voluntary agreements made between individuals and their creditors with the assistance of the Office of the Debtors' Ombudsman.
• It is important that the applicant participate actively in the process while the application is pending.

The following debts are not included in debt mitigation agreements:

• Debt due to alimony or child support.
•  Debt due to student loans (it is possible to negotiate deferred payment alongside a debt mitigation agreement).
• Debt due to fines, value-added tax, etc.
• Debt accruing after the application for debt mitigation has been approved.

For whom is debt mitigation?

• Debt mitigation can be appropriate for individuals who can demonstrate that they will be unable to honour their financial commitments for the foreseeable future.
• The applicant must satisfy certain requirements that are laid down in the Act on Debt Mitigation for Individuals.
• Our advisors can help determine whether debt mitigation is appropriate.

How do I apply?

•  Applications for assistance in financial difficulties are filed electronically, using an e-ID or an Íslykill.
• When the application has been filed, the Debtors' Ombudsman obtains information on the applicant’s income, assets, and liabilities, and then decides, in consultation with the applicant, what steps to take next.
• Married or cohabiting couples may apply jointly.

What happens before an application for debt mitigation is approved?

• The application is reviewed, and requests are made for all information that is needed to provide a clear view of the applicant’s financial position.
• The applicant must satisfy certain legal requirements in order for the application to be approved.
• When the application is evaluated, a thorough review of the applicant's finances is carried out, including assets, income, and liabilities over the last four years, at least.
• The applicant must have filed their last four income tax returns.
• A determination must be made of whether the applicant will have access to funds other than earned income that they can use to pay debts; i.e., the proceeds of asset sales or funds contributed by others.
• The Debtors' Ombudsman verifies the applicant’s income, according to official data and activity (total deposits) on the applicant’s bank accounts.
• If there is a discrepancy between bank account activity and income according to official data, the applicant must provide an explanation.
•  Living expenses are estimated using the Office’s cost-of-living references and information from the applicant on other expenses. It is necessary that the application include documents confirming the information provided, including rent, costs relating to running the home, and other monthly expenses.
• If there is any doubt about whether the applicant satisfies the requirements for debt mitigation, the applicant is sent a letter or e-mail inviting them to provide explanations and submit data by a specified deadline.

What happens when the application is approved?

• When it has been established that it is possible to approve the application, the applicant is contacted by telephone if possible, and the debt mitigation process, debt moratorium and the applicant’s obligations during moratorium, the possible outcomes of a debt mitigation agreement, etc., are discussed. If the applicant owns assets, the requirements that must be satisfied in order for the applicant to exclude the assets in question from debt mitigation are also discussed. If it is foreseeable that assets must be sold as part of the debt mitigation process, the applicant is informed of this.
• Then the applicant is sent an e-mail containing important information on the debt mitigation process and the next steps in their case. If the applicant wishes to continue, a decision is made to approve the application, and it is sent by e-mail, together with information on debt moratorium.
• When the Debtors' Ombudsman has approved an application for debt mitigation, a supervisor is appointed to oversee the case. The supervisor may be a lawyer employed by the Office or a lawyer that the Office engages for the project.

Debt mitigation does not include the following:

• General legal advice or assistance with matters falling under civil law.
• Forgiveness of the applicant’s entire debts.
• Assistance with filing income tax returns and/or guidance on tax matters.
• Receipt of funds from the applicant for delivery to creditors.
• Advice on cases involving compensatory damages.