Treatment of penalty interest during debt moratorium
On 8 March 2018, the Supreme Court confirmed the Debtors' Ombudsman’s interpretation that creditors are not authorised to charge penalty interest on claims during the period when an individual’s payments are temporarily deferred (called moratorium) in connection with debt mitigation.
The summary of the Supreme Court judgment in Case no. 159/2017 reads as follows:
K demanded that it be acknowledged that A hf. had been unauthorised to demand payment of penalty interest on two mortgage loans due to arrears during the period when K was protected by deferral of payments pursuant to Article 11, Paragraph 1 of the Act on Debt Mitigation for Individuals, no. 101/2010. In the Supreme Court judgment, it emerged that pursuant to Article 11, Paragraph 1, Item (a) of Act no. 101/2010, creditors are prohibited from demanding or accepting payment on their claims during a moratorium on payment. Furthermore, pursuant to Article 7 of the Act on Interest and Price Indexation, no. 38/2001, penalty interest shall not be calculated on claims during the period of arrears if, for legitimate reasons, the debtor withheld payment or a portion of it. This was considered to apply to K’s situation during the period in question. It also emerged that because a claim for penalty interest could only be sustained on the basis of legal authorisations, the legislature could, by the same token, subject such authorisations to the restrictions specified in the aforementioned Article 7, and that such an arrangement would not violate Article 72 of the Constitution. K’s claim was therefore granted.
What follows from the Court judgment?
It follows from the Court judgment and Article 11 of the Act on Debt Mitigation for Individuals that it is only permissible to charge regular interest on claims during the moratorium period.
In cases involving moratorium that ended without a debt mitigation agreement (for example, due to withdrawal or rejection of the application, or to revocation of the authorisation for debt mitigation), many creditors and collections entities acting on their behalf charged penalty interest for the period when moratorium was in effect once collection of claims began again. It should be noted that according to information from Íslandsbanki and Borgun, these two companies generally did not charge penalty interest for the moratorium period. The possibility cannot be entirely excluded, however; therefore, the debtor must contact the company in question if there is a suspicion that penalty interest was charged.
The Office encourages individuals to check on whether they may have paid penalty interest during this period and whether they are entitled to reimbursement. They should also try to determine whether there is a need to correct the outstanding amount of the claims concerned.
Where shall I direct queries and communications about settlement?
Queries and communications about settlement and the status of claims should be sent to the creditor in question, and the Office does not act as an intermediary in such communications.
Arion Bank and Landsbankinn have set up dedicated e-mail addresses for such communications:
In general, creditors have not charged penalty interest for the moratorium period if the case concluded with a debt mitigation agreement. It should be noted, however, that penalty interest was generally charged on property taxes, residents’ association fees, and fire insurance (so-called statutory liens) during moratorium, irrespective of whether or not the debtor’s case concluded with a debt mitigation agreement. (According to information from the Municipality of Kópavogur, penalty interest was generally not levied on property taxes during the moratorium period.)
In this context, individuals are encouraged to obtain further information from the City of Reykjavík or other municipalities, or from other holders of statutory liens. If creditors other than those listed above have charged penalty interest on claims during the payment moratorium period despite a debt mitigation agreement, a query should be directed to the creditor in question.
For further information from the City of Reykjavík: endurgreidsla@reykjavik.is