Debts of the natural person: The unsatisfied liabilities of the natural person in insolvency proceedings and a practical advice for those of you who are in this situation.

When a company enters into insolvency, bankruptcy or whatever this process is called in each country, the company is extinguished. And with the company, the liabilities, the debts, are also extinguished. But what happens with natural persons? A judge cannot extinguish the individuals with a judicial resolution. But he can extinguish their debts, their unsatisfied liabilities. Is there really a second chance for natural persons, for sole proprietors, for self-employed persons, for the “autonómos”?

1.      The second chance law in Spain

In 2015, when it seemed that economic growth was beginning to consolidate, the second chance law was enacted. This Law focused on allowing individuals with economic failure to have the possibility of getting their personal and professional life back on track. The legislator intended to encourage new economic activities, after a business or personal economic failure.

2.      The second chance mechanism and its conditions

In general, the law establishes that the natural person debtor can obtain the BEPI by meeting certain objective and subjective requirements.

The objective target establishes the mechanism from which the BEPI can be requested, in particular:

• Once the non-exonerable credits have been satisfied. Such as the credits against the mass and the credits qualified as privileged, or
• In the event of impossibility  to meet the non dischargeable credits to adopt a payment plan. Such plan will be for 5 years and to satisfy such credits.

However, the individual debtor must meet a subjective requirement, linked to the debtor’s good faith. Specifically, the debtor is considered to be in good faith when it meets the following requirements:

• He has not been found guilty.
• It has not been condemned by a crime against the patrimony, the socioeconomic order, of documentary falseness or against the public administrations. And this, in the last 10 years.

Si te ha interesado este artículo no dudes en leer:

The Agreement with Creditors in the Bankruptcy Procedure

The agreement between the debtor and its creditors modifies the circumstances of the credits subjected to the Bankruptcy Procedure. This agreement, if fulfilled, is a way of ending a Bankruptcy Procedure.

3.      Public law credits and the second chance law

As mentioned above, the Second Chance Law establishes the BEPI through two mechanisms. The first one, when the mass and privileged credits have been satisfied during the insolvency proceedings. The second, when it has not been possible to satisfy them, and it is necessary to subscribe a payment plan to satisfy them. These two situations, which a priori appear to be the same, have generated, due to the wording of the law, discrepancies in their interpretation. Discrepancies mainly in the enforceability of the payment of public law credits.

Public law receivables are generally classified as privileged receivables. However, not in their entirety, but only for fifty percent of their amount. Certain public law claims are also classified as subordinate. This is the case of penalties, surcharges, etc.

Public law claims are among those claims that the debtor as a natural person must satisfy in order to benefit from the BEPI. Initially, the law presented differences in the payment of these credits. And this, depending on whether or not the debtor could have satisfied the minimum threshold of claims. That is to say, if the debtor was eligible for the BEPI due to the payment of the debts or if he/she had to subscribe a plan to satisfy them.

The difference was that, if a payment plan was signed, no public law claims would be exonerated. Under the first mechanism, it was only necessary to pay privileged public law claims.

However, the new wording of the provision in the revised text of the Insolvency Act leaves no doubt. There is an absolute shielding of public law credits.

Any individual wishing to avail himself of the BEPI will have to pay public law claims.

4. When can the BEPI be requested?

The BEPI is requested once the Order of Conclusion of the bankruptcy has been issued. That is to say, once the resolution that puts an end to the bankruptcy proceedings has been obtained. It is necessary that the insolvency proceeding has been concluded, obviously, due to insufficient assets or liquidation.

The insufficiency of the insolvency Estate is, most frequently, the cause for which the vast majority of insolvency proceedings in Spain are terminated. The lack of mass implies that the assets of the insolvent party are not sufficient to satisfy the debts incurred. In other words, its assets are not sufficient to pay all creditors.

The insolvency law allows insolvency proceedings to be concluded due to lack of assets, as long as the qualification piece is not being processed. And obviously, as long as it is not foreseeable to file actions for reinstatement or third party liability.

The insufficiency of the estate does not require that the insolvent party has no assets, but rather that the assets do not have sufficient market value. Thus, it is possible to conclude an insolvency proceeding when the insolvent party holds title to certain assets, for example, assets that are unseizable or whose realization cost is higher than their market value.

Likewise, the Judge, valuing the assets of an insolvent party, may agree on the declaration and conclusion of the insolvency proceeding in the same act. It is not necessary to appoint an insolvency administrator, since the insolvency proceeding has not been opened. In this case, the insolvent party may also request the BEPI.

Conclusions

Can a natural person really be exonerated from his debts? Yes, it can, through the second chance mechanism. The individual must file for insolvency proceedings. If his or her assets are not sufficient to satisfy the debts, and the insolvency proceeding is concluded, he or she may apply for the BEPI. It is necessary that the insolvency proceeding has not been classified as guilty and that he/she has acted in good faith. However, it is important to remember that the exoneration will not, in any case, affect public law credits. That is to say, the credits that the debtor has with the AEAT (State Tax Agency) or the TGSS (General Social Security Treasury), among others, must be satisfied.  Either with his assets, or by means of a payment agreement, once the insolvency proceedings are concluded.

A piece of advice, if you have unpaid debts that do not allow you to develop your professional activity, consider filing for insolvency proceedings. There is a second chance, you just have to know how to get it.

If this article has been of interest, we also suggest you to read the following article published on our website: List of Payments of the Bankruptcy Credits.