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Individual Bankruptcy: is there really a right to a second chance?

Royal Decree 1/2015, which regulates the so called “second chance”, makes a change to the Bankruptcy Law of 2003, regarding individual bankruptcy, which, while recognized by Spanish law, was little used because of its complexity and difficulty. As a starting point, it is necessary to note that it is possible that both legal persons, ie companies, and individuals be declared bankrupt, depending the procedure in this last case on whether the individual in question is an employer or a consumer.

The amendment to the Bankruptcy Act includes, regarding individuals, the benefit of exoneration, which is known as the “second chance”. However, the use of this right is subject to several conditions:

  1. Procedural situation: the bankruptcy procedure must be concluded, either because of insufficient assets or because of having reached the liquidation phase, (considering that the qualification phase begins once the common phase has finished, having been determined both the assets and the debts).
  2. The debtor must apply for exemption from unsatisfied debts, within the allegations deadline and prior to the conclusion of the bankruptcy procedure.
  3. That the debtor is acting in good faith.

The criterion GOOD FAITH is the most complex in practice, and it will be necessary that the following basic conditions be met:

1.º That the bankruptcy has not been classified as “culpable”.

2.º That the debtor has not been convicted of crimes against property, against the economy, forgery, against the Treasury and the Social Security or the rights of workers in the 10 years prior to the insolvency. If there are pending criminal proceedings, the bankruptcy judge shall suspend the decision regarding the exemption from liability until there is a final criminal judgment.

3.º That, the requirements of article 231 having been met, the parties have concluded or at least tried to conclude an out-of-court settlement of payments.

In addition to the above, it is necessary for one of the following alternative conditions to be met:

That the credits against the mass have been completely paid, and the privileged bankruptcy credits and, if no previous out-of-court settlement had been attempted, at least 25 percent of the amount of the ordinary bankruptcy credits, or, failing that, any of the following:

  • That he agrees to the payment schedule set out in paragraph 6.
  • That the collaboration obligations with the Bankruptcy Administration have not been breached.
  • That he has not obtained this benefit within the last ten years.
  • That he has not rejected an appropriate job within four years prior to the bankruptcy declaration.
  • That he expressly accepts, in the application for exemption from unsatisfied debts, that the fact of having obtained this benefit shall be recorded in the special section of the Bankruptcy Public Registry with the possibility of public access over a period of five years

Even in the case of meeting the first three basic circumstances and being able to claim one or more of the alternative circumstances; the solutions proposed by the Bankruptcy Act reform for alternative circumstances pose tremendous difficulties in terms of proof. If one agrees to a payment plan, it would not be a real exemption, but an extension of the deadline. Also, it is necessary that case law develop the requirement of not having rejected a job suited to their capacity, since it is unenforceable if it remains the way it is drafted.

Finally, the amendment also includes a possibility for creditors to withdraw the benefit of exemption from debts when the debtor improve his financial situation in the next five years.

We understand from the foregoing that the right of exemption is largely curtailed by a complex legislative technique and case law will have to determine exactly to what extent it may be applied.

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