Second Chance Act. The mechanism for overcoming insolvency.

The Second Chance Act: a way to prevent the debtor’s ‘civil death’

The Second Chance Act, amended in 2022 as part of the new consolidated version of the Insolvency Act, has simplified and streamlined the procedures for private individuals and the self-employed seeking to resolve a situation of insolvency. This legislation allows debts to be written off, preventing the debtor from being effectively ‘civilly dead’ and promoting a fair and viable solution for both debtors and their creditors. Here we explain how this mechanism works.

What is the Second Chance Act?

The Second Chance Act is a legal procedure designed to grant a a fresh financial start to individuals who, due to unforeseen circumstances, are unable to meet their debts. Its purpose is to prevent the debtor from being effectively excluded from society and to reintegrate them into the economy by allowing for the full or partial cancellation of outstanding obligations.

Thanks to the 2022 reform, the procedure is now more accessible, as it has eliminated unnecessary steps and been adapted to current economic realities.

Who is eligible for this scheme?

To be eligible for the Second Chance Act, you must meet the following basic requirements:

Commitment to restructuring: Whilst the attempt by a Out-of-Court Settlement Agreement (AEP) It is no longer mandatory; the law gives priority to whether the debtor has acted reasonably to avoid insolvency or minimise its impact.

1. Actual insolvency: The debtor must demonstrate that they are unable to meet their debt repayments on a sustainable basis.
2. To act in good faith:
   • Not to have been found guilty in a previous competition.
   • Not to have committed any socio-economic offences.
   • Cooperate with the procedure by providing full and accurate information about your financial situation.
3. Commitment to restructuring: Whilst the attempt by a Out-of-Court Settlement Agreement (AEP) It is no longer mandatory; the law gives priority to whether the debtor has acted reasonably to avoid insolvency or minimise its impact.

Stages of the Procedure: A Simplified Guide

The procedure consists of two main stages: insolvency proceedings y Application for the Benefit of Exemption from Unsatisfied Liabilities (BEPI).

1. Simplified insolvency proceedings

The debtor must file for insolvency proceedings, which, in cases of personal insolvency, are dealt with under the special procedure for individuals. This is carried out as follows:

• An analysis of the debtor’s assets.
• The realisation of available assets, whilst respecting exempt assets such as the minimum wage, the main residence or even a personal vehicle, subject to certain limits.

2. Discharge of Unsatisfied Liabilities (EPI)

The EPI is central to this procedure, as it enables the remaining debts to be written off once the insolvency proceedings have concluded. There are three main types:

• With the realisation of assets: If the debtor is unable to meet the terms of a repayment plan, their debts are written off once the attachable assets have been realised.
• No settlement, with a payment plan: In specific cases, the debtor may retain their assets by undertaking to repay part of their debts over a period of three or five years, depending on the circumstances.
• Direct discharge for debtors with no estate: In insolvency proceedings where there are no assets, the debtor may be granted immediate discharge as there are no assets to be liquidated. This avoids the need to prolong the proceedings unnecessarily.

Which debts can be written off?

The 2022 reform has broadened the range of debts eligible for cancellation, although there are significant restrictions:

1. Debts that are fully dischargeable:
   • Personal loans, credit cards and bank overdrafts.
   • Debts to suppliers or private creditors.
2. Partially dischargeable debts:
   • Obligations to the tax authorities and Social Security, up to a limit of 10,000 euros each.
   • This limit is cumulative: the first 10,000 euros of debt owed to the Tax Agency and the TGSS may be included in the BEPI, which represents a significant improvement on the previous regulations.
3. Non-dischargeable debts:
   • Maintenance payments, civil liability arising from criminal offences and criminal fines.

Conclusion: A New Beginning Is Possible

The Second Chance Act reinforces the principle of economic justice, enabling individuals and the self-employed to escape the trap of insolvency and regain control of their financial lives. Although the procedure may seem complex, the support of a specialist solicitor is key to ensuring that the debtor’s rights are respected and that a genuine discharge of debts is achieved.

This scheme is not only a source of financial relief, but also a way of reintegrating individuals into the economic and social fabric, by removing the stigma associated with insolvency.