Can I have a second chance?

Many people who, in the current climate, find themselves in dire financial straits are unaware that there are mechanisms in place to enable individuals with debts to be released from those debts which they cannot repay with their assets.

It is possible to apply for an out-of-court settlement; if no such settlement is reached, the debtor must apply for insolvency proceedings and, finally, if, in the course of the insolvency proceedings, all their assets are realised but are insufficient to settle their debts, the debtor may apply for the “discharge of unsatisfied liabilities” as provided for in section 178 of the Insolvency Act.

In this article, we will focus on the out-of-court settlement. An out-of-court settlement is a non-insolvency agreement in which a proposal is put forward to creditors to resolve a situation of insolvency. If they do not accept it, the matter will be referred to the court and, following a sort of “fast-track” insolvency procedure, the judge – provided a series of requirements are met – will grant the debtor a second chance by discharging their debts. This is undoubtedly a way in which the legislator has sought to incentivise creditors to facilitate such agreements: “either you help your debtor, or you may lose all right to recover your debt”.

Consequently, the out-of-court settlement scheme will enable both individuals (whether or not they are business owners) and small and medium-sized enterprises to restructure their debts by negotiating with their creditors, proposing debt write-offs and repayment deferrals of up to ten years.

Regarding the procedure to be followed:

It is the debtor who must initiate the proceedings with the creditors on the basis of a repayment plan which must be approved by them.

Firstly, the application must be made using a form available on the Ministry of Justice’s website.

The applicant must provide proof of identity and then set out their personal, family and employment or professional circumstances on the form. This proof of identity must be accompanied by details of their assets and rights. Finally, they must provide a list of creditors, which will enable the extent of each creditor’s claim to be ascertained and their impact on the total debt to be assessed.

Applications from non-business debtors, whether natural or legal persons, must be addressed to the notary responsible for their place of residence. Once the notary has examined the documentation received, they will decide whether to act as the insolvency mediator themselves or to appoint an insolvency mediator within five days.

The Notary then notifies the court with jurisdiction over the subsequent insolvency proceedings of the commencement of negotiations with the creditors. Once the insolvency mediator has accepted the appointment, they are given a period of 15 days to review all the documentation provided and to convene a meeting of creditors. At this meeting, a repayment plan previously drawn up by the insolvency mediator with the debtor’s consent will be discussed.

If no agreement is reached to approve the plan and the debtor remains insolvent, the insolvency mediator shall immediately apply to the competent court for a declaration of insolvency, giving rise to what is known as ‘consecutive insolvency proceedings’, which will be the subject of another article.

In any event, it should be borne in mind that an application for an out-of-court payment arrangement – quite apart from the fact that it may provide a way out of the debtor’s insolvency – is a necessary requirement for eligibility, following a consecutive insolvency proceeding, the “benefit of discharge from unsatisfied liabilities” or Second Chance scheme.

Xavi Saula
Insolvency practice