How to eliminate the debts of a natural person after the new insolvency law

The new exoneration of unsatisfied liabilities (epi):

Requirements and extent of which debts can be exonerated

The new Insolvency Law, approved last September 2022, adapting it to European insolvency regulations, foresees a series of novelties that aim precisely to expedite the judicial insolvency process and, in any case, to ensure that it suits the real problems that are occurring on the ground for debtors, both legal entities and individuals, entrepreneurs and non-entrepreneurs.

Focusing on one of the problems that most concerns and, at the same time, attracts people who suffer insolvency problems, it should be said that the new Insolvency Law continues to devote part of its articles to what is commonly known as the "Second Chance Law", but it introduces a series of amendments with the aim referred to above, that is, to speed up the process, economise it and adapt it to the problems that arise in the day-to-day life of a debtor who has been declared insolvent.

One of the main novelties that speeds up this process is the elimination of the entire phase prior to the insolvency proceedings, which required at least having attempted an "Out-of-Court Settlement Agreement" with the creditors, requesting the appointment of an "insolvency mediator" for this purpose before a Notary Public, Chamber of Commerce or Commercial Registry. The reason for this removal is, fundamentally, that the statistics gave us a very low percentage of success in achieving this out-of-court payment agreement, as the majority of creditors did not attend the Meeting and, if any did attend, they voted negatively, or positively but in an unimportant way as their vote was in the minority with respect to that of the other creditors, resulting in a procedure that consumed time and expense that was absolutely unnecessary.

With the new Law, the insolvent debtor must comply with a series of requirements which, fundamentally, seek to demonstrate the debtor's good faith, and how is the concurrence of said good faith demonstrated? The Law answers this question by establishing these requirements sensu contrario, i.e., it considers a debtor/insolvent debtor to be in good faith if none of these circumstances are presented:

1. When, in the 10 years prior to the request for exoneration, he/she has been sentenced in a final judgment to imprisonment, even if suspended or substituted, for crimes against property and against the socio-economic order, false documentation, against the Public Treasury and Social Security or against workers' rights, all of them provided that the maximum sentence for the crime is equal to or greater than three years, unless on the date of presentation of the request for exoneration the criminal liability has been extinguished and the pecuniary liabilities derived from the crime have been satisfied.

2. When, in the 10 years prior to the request for exoneration, the debtor has been sanctioned by a final administrative decision for very serious tax, social security or social order offences, or when in the same period a final agreement has been issued to assign liability, unless on the date of submission of the request for exoneration the debtor has fully satisfied his liability.

In the case of serious infringements, debtors who have been sanctioned for an amount exceeding 50% of the amount eligible for exoneration by the State Tax Administration Agency referred to in Article 489.1.5.o may not be exonerated, unless on the date of submission of the application for exoneration they have fully satisfied their liability.

3. When the insolvency has been declared guilty. However, if the insolvency proceedings have been declared guilty solely because the debtor has failed to comply with the duty to apply for the declaration of insolvency in a timely manner, the judge may take into account the circumstances in which the delay occurred.

4. When, in the 10 years prior to the request for exoneration, he/she has been declared an affected person in the judgement of qualification of the insolvency of a third party classified as guilty, unless on the date of presentation of the request for exoneration he/she has fully satisfied his/her liability.

5. When the debtor has failed to comply with the duties of collaboration and of information with regard to the judge in the insolvency proceedings and the insolvency administration.

6. When the debtor has provided false or misleading information or behaved in a reckless or negligent manner when contracting debt or discharging its obligations, even if this has not led to a ruling declaring the insolvency to be guilty.

7. From this point onwards, the new Law provides for three fundamental and differentiated ways of accessing the Exoneration of Unsatisfied Liabilities (EPI, from its acronym in Spanish):

I. LIQUIDATING THE DEBTOR'S PROPERTY/ASSETS

This is the most classic approach, which provides for liquidating the debtor's assets and paying the creditors in accordance with the legally established order and, after that, if there is still a debt, discharging it

II. WHEN THE DEBTOR WISHES TO PRESERVE HIS ASSETS

In this case, the debtor avoids disposing of his assets and/or rights, provided that he is able to present a proposal for a payment plan for non-dischargeable claims (and part of those that are dischargeable). This payment plan will be for a maximum period of three years, although in the event that the debtor intends to keep the habitual residence, it may be extended to five years.

III. WHEN THERE ARE NO ASSETS/MASS IN THE INSOLVENCY PROCEEDING

This way, as there are no assets of the insolvent party subject to valuation, analysis or liquidation, is the quickest and most agile. Under the new Law, the appointment of an insolvency administrator can even be avoided and saved if a series of conditions established by the Law are met.

Another of the issues that the new Law modifies, and which is of great interest to debtors who are in a state of insolvency, is: to which debts does the intended exoneration extend? Are all debts released? The answer is no, although the list of exonerable debts is more flexible than under the previous law. Thus, "EPI" will extend to all unsatisfied debts, except for the following:

1. Debts for non-contractual civil liability, for death or personal injury, as well as for compensation arising from accidents at work and occupational diseases, regardless of the date of the decision declaring them.

2. Debts for civil liability deriving from a criminal offence.

3. Debts for alimony.

4. Debts for wages corresponding to the last 60 days of effective work carried out before the declaration of insolvency proceedings in an amount not exceeding three times the minimum interprofessional wage, as well as those which have accrued during the proceedings, provided that their payment has not been assumed by the Wage Guarantee Fund.

5. Debts for public law credits. However, debts for the collection management of which the State Tax Administration Agency is responsible may be exonerated up to a maximum amount of €10,000 per debtor; for the first €5,000 of debt the exoneration will be complete, and from this figure onwards the exoneration will reach 50% of the debt up to the maximum indicated. Likewise, debts for social security credits may be exonerated for the same amount and under the same conditions. The amount exonerated, up to the aforementioned limit, shall be applied in reverse order to the order of priority legally established in this law and, within each class, according to its seniority. Debts exceeding this limit may be subject to a payment plan.

6. Debts for fines to which the debtor has been sentenced in criminal proceedings and for very serious administrative sanctions.

7. Debts for legal costs and expenses arising from the processing of the application for exoneration.

8. Debts with a real guarantee, whether for principal, interest or any other concept owed, within the limit of the special privilege, calculated in accordance with the provisions of this law.

ILLESLEX Abogados is at your entire disposal for any doubts related to this type of matters of the "Second Chance Law" or Insolvency Proceedings, or other legal matters.