Second Chance Law Proceedings for individuals

Its objective is none other than to allow what its name so expressively describes: that a natural person, despite a business or personal economic failure, has the possibility to get his or her life back on track and even to risk new initiatives (the second chance restores his or her reputation in order to apply for money or start a new business activity. As a result of the cancellation of debts and exit from the files of debtors, the former debtor will be able to reapply for bank cards, loans or credits with greater probability once the debts are exonerated), without having to drag indefinitely a debt burden that he will never be able to satisfy.

This procedure, for which the Commercial Court will be competent (after the reform, the Notary’s Office, the Commercial Registry, the Chamber of Commerce and the insolvency mediator are not involved, so the second chance procedure goes directly to the Commercial Court. They will be in charge of requesting ex officio the withdrawal of the debtor’s data from the default files), is regulated in Law 25/2015, of July 28, 2015, on second chance mechanism, reduction of the financial burden and other measures of social order, which came into force on July 30, 2015. Likewise, it is regulated in the Insolvency Law, as amended by Law 16/2022, of September 5, amending the revised text of the Insolvency Law, approved by Royal Legislative Decree 1/2020, of May 5, for the transposition of Directive (EU) 2019/1023 of the European Parliament and of the Council.

One of the basic requirements of this Law is the good faith of the debtors. The exoneration system, apart from the fact that the debtor must be in good faith, has another fundamental pillar: the prior liquidation of the debtor’s assets.

The preamble of the reform of Law 16/2022 of September 5 states that:

“When the insolvent debtor is a natural person, insolvency proceedings are intended to identify bona fide debtors and offer them a partial exoneration of their unsatisfied liabilities, allowing them to benefit from a second chance, avoiding their passage to the underground economy or to a situation of marginality.”

Another of the requirements that must be proven in order to be able to access the second opportunity is to demonstrate that there are insufficient assets to pay the debts, that is to say, that the debtor is in a situation of insolvency.

In the year 2022 the Bankruptcy Law was reformed, specifically by Law 16/2022, of September 5, involving a series of changes in the Second Chance Law Proceedings:

• Possibility of exonerating the debt without liquidating the estate.

Following the bankruptcy reform, the requirement to attempt an out-of-court payment agreement has been eliminated and the exonerable debts have been extended to include bankruptcy debts and debts against the masses.

The debtor may choose between:

• Cancel all of its outstanding debts by liquidating or sacrificing all of its assets, if any.
• Retain their primary residence (in the event of foreclosure, the Second Chance Law Proceedings allows the debtor who has no more assets to have 100% of the outstanding debts exonerated once the home is surrendered) and the means to carry out their professional activity provided that they commit to a payment plan without liquidation, in which they allocate their future income and revenues during a general term of three years to the satisfaction of their debts, said payment plan may have a waiting period of up to five years without interest.

If the option not to dispense with the debtor’s habitual residence is chosen, the debtor’s outstanding debts will be reduced and the percentages of the existing debts that the debtor will have to continue to pay through a 3 to 5 year payment plan, appropriate to his or her economic capabilities, will be determined by Your Honor.

Article 496.2 of Law 16/2022 states that it “may establish payments of a determined amount, payments of a determinable amount based on the evolution of the debtor’s income and available resources or combinations of one and the other”.

• Cost and time savings.

It will no longer be necessary, prior to requesting the cancellation or exoneration of the unsatisfied liabilities, to attempt an out-of-court payment agreement with the creditors.

Several figures of this procedure are eliminated, implying a considerable reduction of costs, as well as of deadlines. The figure of the Notary Public, the Commercial Registry, the Chamber of Commerce and the insolvency mediator are dispensed with. Likewise, although not eliminated, the figure of the insolvency administrator will not have to be used in most cases.

It is reduced from 10 years to 5 years between exoneration requests. For those cases in which an exoneration is obtained through a payment plan, the term will be two years.

• Exoneration of public debts.

Debts for the collection management of which the State Tax Administration Agency (Treasury) is competent may be waived up to a maximum amount of €10,000 per debtor. Likewise, debts for social security credits may be exonerated for the same amount, i.e. up to a maximum amount of €10,000 and under the same conditions.

For the first €5,000 of debt, the exoneration will be complete, and from this amount on, the exoneration will reach fifty percent of the debt up to the maximum indicated. The rest of the public debt will be subject to and incorporated into the payment plan.