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A new chance for the second chance?

"A new reform of the Bankruptcy Law is processed as a result of a European Directive"

Until about ten years ago, no one, not even the most specialized legal operators, spoke of terms such as “second chance”, “benefit of exemption from unsatisfied liabilities” or “recovery of economic capacity”. The general rule that was applied was that of the universal patrimonial responsibility, that is, a person had to respond with all their assets, present and future, to the debts that they had and there was great resistance to looking for mechanisms of exception to this general rule, unlike what happened in other countries around us, Among them, the United States, where debts, mainly mortgages, are paid with the return of the guaranteed asset to the entity that granted the loan.

However, the huge financial crisis of 2008 greatly affected, not only companies, but also had a particularly relevant impact on both businessmen and consumers, therefore, starting with a series of recommendations issued by the European Union and Based on international legal regulations, several commercial judges began to issue resolutions exonerating individuals who declared bankruptcy from paying part of their debts.

That beginning gave rise to a series of legislative reforms in Spain, prompted by community recommendations and by the issuance of those court decisions, which led to the establishment in the Bankruptcy Law of the so-called "second chance mechanism" that responded to the objective of save natural persons from unavoidable "civil death" in case of being subjected to a spiral of over-indebtedness caused not only by the fact of having dissolved and liquidated your company, but also by having taken on loans beyond your economic possibilities. All of this was aggravated as a consequence of the aforementioned crisis of 2008.

The reform of the Bankruptcy Law, through what was called the Second Chance Law, marked the beginning of a legislative and judicial journey that has had lights and shadows.

On the one hand, it has helped many individuals, both entrepreneurs and non-entrepreneurs, to get ahead, recovering an adequate and sufficient economic situation to live and be able to recover their economic level to start over, avoiding the "civil death" that problems of over-indebtedness they generate and have generated in recent years, especially, as we have said, as a consequence of the financial crisis of 2008.

On the other hand, however, what we could qualify as timidity or lack of initiative of the legislator when it comes to following the recommendations of the European Union and, even, other similar regulations in other countries of the Union or of our surroundings and the resolutions judicial already dictated, has not allowed a sufficient and complete practical application of the second chance mechanism. Let us consider that, for example, in Germany, insolvency proceedings requested by natural persons are practically three times as many as those processed in Spain.

This lack of practical application has led to the loss of opportunities for the development of the second chance system, by forcing individuals to enter a labyrinth difficult to explain and find a way out, first demanding a proposal for an agreement. with creditors outside the Court to end, in most cases, in a complicated bankruptcy procedure in which it is necessary to meet a series of requirements to finally obtain the benefit of debt relief so eagerly sought in order to start over. 

Added to the above is the low level of fees to be received by the professionals in charge of managing the process - mediators and insolvency administrators -, which makes obtaining a designation, in many cases mandatory, unattractive, causing said professionals to work almost free in these procedures.

So things, in 2019 a new Directive was approved community on insolvency that must be transposed by the Spanish Government, which has led to the preparation of a Draft Reform of the Bankruptcy Law that is generating much controversy among legal and economic operators.

However, in terms of second chances, it establishes a change of parameters that can be considered positive, since, for example, the prior process of extrajudicial negotiation is not required, the exemption is not subject to the payment of non-exonerable debts - minimum liability -, the liquidation of the assets of the person is not required in any case as an obligation, thereby preventing the debtor from presenting a payment plan to liquidate his assets, and may reach direct exoneration, applying this regime to both employers and consumers, the latter not contained in the text of the Community Directive.

Although there are still some shadows in the projected regulation, it seems that there has been a progress in the exemption regime to favor the honest debtor, who can enjoy a new beginning and avoid civil death.

However, the projected non-exonerability of public law credit can undoubtedly be an insurmountable stumbling block to achieve a real second chance for second natural persons.

We will see what regulation is finally approved by the public powers and if there will be a new opportunity for the second chance.

Juan Manuel de Castro Aragonese

Managing Partner of the Litigation, Insolvency and Arbitration Area, Barcelona Office of GOMEZ-ACEBO & POMBO ABOGADOS

Article originally published in the Blog Fide of the withfideinitial

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