Since 2015 there is a new opportunity for those individuals who cannot face their debts and want to start over: The Second Chance Law (LSO). The new text of the Bankruptcy Law, which affects this law, is approved in Congress and pending approval in the Senate in October. In this article, we will explain how it can be applied for, what the process is and what requirements are necessary to take advantage of this mechanism, taking into account the changes pending approval.
What is the Second Chance Law?
It is a legal remedy that provides the possibility for individuals and the self-employed to renegotiate and/or eliminate, totally or partially, the debts they cannot face. As its name indicates, it is a second chance for those who are unable to pay off their debts, without forgetting the creditors’ collection rights.
How does the Second Chance Law for Individuals work?
This law seeks a fair balance between individuals overwhelmed by debts and the right to collect on the part of those to whom they owe. To this end, the debtor must invest all his assets (if he has any) in paying the debt and after its liquidation, present an out-of-court payment agreement.
In this agreement are included the quitas (reduction of the debt) and the waits (terms to face the debt, the law establishes a maximum of 5 years (it is reduced to 3 years in case of being approved)). The law obliges the parties to reach an agreement, but it is frequent that the creditors reject it, giving rise to a judicial process (with the New LSO this may not be a requirement).
Who is eligible for the Second Chance Law?
This law can only be applied to individuals and self-employed persons who are not solvent enough to pay their debts (in the New LSO any natural person can also apply).
What are the requirements to benefit from the Second Chance Law?
Limit on the amount of the debt?
Debts cannot exceed five million euros.
Demonstrate that you are a transparent person and act in good faith.
It is important to demonstrate a track record as a good payer and to prove that it is a complicated circumstantial situation due to which you have not been able to pay your debts, that is to say, that you have acted in good faith.
Not having been declared in insolvency proceedings
In this case the debtor must demonstrate that its insolvency situation is not a consequence of bad actions carried out voluntarily.
Not having been convicted of economic or social crimes.
It must be proven that the applicant has not been convicted of economic, social, patrimonial or documentary falsehood crimes in the 10 years prior to the application.
Not having used the Second Chance Law or similar in the last 10 years.
The LSO does not allow to benefit from it more than once in a period of 10 years. This prevents the debtor from falling into malpractice.
Having paid the preferential credits
The preferential credits refer to the credits against the mass (notary and lawyer fees) and to the privileged bankruptcy credits (debts with the Tax Agency, the Social Security and mortgages) that have been originated after the bankruptcy has been declared. This requirement may be waived if it is demonstrated that attempts have been made to pay them.
Whenever possible, to have tried to reach an out-of-court payment agreement.
As mentioned above, the law currently requires an agreement between the parties, so it must be proven that such an agreement has been entered into or that an attempt has been made by the debtor. In case of failure, the cause of such failure must not be, in any case, due to the debtor’s fault.
Not having refused a job in the previous 4 years.
Although it is difficult to prove that a job offer has been refused, it is a requirement for this law not to have refused to work in a position for which one has professional capacity in the 4 years preceding the application.
How to initiate a second chance procedure: How to file an application
The first step is to formulate an application that includes all the documents and requirements proposed by the law to ensure its approval. At this point it is essential to have an expert lawyer to accompany and advise the applicant, since it is a complex process and any oversight in the procedure can lead to its failure. The LSO can be requested at the notary (individuals) or at the Mercantile Registry (self-employed).
What are the advantages of taking advantage of the second chance law for individuals?
Debt restructuring
This law makes it possible to refinance the debt with creditors and restructure it into smaller amounts (reductions) and payment terms (waiting periods).
Possibility to stop foreclosures and garnishments
The LSO is a way to paralyze judicial seizures and suspend executions that force compliance with a judgment.
Possibility of exonerating those debts that cannot be paid. Starting from scratch
This is the most attractive advantage of the LSO, since it is the opportunity to get ahead after a complicated situation. With this law it is possible to build a new life and activate again the motivation and the economy of the applicant, allowing to reach wealth and success.
Being able to keep the salary
A portion of the income will be unattachable by law and that amount of the salary will be free from intervention. Depending on the stage of the process, this amount may be more or less altered.
To disappear from the lists of delinquent debtors
Thanks to the second chance, the debtor can remove his or her name from the most popular debt collection lists.
But not everything is rosy: Disadvantages of taking advantage of the law:
Your free disposal of your assets is limited.
For the duration of the proceedings, the free use and disposition of the debtor’s assets will be limited and subject to review by the insolvency administrator.
Liquidation of all your assets
The new LSO pending approval in October, allows the debtor to choose whether to cancel the debt through the liquidation of all its assets, rights and income or through a payment plan. Currently, all assets, including the family home, would be liquidated.
Public insolvency registry
Although the debtor’s name disappears from the list of debtors, it does not disappear from the Public Insolvency Registry for 5 years. This registry depends on the Ministry of Justice and its management is delegated to the Association of Registrars of Property, Mercantile and Movable Goods of Spain.
You will not always get 100% of the debt exonerated.
Each case has some particularities that will define the success of the procedure, and although there is the possibility of exonerating the debt in its totality, it is not always a guarantee.
Period of 5 years where if your equity increases you will have to face the debts that are pending or cancelled.
The debts are not cancelled forever until 5 years after the judicial decision. During that period, the exoneration will be provisional, although the debt will not have to be settled. This means that the case is reserved for 5 years and may be reviewed during that period if there is fraudulent behavior.
Debts with the Tax Authorities and Social Security are not included.
Although at present they are not included, if the new Insolvency Law is approved, it is contemplated that the debtor may cancel a maximum of 20,000 euros of debt to be distributed in a maximum of 10,000 euros with the Tax Authorities and 10,000 euros with the Social Security. This could only occur once.
Other common questions
Where does the creditor stand?
One of the objectives of the LSO is for creditors to collect part of their debts. If there is an out-of-court agreement, they will be affected by the reductions and waivers and, in the event that the debtor defaults, they will be able to liquidate the debtor’s assets. On the other hand, if there is no agreement, it may mean that they will not collect the debt, but they are given the possibility to file an appeal.
How long does the Second Chance Law procedure last?
The duration of the procedure will depend on the complexity of each case, the saturation of the judicial system and the number of assets to be settled.
The first phase of out-of-court settlement usually lasts from two to six months. In the event that this agreement is not reached, the process will take at least six more months.
What happens if I do not get the out-of-court settlement approved?
If the agreement fails, the benefit of exoneration of unsatisfied liabilities (BEPI), the mechanism of the Second Chance Law that allows the cancellation of debts that the debtor is unable to pay because he/she does not have sufficient assets on a provisional or permanent basis, is applied.
Is the Second Chance Law revocable?
The cancellation of the debt determined by the judge is revocable during the 5 years following the judicial decision. After that time, the debt disappears forever and no claim can be made.
How much does it cost to take advantage of the Second Chance Law?
The price for taking advantage of the Second Chance Law is approximately 5% of the value of the debt. In this case, taking into account that 100% of the debt can be exonerated with the work of a good lawyer who guides the process, it means a release of 95%.
Summary
To consider initiating the procedure to take advantage of the second chance law is a very important decision and denotes a complicated situation. If you find yourself in this situation and you need to know each phase of the process, as well as a professional and expert guide in this mechanism, contact us by phone (+34) 670 853 386 or through the email address ignacio@garciataboada.es without any commitment.
