When the end of the most serious Spanish economic crisis since the post-war era is in sight, the Cabinet has just passed the so-called Law of Second Opportunity. This measure is vital to ensure that the impact of the crisis does not make it impossible for people to start over. We can highlight three causes a priori which give rise to such a law:
- First, the desperate situation for millions of people has turned this issue into a national emergency. It is heartbreaking to see, as a result of the current climate, how so many people have lost everything and have debts they will never be able to pay back.
- We live in country where informal economy rates are alarming: they double and triple the rates of the formal economy. 1 out of every 4 Euros comes from the informal economy. According to research, this reduces the possibility of certain debtors – given that a large part of their salary goes towards reducing an insurmountable debt – opting for the formal economy, instead of the informal economy.
- Due to the electoral marathon we will witness through 2015, we attend almost weekly debates, presentations, talks and other opportunities which tackle various economic issues. Nearly all political parties seem to agree that entrepreneurs will have an essential role in exiting the crisis. In our country, it is the self-employed and small businesses who generate employment and who form the largest part of the national business community.
To put an economic model in place where entrepreneurs are the key players, it is essential to construct a system which accommodates failure: when a business endeavor fails – albeit in good faith – the entrepreneur should not be prevented from embarking on new corporate endeavours.
Generally, when we think about entrepreneurial success stories they are usually American. Quite a large consensus attributes part of this success to the way American culture treats failure. For them, failure itself is not bad and can even be positive for the future as long as a lesson is learned. A good example is the fashion designer Tommy Hilfiger who defined his bankruptcy at the age of 25 as his “own MBA. A way of opening your eyes”.
This said, I don´t mean to defend initial failure as the best case scenario for the entrepreneur. Instead I mean to impress the need for a second opportunity.
Since the introduction of the Royal Decree-Law 1/2015 which outlines the ‘second opportunity’, a certain resource, much needed by many sectors of the population, has appeared: the possibility of exoneration from unpaid debt once a claim to liquidation or insufficient funds (bankruptcy) has been finalized. Without this regulation, the debtor (a natural person) would continue to carry any debt, if their assets do cover the debts to their creditors. It would prevent any possibility of starting a new entrepreneurial adventure and would limit employment prospects.
First, it is important to warn that no debtor can use this to their advantage. A series of a priori strict requirements exists to help the debtor in good faith. At this point we find 3 separate routes to achieve the benefits of exoneration. The three routes have a series of requirements in common:
- That the bankrupt party has not been found to be acting in bad faith.
- That the debtor has not been charged and sentenced for crimes against the state, the socio-economic system, the tax authorities, the social security system, worker´s rights or for forgery and fraud in the 10 years prior to the declaration of bankruptcy. If a criminal procedure is pending, the judge for bankruptcy proceedings must postpone his decision regarding debt exoneration until a legal sentence is finalized.
A. The first option to achieve the benefits of exoneration is an extrajudicial payment settlement. Furthermore this legislation seems to favor this possibility. In this case the debtor is required to have solicited, or at least tried to solicit, an extrajudicial payment settlement.
The debtor in this situation should make such a request to obtain this extrajudicial payment settlement. For this, there are a series of constraints:
- The debtor is not able to make an extrajudicial payment settlement request when the initial estimate of the debt is over 5 million Euros. To this effect, where natural persons are soliciting settlement, they should contribute the corresponding difference.
- Those who have been charged and sentenced for a crime against the state, the socio-economic system, the tax authorities, the social security system, worker´s rights or for forgery and fraud in the 10 years prior to the declaration of bankruptcy, will not be able to request an extrajudicial payment settlement.
- Finally, a deadline is established. It is not possible for a debtor to reach an extrajudicial payment settlement who, in the past five years has: obtained an extrajudicial payment settlement with their creditors, obtained judicial confirmation for a refinancing agreement or been in bankruptcy proceedings.
The debtor (and natural person) will need to request an assigned bankruptcy mediator through the presentation of a request form drawn up before a registered notary – if they are a business owner they must to go to the Official Chambers of Commerce, Industry, Services and Navigation ( as specific regulation requires).
This document will contain a list of the capital, entitlements assets and anything else belonging to the debtor, with a list of the creditors. It is important to emphasize that the debtor will need to state if he/she is married with a joint marital property status. From this moment, the debtor is forbidden from carrying out any actions which interferes with their business´ transaction and transference operations. After this, the notary will appoint an officially registered bankruptcy mediator.
Next, the bankruptcy mediator will analyse the provided documentation, and will request clarification or additional information if considered necessary. If the information is sufficient, the mediator will call the creditors to a meeting to negotiate the extrajudicial settlement. This settlement will consist of:
- A waiting time of no longer than ten years
- Transfer of assets or deeds to creditors in installments (either all or part of the debt.)
Some of the conditions to be considered in negotiating the agreement: the impossibility of the debtor (who is negotiating the extrajudicial settlement) being declared bankrupt; the impossibility of implementing the agreed actions for a period of three months – unless they are actions of creditors who have collateral (not including habitual residence and those which aren´t necessary for the running of the company); and the suspension of interest gains on the debt which can affect the extrajudicial settlement.
This requirement creates certain problems when ´”putting into practice”. This issue has not been resolved. This is because, it would be possible a priori to think that the debtor despite requesting an extrajudicial payment, is negotiating in bad faith and preventing any type of settlement. The spirit of the law supposes the debtor´s good faith, which implies not tolerating such behavior (although it has not been specified explicitly).
The other requirement to be able to adopt this first option: to have satisfied the entirety of the debt claims against the total and the preferential debt.
B. There is a second way of receiving the benefits of exoneration. It is expected that debtors who haven´t even tried to reach an extrajudicial payment settlement are able to pay all of the claims against the total, the preferential debt and at least 25% of the ordinary debt. To further the aforementioned point about good faith, in this event it would not even be necessary to try and achieve an extrajudicial payment settlement if there is a possibility of paying the 25% of the ordinary debt.
C. In the event that the requirements are not fulfilled in any of the aforementioned events (not satisfying all of the claims against the total and the preferential debt when attempting to reach an extrajudicial payment settlement, or on the other hand not satisfying the 25% of the ordinary debt) these are the following requirements to achieve exoneration:
- To agree to a payment installment plan. The plan´s design should be presented by the debtor. Once the plan is presented, the parties have ten days to make any protests and subsequently the judge will approve the debtor´s plan with any appropriate changes. The plan must have the following characteristics:
- Debts which are not exonerated must be satisfied by the debtor within the following five years after the end of the proceedings, unless there is a posterior expiry date. During this period the pending debts cannot earn interest.
- With regard debts owed to the government, the processing of requests for postponing or divisions will be governed by the provisions of specific regulation.
- To have collaborated (as is required) with the judge as well as the bankruptcy Administrations. It seems that this expectation concerning good faith has not been included in the previous criteria.
- Within the last ten years not to have received the benefit of exoneration for unpaid debt. In this event, if the debtor does not fulfill this condition this period will be increased from the 5 years which were allowed for the previous case.
- Not to have rejected within the previous four years, when declaring bankruptcy, a suitable offer of employment.
- To accept expressly, in the request for the exoneration of unpaid debt, that the receipt of this benefit will be stated in the Public Bankruptcy Register which has public access, for a period of five years. This is important for the debtor, since it stigmatizes the recipient and reduces their chance of future credit.
The debtor who fulfills the aforementioned requirements in any of these three options, will have the following debts exonerated:
- Ordinary debts, with the aforementioned limitations
- Secondary debts
- Unpaid parts of the privilege debt guarantee.
One must emphasize that it is impossible to exonerate debts owed to the government or maintenance debts.
The procedure to request the exoneration of unpaid debt starts with the bankrupted party´s presentation of a request before a judge during the allocated period, in order to accommodate any opposition to its finalization.
Finally, it is important to point out that the privilege can be revoked in the following events:
- Any of the circumstances occur which would impede the approval of exoneration of unpaid debt.
- Not fulfilling the payment installment plan. Specific circumstances and the creditors can be taken into account. When the debtor has used half of the non-seizable part of their salary to satisfy the plan, during the 5 year period of said plan: the judge after hearing the creditors will declare definitively the unpaid debt as exonerated, despite not fulfilling the payment plan.
- That the debtor´s financial situation improves substantially and therefore can pay all pending debts without detriment to his/her maintenance needs. This fact provides the creditor with a defense against the debtor´s chance at a second opportunity – it provides a disincentive to start new endeavors.
- The existence of hidden assets, deeds or income.
The period for a revocation request is up to five years after granting exoneration. Any creditor can request it, and such a request will be processed in accordance with civil procedure law for a verbal hearing. If the request is approved, the creditors would recover all of their equity facing the debtor in order to recover the unpaid debt at the time of finalizing the bankruptcy.
After these five years have passed, the debtor will request from the relevant judge an order stating the end of the exoneration.
In conclusion, compared with previous policy, I consider this exoneration policy of unpaid debt, introduced by the Royal Decree-Law 1/2015, as a big advance. It guarantees that those who have suffered in the crisis can enjoy a second opportunity and are not impeded in their future careers. It will be important to analyze its practical application in order to improve certain areas. Furthermore it will also introduce new tools to guarantee that a bad professional experience for a person can be a simple slip-up – one that can be recovered. This must be done without reducing the creditor´s rights and should exclude debtors who act in bad faith. It also will try to ensure that after the crisis period (this one or any future crisis) the majority of citizens are not prevented nor discouraged from starting over. If we collaborate in this way we can generate new employment and regenerate the business community of our country.