This article, by regular legal-contributor Raymundo Larraín Nesbitt, explains the recent changes on filing for personal bankruptcy in Spain.
Lawyer – Abogado
8th of September 2015
In 2003 law 22/2003, Ley Concursal or Insolvency Law, was passed which updated Spain’s outdated insolvency procedure. The previous laws, which were intended as ‘temporary’ were from 1885 and 1922. The timing of the law couldn’t have been better as shortly after its approval Spain’s economy would take a severe downturn driving thousands of companies into insolvency.
This new law has undergone over two dozen amendments in such a short span of time. Some of these have been major to assist it to adapt to reality as the law was not working as intended. In theory the mission statement of this law is to save companies that file for creditor protection helping them to exit receivership and trade again normally.
In practice it works out very differently. Whereas, for example, in the US 95% of companies that file for creditor protection manage to come on top within a three-year period, in Spain 95% of companies end up being liquidated within the same time frame. In Spain filing for creditor protection is almost a guaranteed corporate death sentence. This trend must be reversed.
Despite this well-meaning law the shortcomings are clear. The major culprit of Spanish companies going under, once they have filed for protection, are the privileged credits held by the Tax Office and the Social Security. These single-handedly strangle financially ailing companies forcing them into administration. It is clear to my mind that the iron grasp held by both institutions must be released if struggling companies are to continue trading successfully. Companies create wealth, jobs, services and products not to mention they contribute paying taxes. It is in Society’s best interest to protect and save them where possible. The failings of this law should be addressed by lawmakers assisted by professionals on the ground. 90% of Spanish companies are SMEs and find themselves unable to endure repayment of these privileged creditors should they file for insolvency.
Amidst these changes was February’s Royal Decree 1/2015 popularly dubbed as ‘Second Opportunity Law’. This law focuses on private individuals, not companies, filing for creditor protection (bankruptcy). The change was spurred in a conference of lawyers when a speaker pointed out that struggling borrowers in Spain echoed Sisyphus’ myth. Like the myth, some individuals face the daunting prospect of facing a mounting debt, with rolled-up interest, creating a ceaseless debt spiral of which there is no escape. The intention of this law was to put an end to the gridlock by cleaning the slate and allowing borrowers to restart anew. Or at least so goes the theory.
In practice however there are serious repercussions which borrowers ought to ponder which may even dissuade them from taking this route; at least until the law is amended.
Second Opportunity Law
The conditions to benefit from it are laid out in Art. 178 bis of Spain’s Insolvency Act. To file for (personal) bankruptcy one must do so before a Mercantile court in Spain. The procedure will be overseen by a Mercantile judge. A private individual must meet the following requirements:
1. Physical person.
2. Must have filed previously an insolvency procedure. The procedure concludes outstanding debts & liabilities outstrip assets.
3. The insolvency procedure must have concluded the borrower is not guilty or at fault. They must be borrowers in good faith. Good faith is the leitmotif that pervades throughout the Second Opportunity Law. Creditors will clutch at any crevice to overturn this principle and portray a borrower in a different light so as to disqualify him for this creditor protection.
4. The borrower must not have been convicted by a court ruling of a catalogue of economic related crimes within the previous ten years.
5. The borrower must have tried reaching an out-of-court settlement with its lender, creditors.
Two options fan out at a borrower’s choice.
1.- Option A
The borrower pays the credits against the mass as well as all privileged credits. Those regarded as privileged are lenders (i.e. mortgages), Tax Office and Social Security. Note that privileged credits must be repaid in full regardless.
The upside is that ordinary credits, those held by family members or friends, only have to repaid up to 25%. The remaining 75% is condoned legally.
2.- Option B
The borrower submits himself ‘voluntarily’ to a draconian five-year repayment plan which takes into account the individual’s income and debt amount; it is a tailored plan.
• The first requirement is that the borrower proactively assisted in finding a solution.
• The borrower must not have attained this privilege previously.
• The borrower must have actively sought job placements (and be able to prove it).
• The borrower’s name will be lodged in a public insolvency registry for the next five years.
• The borrower must continue to pay alimony, where applicable.
• The borrower must continue to pay privileged creditors, as listed in the point above.
The result is that after the five years have elapsed all ordinary and subordinate outstanding debt will be cancelled.
However, debts owed to privileged creditors will remain outstanding in full:
• Mortgage debt (lenders).
• Unpaid taxes plus interests (Tax Office).
• Unpaid wages (Social Security).
Both options can be jeopardized by a borrower on any of the following:
• Breach of any requirement. The observation of all and any requirements is stringent.
• Non-payment within the repayment time frame of any amount. This automatically invalidates the good faith requirement.
• Discovery by the court of concealed assets or non-disclosed sources of income i.e. working off-the-books when on the dole.
• Significant improvement of financial situation i.e. beneficiary of an inheritance.
Debt-laden borrowers may want to think twice before taking this route.
Despite the hype I have read in the press, hailing this new law as the perfect solution to many’s ongoing financial tribulations, the truth is far from it.
The key point is that the debts which are written off are those classified as ordinary or subordinate; which normally belong to friends and relatives. Meaning that those who trust and love you more are the ones that will bear the brunt for you.
In sharp contrast, privileged creditor’s debts (lenders, Tax Office, Social Security) remain as is. Not a cent will be condoned and will have to be repaid in full. This is what’s misunderstood at large.
In other words, to save your own financial situation you will be alienating yourself from those that love and care for you the most. Besides, on following this route your personal details will be listed at the Civil Registry for any to see. And these are not erased. You will become a financial pariah which consequences will last throughout your lifetime in Spain. Lenders will be highly reluctant to lend you money again, whether as a personal loan or to start a new business. So much for ‘second opportunity’.
Which is why in my opinion, and that of others more qualified than myself, filing for personal bankruptcy in Spain should be taken only as last resort when all other venues have been exhausted. In fact, only 1.65% of bankrupt people chose this path in so far this year (one in fifty).
Some privileged creditors (read lenders) are walking away scot-free when in many cases they were the culprits on creating this situation in the first place by offering recklessly loans to borrowers that clearly did not meet the minimum requirements in the heyday of the property boom. They directly contributed to the current situation and should be held co-responsible, sharing in the losses of their own making. Accountability shines for its absence.
For those that have reached a nadir in their financial situation, and seek a second opportunity, you may want to think twice before taking this option. Whilst I am a firm believer in giving people a second chance in life, you may want to sit this one out; at least until the law is amended and lenders bear too the consequences of the folly of the roaring 2000s.
“La elección no depende solo de la voluntad, sino de la posibilidad.” – Spain’s Supreme Court.
Loosely translated as: “Choice doesn’t hinge solely on one’s own will, albeit on opportunity.”
I am especially indebted to Ms Catalina Cadenas de Gea, Judicial Secretary of Málaga’s Mercantile Court Number Two, for her invaluable input on writing this article. Gracias.
Lifetime Loans or Reverse Mortgages in Spain Explained – 21st February 2011
Advice to Struggling Mortgage Borrowers in Spain – 8th March 2011
Spanish Mortgage Loans: Beware of Abusive Clauses – 8th January 2012
Spanish Mortgage Loans: An Overview – 21st February 2012
Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’) – 8th December 2013
Bank Repossessions in Spain– 21st February 2014
Bad Debtor’s List (‘Fichero de Morosos’) – 8th April 2014
Spanish Creditors Pursuing Debts Abroad – 8th May 2014
Dación en Pago Explained or How to hand Back the Keys – 8th December 2014
Limiting Liability in Spain – 8th November 2015
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2015 © Raymundo Larraín Nesbitt. All rights reserved.