EVERYTHING ON THE SECOND CHANCE LAW FOR ENTREPRENEURS

Following international claims for the establishment of a real and effective second chance system, the Second Chance Law was enacted in July 2015 (Act 25/2015, second-chance mechanism, reduction of the financial burden and other corporate measures). With the new regulation, it is possible for the debtor to see the outstanding liability forgiven after the liquidation of its assets to avoid corporate exclusion.

Among other objectives, the act aims to:

• Increase the prevention of private over-indebtedness and encourage the responsible granting of credit;
• Coordinate satisfying the interests of creditors with the rehabilitation and recovery of the debtor.

The debtor has two options:

• Submit to a payment plan.
• Immediate satisfaction of the exonerable liability.

1. Who can benefit and requirements

The law is mainly aimed at self-employed and private citizens who have failed in their business and until now had to face their debts with their present and future assets. The mechanism, in practice, is very beneficial for individuals, debt guarantors of companies of which they are or were partners and/or directors.

The requirements to qualify for the exemption are as follows:

A. Attempt an out-of-court settlement of payments and, if no agreement is reached, request a voluntary creditors’ tender by the debtor. There are several conditions to make the AEP fruitful. Among them:

– The debtor compensates its creditors with the transfer of assets not needed for the exercise of their professional activity or shares of their own company.

– The entrepreneur proposes a viability plan and payment schedule to his creditors to deal with the debts.

B. The insolvency has been concluded due to liquidation or insufficient assets.

C. It is a debtor in good faith. Exemption will be denied if over-indebtedness is due to a disproportionate use of credit or negligent or malicious asset management[1]. Requirements to be consider a debtor in good faith:

– The insolvency has not been declared responsible (in accordance with articles 164 and 165 LC).

– No criminal conviction in the 10 years prior to the declaration of insolvency[2].

– Attempt of prior judicial settlement if it does not exceed a liability of 5 million euro.

1. A minimum liability threshold is paid or agrees to submit to a payment plan

Minimum liability threshold (payment of non-exempt debts)

1. Credits against overall assets.

2. Privileged bankruptcy claims.

3. 25% of ordinary bankruptcy claims.

Payment plan

It is the debtor who has to propose a feasibility plan and payment schedule. The maximum term is ten years. Plus, in good faith required for the payment plan:

1. It has not breached collaboration obligations within the insolvency.

2. This benefit has not been obtained within the last 10 years

3. An adequate job offer has not been rejected within the 4 years prior to the insolvency.

If any of the creditors do not agree with the exemption, revocation can be requested. In this case, it must be proven that the debtor has acted in bad faith or has defrauded the Treasury by entering money illicitly.

2. Exonerable debts

It is necessary to differentiate between the two models within the regulation

2.1 The debtor who pays a minimum liability threshold (article 178 bis.3.4 ° LC)

Exoneration	No exoneration
75% of the ordinary liabilities and subordinated credit or, 100% if out-of-court settlements were attempted	Credits against overall assets Privileged credit 25% of the ordinary liability (whether or not an AEP has been attempted)

2.2 If the debtor is subject to a payment plan (article 178a. 5)

Exoneration	No exoneration
Ordinary and subordinated credits outstanding at the date of conclusion of the insolvency (although they were not communicated). Credits with collateral: (Article 90.1 LC), the part that could not be satisfied with the execution of the guarantee will be exonerated, unless the surplus is not ordinary and subordinated credit.	Public law credits Food credits

3. Effects: Debt relief

3.1 Provisional release (for 5 years)

This will occur whenever the creditors have not opposed the granting of the benefit within 5 days (article 178 bis.4 LC). This means that in the 5-year period, creditors cannot initiate any type of action against the debtor for the collection of their credits and the outstanding debts cannot earn interest.

3.2 Definitive exoneration

• Over the course of five years

After the five-year period without revocation of the benefit, the judge will issue a decision recognising the finality of the exemption, against which there is no recourse.

• For partial fulfilment of the payment plan

It is possible to exonerate the debt to the debtor, even if the payment plan has not been fully fulfilled, when at least 50% of his/her income has been earmarked, which is not considered to be unseizable.

Also, debtors who have not met any amount can benefit when they have not had seizable income (50% of 0 income is 0).

However, creditors’ shares are still alive to claim non-exempt credits.

[1] To do this, the judge will assess the following circumstances (among others): A. The equity information provided to the creditor before granting the loan for evaluation purposes is the solvency of the equity; B. The sumptuary or necessary character of the goods acquired in the 8 years prior to the declaration of insolvency; C. The socio-professional level of over-indebtedness; D. The personal circumstances of over-indebtedness; E. Whether the insolvency situation has occurred due to foreseeable and avoidable circumstances.

[2] Final judgements are taken into account for crimes against property, socio-economic order, falsification of documents, against the Public Treasury and Social Security or against the rights of workers in the 10 years prior to the declaration of insolvency.

LEQUID