Guide to the Second Chance Act

ley segunda oportunidad

The call “Second Chance Act” aims to prevent “attainder” of those who have experienced a business failure or have sobreendeudado

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In situations of business crisis,  having secured indebtedness or third-party debt, people may be sentenced to payment of debts that may not cover the rest of their lives. To avoid these situations, Law was issued 25/2015.

What is the Second Chance Act?

The Law 25/2015, of 28 July, de mecanismo de segunda oportunidad, reducing the financial burden and other measures of social order (better known as, Second Chance Act), It emerged as help when recession that lived the Spanish economy and that affected much of the citizenry.

The purpose of this law, as well exposes the preamble thereof, is none other than allowing a natural physical person or entrepreneur,  despite having suffered an entrepreneurial economic failure or personal, has the ability to redirect your life again and even undertake new initiatives, without having to drag on indefinitely a debt that can never meet.

The law focuses on giving a second chance those who are affected by over-indebtedness by exemption mechanisms. Similarly, the law seeks to avoid situations of premeditated insolvency so not all debtors will be able to satisfy: certain requirements must be met, without which, no exemption.

Article 1.911 Civil Code establishes the principle of universal liability so that, the debtor is obliged to respond with all its assets present and future. So good, Law Second Chance limits the universal This Article.

Who can benefit from the”Second Chance Act?

The initiatives contained in the Second Chance Act are aimed at those in a close situation to the insolvency for their economic and social circumstances of vulnerability.

Thus, subjects that can adhere to the law are individuals whether or not entrepreneurs.

Competent courts on “Second Chance Act”

Section 1 of Chapter II of the Insolvency Act deals with the jurisdiction applicable to competitions. This standard determines the territorial jurisdiction criteria are based on the location of the center of main interests, this being his home. However, if the center of main interests and address of the debtor does not coincide, debtor contest the applicant is granted the power to choose any of them for the purposes of territorial jurisdiction.

This approach is confirmed by the Supreme Court in its order of 18 January 2017, that comes to solve the negative conflict of territorial jurisdiction existing in consecutive contests persons who are not entrepreneurs. determines that, “It should integrate arts. 242.1 and 232.3 LC, in relation to art. 10 LC y, understand that the territorial jurisdiction consecutive contest a non-trader natural person debtor is requested <> It corresponds to court of the debtor's domicile, unless it is established that does not match the center of its main interests, in which case the competition will correspond to judge where you are located the center of main interests ".

But what court will hear the consecutive contests persons who are not entrepreneurs?

The art. 85.6 LOPJ and 45.2.b) LEC determined to be Courts of First Instance managers know about contests no natural person entrepreneur.  Is presumed to be the center of interest is at home.

While, other contests will be known commercial courts specialized in bankruptcy preinsolvencia material.

Procedure for the application of the Second Chance Act

If you can qualify for the Second Chance Act, What should you do? How to start the procedure?

Second Chance procedure is regulated in articles. 231 a 242 bis of the Bankruptcy Act and, is divided into two phases, a first court and another court.

extrajudicial phase of the Second Chance Act

This first phase is intended reach a settlement of payments with creditors through the intervention of an impartial and expert figure (concursal mediator).

Requirements to apply for settlement payments

The debtor who is insolvent or stipulating that may not regularly meet their obligations,  You must meet certain requirements, according to art. 231 LC:

  • If the debtor is natural person: His initial liability must not exceed 5 million.
  • If the debtor is natural person entrepreneur: It must provide the appropriate balance.

Now, the same article includes those cases in which NOT may make the request to reach a settlement payment, and it will be when:

  • They have been been convicted of a crime against property, the socioeconomic order, forgery, public estate, Social Security or workers' rights in 10 years old prior to the declaration of insolvency.
  • The debtor whether it has reached within the last 5 years a settlement of payments with creditors, they had obtained court approval of a refinancing agreement or had been declared in bankruptcy.
  • The debtor is negotiating an agreement with creditors refinancing or whose competing application would have been admissible.

Application settlement

If the requirements are met, the beneficiary must complete the standardized application form settlement, provisions of the Order JUS / 2831/2015, of 17 December, and available on the BOE.

Attached is the link so you can easily download: https://www.boe.es/boe/dias/2015/12/29/pdfs/BOE-A-2015-14225.pdf

The form will be attached, necessarily:

  • A inventory, which will include:
    • cash and liquid assets available to the debtor at the time,
    • property and rights whose ownership has, and,regular expected revenue
  • A list of creditors, in which will be specified:
    • the identity, address and email address of the creditor,
    • the amount and maturity of the respective loans,
    • a relationship of existing contracts.
  • A list of expected monthly expenses.

Also, if the creditor The person was married (unless the matrimonial regime were the separate property), indicate the identity of your spouse. And, If the spouses are owners of the family home and this may be affected by the settlement of payments, the application must subscribe by both spouses, or by one with the consent of the other.

Once completed the form, will take place the mediator application concursal. And, we must distinguish whether:

– The debtor is a natural person: It should go, with the already completed form and accompanying documents, the notary from home where the designation request mediator concursal.

–  The debtor is small business (autonomous or SMEs): The appointment of the mediator will ask the bankruptcy Merchant recorder for your home by instance electronically may be Studied.

The recipient of the request shall check that all requirements have been met data and documentation provided. If there is an error, shall grant the debtor a single period of remediation which shall not exceed five days.

Effects on the debtor

The request to open the file of settlement generates the following effects on the debtor:

  • you can continue with their work, business or professional and,
  • is refrain from any act of administration and disposition exceeding acts or own trafficking operations activity.

Appointment of mediator bankruptcy

If the request is accepted, It will proceed to appointment of insolvency mediator. In individuals not entrepreneurs, the notary promote negotiations between debtor and creditors, mediator may be appointed insolvency.

If the bankruptcy mediator accepts the position, will check in 10 days following contains all the information and documentation necessary. Otherwise, may require the debtor to remedy.

Meeting with creditors

In the same period 10 days, the mediator convene a meeting between the debtor and creditors appearing on the list presented.

The meeting must be held within the following two months and will take place in the town where the debtor has his domicile.

The purpose of the meeting is to identify all creditors and the amounts owed to them trying to reach a payment agreement.

The proposed settlement

So good, as soon as possible and always with a minimum notice of 20 natural days (in non-business people the term will be 15 natural days) on the date scheduled for the meeting, the bankruptcy mediator will send creditors a proposed out-of-court settlement.

The proposal may contain any of the following measures:

  • Waits for a period not exceeding 10 years old
  • Remove
  • Assignment of assets or rights to creditors in payment or for payment of all or part of the credits. Only those assets or rights that are not necessary for the continuation of professional or business activity may be included.
  • Conversion of debt into shares or participations of the debtor company
  • The conversion of debt into participative loans for a term not exceeding ten years or in any other financial instrument of rank, maturity or different characteristics of the original debt

The proposal will include:

  • a payment plan with details of the resources foreseen for its effective fulfillment,
  • a viability plan,
  • a proposal for regular compliance with new obligations, including, where appropriate, the setting of a maintenance amount for the debtor and his family, and,
  • a plan for the continuation of professional or business activity

So good, In no case may the proposal consist of the global liquidation of the debtor's assets for the satisfaction of its debts, nor may it alter the legally established order of priority of credits, except that the deferred creditors expressly consent.

Alternative proposals or modifications

Within the 10 calendar days after sending the proposal according to the creditors, they may present alternative proposals or modifications.

But, if within the previous period of 10 natural days, the majority of the creditors representing the liability decided not to continue with the negotiations, the bankruptcy mediator must immediately request the declaration of CREDITORS 'CONTEST.

 A la meeting summoned creditors must attend, unless they had expressed their approval and opposition within the 10 calendar days prior to the meeting.

The payment plan and the viability plan may be modified at the meeting.

Success or failure of the settlement

For the out-of-court settlement to be considered accepted majorities of one 60% o un 75% votes in favor (art. 238 LC).

So it can happen that:

  1. The proposal turns out ACCEPTED by creditors for fulfilling the majorities. In this case, the deal will immediately rise to deed and the procedure will end.
  2. But, if the proposal has been REJECTED, we will enter the second phase.

Phase COMPETITION

If it is impossible to reach a settlement of payments between debtor and creditors, or when the out of court settlement has been approved but the debtor is not able to fulfill it, the bankruptcy mediator will immediately request from the competent Judge the declaration of consecutive bankruptcy.

Then, the judge in the decree of bankruptcy will appoint a Bankruptcy administrator, which may be the bankruptcy mediator himself or a different person.

Upon conclusion of the contest

The art. 178 of the LC determines that, in cases of conclusion of the contest by settlement the insufficient active mass, the debtor natural person will be responsible for the payment of the remaining credits.

But, Article. 178 bis introduced by the Second Chance Law, established that in the case of debtor natural person, si el contest concludes for any of the two previous causes (liquidation or insufficiency) and is rated as fortuito, the judge in the order of conclusion of the contest may declare the exoneration of the unsatisfied liability on settlement.

The benefit of the exemption from liability dissatisfied

The Law 25/2015 It provides for this possibility to allow those who have lost everything by having liquidated all of their assets for the benefit of their creditors., may be released from part of the outstanding debts after settlement.

To start this benefit, the debtor must present his exemption request of the unsatisfied liability before the bankruptcy judge. This application will be forwarded to the bankruptcy administration and creditors so that within a period of 5 days allege what they deem opportune.

  • If these show their conformity or not oppose, the contest judge will grant, provisionally, the benefit of exoneration of the unsatisfied liability, declaring the conclusion of the contest at the end of the liquidation phase.
  • If the Insolvency Administrator or the creditors they oppose, they can only do so due to the non-attendance of any of the requirements, giving rise to the bankruptcy incident.

Appropriate requirements for the benefit of the exemption

The exemption system has two fundamental pillars: The art. 178 bis of the LC determines the requirements for the natural person debtor to obtain the benefit of exoneration of the unsatisfied liability:

1º The bankruptcy must have concluded by liquidation of the debtor's assets or by insufficient assets..

The art. 176.to. of the LC provides for the conclusion of the competition for insufficient active mass when the reintegration action is not foreseeable, of challenge or third party liability or the classification of the contest as guilty, the assets of the bankrupt are not presumed enough to satisfy the credits against the mass.

If the bankrupt was a natural person, the judge will designate a Bankruptcy Administrator who must liquidate the existing assets and pay the credits against the estate following the order of priority of art. 176.bis.2 LC.

The debtor's good faith.

Many insolvency situations are due to factors beyond the control of the debtor in good faith, then considering the ethical operation that the legal system does not offer reasonable solutions to this type of debtors who, for a totally unexpected and unforeseen alteration of their circumstances, they cannot keep their commitments. The legitimate protection that the legal system must offer to the rights of the creditor cannot be forgotten., as well as an indisputable premise: the compliant debtor must always be of a better condition than the non-compliant.

But when it is understood that the debtor acts in good faith? For this we must go to art. 178 to. 3. that determines all the requirements that must be met to understand that the debtor acts in good faith and are:

  • That the contest has not been found guilty. This requirement is modular since, if the contest had been found guilty by art. 165.1.1º, the judge may grant the benefit according to the circumstances and as long as there is no intent or serious fault on the debtor.
  • That the debtor has not been convicted in a final judgment for crimes against the Heritage, against the socioeconomic order, forgery, against the Public and Social Security or against the rights of workers in the 10 years preceding the declaration of insolvency.
  • The debtor, meeting the requirements of the arts. 231 LC, I have celebrated or tried to celebrate, an out-of-court settlement of payments.

So good, the precept adds two more requirements that are alternative between them but, that at least one of them must always attend together with the previous ones and they are:

  • That the debtor has fully satisfied the claims against the estate and the privileged insolvency claims. What if I hadn't tried a prior court settlement, unless you have satisfied the 25% of ordinary bankruptcy credits.
  • Or that the debtor, alternatively to the previous section:
    • Agree to submit to a payment plan within 5 years after the conclusion of the contest.
    • Has not breached the collaboration obligations of art. 42 LC.
    • You have not obtained the exclusion benefit within 10 last years.
    • You have not rejected within 4 prior to the declaration of insolvency, a job offer suited to your ability.
    • Expressly accept that the request for exemption be published for a period of 5 years in the special section of the Bankruptcy Public Registry.

After the liquidation of the existing assets and the payment of the credits against the estate, if the debtor also meets the good faith requirement, may request the exoneration of the unsatisfied liability before the bankruptcy judge.

What debts can be exonerated?

Once the above conditions have been met, the debtor may be exonerated from his pending debts:

  • So automatic cuando:
    • You have fully satisfied the claims against the estate or the privileged bankruptcy claims
    • If you have not tried an out of court settlement, must have satisfied the 25% of bankruptcy credits

Alternatively, when you have not been able to satisfy the previous credits and as long as you agree to undergo a payment plan during 5 following years, the debtor will be exonerated provisionally of the: 

  • Ordinary and subordinated credits that are pending at the end of the contest, even if they have not been communicated. Exceptions are credits for public law and credits for food.
  • The credits with special privilege whose part of them could not be satisfied with the execution of the guarantee, will be exonerated. Credits classified as general privilege are excepted.

For release definitive of debts, the debtor must satisfy in that period the debts not exonerated within the 5 years after the conclusion of the contest. After the period set for the payment plan has elapsed without the benefit of the exemption having been revoked, the bankruptcy judge, at the request of the debtor, it will dictate order in which it will recognize the exoneration definitive of the unsatisfied liability in the contest.

Does debt relief is final?

Not, well it is possible the revocation of exclusion benefit.

Any bankruptcy creditor shall be entitled to request the revocation of the benefit from the bankruptcy judge when any of the following circumstances occurs:

  • That, in 5 years after the benefit was granted, the existence of income, hidden assets or rights of the debtor. Debtor's fortune enhancement, eventually, will allow to revoke said benefit for the reasons of justice towards the creditors.
  • If during the period set for compliance with the payment plan:
    • The debtor incurred in any of the circumstances that prevent the granting of the exoneration benefit according to art. 178.to 3.
    • The debtor breaches the obligation to pay debts not exonerated according to the payment plan.
    • That the economic situation of the debtor by inheritance was substantially improved, legacy, donation, game of luck, bet or chance, so that he could then pay off outstanding debts.

If the judge revokes the benefit, the creditors will recover the fullness of their actions vis-à-vis the debtor to make effective their unsatisfied credits at the conclusion of the bankruptcy.

What expenses of the procedure of accession to the Second Chance Act?

Taking advantage of the Second Chance Law involves costs inherent to the initiation and processing of the procedure.

There is certainly no single standardized price, instead, the total cost of the procedure may vary depending on the circumstances of the case.

First, it is necessary to know what professionals are going to intervene and therefore what fees or tariffs we are going to have to satisfy.

As we have already seen, the procedure can be divided into two phases, attending to obtaining, o no, of an out-of-court settlement of payments. The remuneration of fees will be less if we manage to reach an agreement in extrajudicial phase, increasing if we need to go to court for the declaration of bankruptcy.

So, In the first phase of the out-of-court settlement, we will have to pay financially for the expenses of:

  • notary's office
  • Bankruptcy mediator: As provided in art. 233 LC, the bankruptcy mediator's remuneration will be set out in his appointment certificate. And adds the cited article that, the remuneration to be received will depend on the type of debtor, of your liabilities and assets and the success achieved in mediation. We are not facing fixed economic parameters, but a large number of debts and creditors will make negotiations difficult, which will mean an increase in the cost of the services provided.
  • So good, the services of lawyer are not compulsory until the competition phase, but it is highly recommended that, once the negotiations start, the debtor comes to them assisted by a lawyer to be able to properly assert their rights without giving in to pressure or harmful requests.
  • Register: If the debtor is a small business owner and the request for the start of the extrajudicial procedure must be made before such body..

Once the negotiations end without an agreement and we enter the second phase (the consecutive bankruptcy), it will be necessary to attend to the following expenses:

  • Lawyer and Attorney: At this point, representation by attorney and legal assistance is already necessary., although as we have already mentioned, It is recommended to have the advice of a lawyer from the beginning of the procedure.
  • Insolvency Administrator: The Bankruptcy Administrator may be the bankruptcy mediator himself or another person designated for this purpose. So good, the LC establishes, as for the fees of this, a limitation, so that art. 242 LC contemplates that the Insolvency Administrator may not receive in concept more remuneration than that which has been established in the extrajudicial mediation file.
  • Registro de la Propiedad: If the debtor has real estate.

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