Spain Update: Bankruptcy Law Reform: Will There Really Be a Second Chance?

The result of the processing of the draft reform of the Bankruptcy Law that the Government has promoted, if the current terms are maintained, can be very restrictive for insolvent individuals and self-employed who maintain debts with public administrations.

To some extent, its effects could be contrary to those established by European regulations, which are none other than to guarantee a full and real second chance to individuals and self-employed people who, due to various circumstances, have had to face a bankruptcy process.

Perhaps, the best way to get an idea about the new scenario that looms over taxpayers, in case the bankruptcy reform prospers in its current terms, is to review the case of a real citizen doomed to an out-of-court payment agreement and a consecutive bankruptcy, which has finally been exonerated from a large debt in the application of the current bankruptcy legislation.

This is the case. The Treasury derived liability against “Gerard” in his capacity as joint administrator of a family business at the beginning of 2013. He had been employed since 2002 but did not resign from his position at the company due to family issues and lack of advice. The Treasury seized his salary and the flat in the claim of 618,640.58 euros in the concept of VAT, and for the same lack of advice did not appeal the derivation of responsibility.

From 2013 to 2021, the Treasury collected approximately 112,000 euros from this taxpayer through the seizure of the salary, but at the end of 2019, it still owed almost 578,000 euros due to interest, surcharges, and penalties. The apartment was not auctioned by the Treasury, probably because it had a current mortgage.

The European Insolvency Directive of 2019 establishes in its first recital that “insolvent or over-indebted entrepreneurs in good faith can enjoy the full exoneration of their debts after a reasonable period of time, which would provide them with a second chance”, and in its articles, it specifies that period in 3 years.

Since Gerard had already paid for his mistake to the Treasury for much more than 3 years (and of the 5 years established by Spanish regulations), at the beginning of 2019 we started the corresponding notarial procedure (extrajudicial agreement of payments), and later his consecutive bankruptcy before the commercial courts of Barcelona. The Bankruptcy Administrator intervened in his activity and asked us for all the appropriate documentation to evaluate Gerard’s possible culpability, and whether he was worthy of the exoneration of his outstanding debts.

His apartment was valued at 252,000 euros and given the bankruptcy deadlines; the best offer we got was 160,000 euros. However, this amount allowed the mortgagee to be paid and the surplus to be allocated to the Treasury. This body had applied the salary withholdings to the non-privileged credits but required by the court at our instance, corrected its error, specifying Gerard, from that moment, only 15,000 euros to finish paying all the credits against the mass and privileged.

Gerard obtained a family loan to pay the Treasury and its City Council. We requested the exoneration of the rest of the claims, and the Bankruptcy Administrator did not appreciate Gerard’s guilt, relying on the exoneration, without any private or public creditor objecting. The Judge described the contest as fortuitous (not guilty) and has practically definitively exonerated Gerard from the rest of his credits for a total amount of 586,210 euros (almost 452,000 euros correspond to interest, surcharges, and penalties of the Treasury).

The payment of 112,000 euros of his salary, the forced sale of his home for an amount much lower than its value, the payment of the municipal capital gain of an involuntary sale in the amount of 10,200 euros, the payment of the expenses of the procedure and the final 15,000 euros to settle the privileged public credits, justify in our opinion the granting of the exoneration of unsatisfied claims. However, if the Bankruptcy Law Reform Project is approved in its current terms, in the future, other citizens like Gerard will only be able to exempt 2,000 euros of public credit.

It may be that the amendments presented (BOCG of 20.04.22) by several parliamentary groups will make the Government reconsider so that it does not legislate against European regulations and the jurisprudence of the Supreme Court, and that we do not have to wait for the pronouncements of the CJEU or the new European directive in preparation to be able to continue advising our clients without as much uncertainty as until now.

Published to Expansión.

By Mario Lopera, Marimón Abogados, Spain, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact spain@transatlanticlaw.com

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