8 April 2020

Companies and self-employed people are the engine of our economy and society. In these times of uncertainty in which the income from their activity is being affected, they can take advantage of contingency measures approved by the Government (R.D. 463/2020 of 14th March) and second chance mechanisms, which can save the bad situation of those who cannot meet their debts.

In Spain there is the Bankruptcy Law and Law 25/2015 of 28 July on the second chance mechanism, reduction of the financial burden and other social measures. Since it came into force in 2015, individuals, both individuals and self-employed, can obtain exemption from unsatisfied liabilities.

This is a mechanism for helping people who have been through a serious economic situation to start from scratch or to restructure their debts so that they do not have to close down their business.

Through this law, a limitation of the principle of universal patrimonial responsibility of article 1911 of the Spanish Civil Code operates, aimed at addressing the problem of over-indebtedness of those families who, due to a failed business experience or other causes such as the health emergency caused by the coronavirus COVID-19, find themselves having to pay an unaffordable debt.

1) Advantages of availing of the Second Chance Act:

It allows an individual or a self-employed person to take advantage of a process very similar to insolvency proceedings -to which companies are subject when they are in a state of insolvency- with the possibility of renegotiating debts through an out-of-court settlement and even, in a subsequent phase (consecutive insolvency proceedings), obtaining the cancellation of debts that are unpayable due the lack of sufficient assets.

It gives the courts the power to exonerate a percentage that can reach up to 70% of the total debts to the Treasury and Social Security and to order, limit and quantify the instalment payments of the rest of the debt.

Debts secured by a mortgage could not initially be exempted from payment. However, if there is already a foreclosure procedure in which the property has been auctioned and the auction price obtained has not covered all the debt, the remaining amount could be forgiven.

Avail yourself of the Second Chance Law does not mean that you are not entitled to continue working and receive a salary or continue to carry out the professional or business activity that you have been doing.

All the above means that a judge will exonerate you from your debts (immediate exoneration), or that you will reach a refinancing agreement with your creditors, which will allow you to get out of the current situation, stop the seizures, etc. (deferred exoneration).

2) To whom is the Second Chance Law addressed?

  • Company directors: those who carry over debts after their company has wound up or who have guaranteed the company with their personal assets can apply.
  • Self-employed people: those who find themselves without financing to continue with their business and see their family debt increase.
  • Individuals with debts due to lack of work, charges in their name, mainly mortgages or contracts with financial institutions.

3) Requirements to be eligible for the second chance law:

  • Lack of assets to pay debts and give in payment those still held in favour of creditors, except those of basic need and those that are essential for the development of the professional activity in the case of the self-employed.
  • The amount of the debts should not exceed 5 million euros.
  • To be a good faith debtor in accordance with the provisions of the Bankruptcy Law (Article 178 bis section 3).

4) Conclusion:

Those persons whose businesses and companies are being affected by the national lockdown decreed to deal with the COVID-19 outbreak are offered a way out. They have the opportunity of restructuring their debts rather than having to close down or the chance to resume their activity again without having to carry over debts.

This means reaching a settlement with their creditors that will allow them to gain time to sell assets and avoid widespread foreclosure, obtain suspension of interests on loans except those secured by mortgages, stop liens and foreclosures, and reduce debts through debt reliefs.

And if a settlement is not reached, their debts could be forgiven.

Xavier Franquesa