Insolvency law and second chance

Insolvency proceedings are a court procedure, governed by the Consolidated Text of the Insolvency Act (Royal Legislative Decree 1/2020, as amended by Law 16/2022), open to any debtor, whether an individual or a legal entity, who is insolvent: unable to meet their due obligations regularly (actual insolvency) or who foresees being unable to do so (imminent insolvency). The proceedings are handled by a commercial court and have two aims: to pay creditors in accordance with a statutory order and, where possible, to preserve the debtor's activity by means of an arrangement or plan.

They may be requested by the debtor (voluntary insolvency) or by a creditor (compulsory insolvency). On the declaration of insolvency, as a general rule, individual enforcement actions and seizures are stayed, an insolvency administrator is appointed where appropriate, the list of creditors and the inventory of assets are drawn up, and the procedure ends with an arrangement or the liquidation of the assets. A simpler special procedure exists for micro-enterprises and the self-employed.

It is unwise to delay: a debtor in actual insolvency has a duty to apply for insolvency within two months of becoming aware, or of when they ought to have become aware, of it. Delay may result in the insolvency being classified as culpable, with personal consequences for the directors of a company and, for an individual, the loss of the possibility of having debts discharged.

The Second Chance Law is the popular name for the mechanism for discharge of unsatisfied liabilities (Articles 486 et seq. of the Consolidated Text of the Insolvency Act). It allows an individual, whether or not a business owner or self-employed, who cannot pay their debts to cancel in full or in part those that cannot be met, so as to start afresh without carrying a debt that can never be paid. It is not available to companies, which follow their own path (restructuring, insolvency and liquidation).

To qualify, you must be insolvent and a debtor in good faith, which the law defines by specific requirements: for example, not having been convicted by final judgment of certain offences (against property, socio-economic, forgery of documents, against the Treasury and Social Security, or against workers' rights) in the previous ten years, not having been penalised for very serious tax, Social Security or labour offences, the insolvency not being classified as culpable and having cooperated with the court and the insolvency administrator.

There are two routes: discharge with a payment plan, without first liquidating the assets, or discharge following liquidation of the estate. The first generally allows you to keep your main residence and business assets. An application can be made again, but only two years after final discharge with a payment plan or five years after discharge with liquidation.

Not all of them, but the great majority. The law extends the discharge to all unsatisfied debts, except for a closed list of exceptions (Article 489), which are covered in the next question. Among dischargeable debts, the way in which they are cancelled depends on the route chosen.

With a payment plan, for a period (as a general rule, three years, extendable to five in certain cases) the debtor applies to the debts all income above the minimum exempt from seizure, and at the end obtains final discharge of the remainder. With liquidation of the estate, the debtor's seizable assets are sold to pay the creditors and, once the insolvency has concluded, what remains unpaid is discharged. In both cases, the discharge is first provisional and then final.

You should be aware that the discharge may be revoked if it is later discovered that the debtor concealed assets or income, or if the debtor fails to comply with the payment plan. It is therefore essential to be transparent from the outset and to declare all assets and all debts.

Article 489 of the Consolidated Text of the Insolvency Act sets out the exceptions. Debts that cannot be discharged include, among others, maintenance debts, debts for civil liability arising from a criminal offence, those arising from non-contractual civil liability for death or injury, debts for wages for the last days of actual work and claims against the estate, that is, the costs of the procedure itself. The creditors of these debts retain their rights of action against the debtor after the insolvency.

Public law claims (Tax Agency and Social Security) are a separate case: they are not discharged as a general rule, but the law allows them to be cancelled up to a limit (in essence, 10,000 euros: the first 5,000 euros are discharged in full and 50% of the remainder up to that ceiling), and this rule has been the subject of recent interpretations and court rulings, so each case should be analysed. For debts with security in rem (mortgages, pledges), the debt is not discharged up to the value of the security.

The fact that a debt cannot be discharged does not mean that the debtor cannot benefit from the mechanism: under the payment plan route, payment of those debts may be included in the plan, with a timetable approved by the court. The important thing is to know from the outset which debts weigh most heavily and what solution each one has.

The cost depends on the complexity of the case, the type of debtor and the route chosen, so there is no single tariff. The main items are the fees of the lawyer and court representative (procurador), which are agreed in writing before work begins, and the remuneration of the insolvency administrator, where required, which the court sets according to the official scale and which is reduced in small insolvencies. In an insolvency with assets, the costs of the procedure are paid from the debtor's assets ahead of most creditors.

Some procedures are specifically designed to make the process cheaper. The special procedure for micro-enterprises and the self-employed is simpler and does not always require an insolvency administrator, and insolvency without assets (concurso sin masa), where the debtor does not have enough assets even to pay the costs of the procedure, is handled more quickly. These routes also allow discharge of debts to be requested within the same procedure.

In the initial study we should explain clearly what the fees include, what further costs can be expected and how they are paid. Be wary of debt cancellation offers at fixed prices that do not distinguish between types of debt or procedural routes.

It depends on the type of insolvency, the court's workload and whether creditors oppose. As an order of magnitude, an insolvency without assets or a special micro-enterprise procedure, which are simpler, may be resolved in a few months. An ordinary insolvency with assets to be liquidated or an arrangement to be negotiated usually takes more than a year, and complex business cases may last considerably longer.

With the second chance, the period for the chosen route must be added. With discharge after liquidation, the debtor obtains the discharge when the liquidation ends. With a payment plan, the timetable is usually three years, extendable to five in certain cases, and final discharge comes on completion. During the plan, the debtor may carry on with their life and work, but must comply with it.

Timescales shorten when the application is filed complete and well documented (inventory, list of creditors, income and expenditure), and lengthen with requests for further information, opposition incidents or appeals. That is why advance preparation of the case is so important.

It depends on the route and the circumstances. In discharge after liquidation, seizable assets form part of the estate and may be sold to pay the creditors, including the home, which is usually also mortgaged: the mortgage creditor has a special priority and is paid from the value of the property. By contrast, in discharge with a payment plan, the debtor can generally keep their main residence and business assets in exchange for applying their income to paying the debts during the plan.

There are assets that the law treats as exempt from seizure and that are not lost: basic furniture and household goods, and the tools needed to practise a profession or trade. A vehicle may be retained if it is shown to be essential for work, and the payment plan is assessed in a similar way. Each case is studied in light of the value of the asset, the debt charged on it and how necessary it is to the debtor.

You should be aware that, in insolvencies without assets or those concluded for insufficiency of assets, discharge is sought through the liquidation route, so a choice is not always possible. It is therefore useful to study the strategy before filing the application: the decisions taken at that stage later determine which assets are kept.

The main difference is the final objective. An individual is liable for their debts with all their present and future assets (Article 1911 of the Civil Code), and insolvency gives them access to discharge of unsatisfied liabilities: cancelling the debts they cannot pay and starting afresh. A company, by contrast, has no access to discharge: if the insolvency ends in liquidation, its assets are sold, the debts are paid as far as they will go and the company is dissolved and removed from the Commercial Registry.

There are other important differences. In a company, the directors come into play, who may be personally liable if the insolvency is classified as culpable or if they failed in their duty to apply in time, and there is the possibility of saving the business through an arrangement or restructuring plan. For an individual, in addition to their own assets, the matrimonial property regime and debts incurred with a spouse must be taken into account.

For the self-employed and micro-enterprises (fewer than ten employees and certain turnover and debt limits) there is a special procedure, with a continuation route and a liquidation route, which is compulsory when its requirements are met and which also allows an individual to seek discharge within the same procedure.

It is a preventive solution, prior to insolvency, for companies and business owners who are in difficulty but can still be saved. Following the 2022 reform (Law 16/2022, transposing a European directive), the former refinancing agreements have been replaced by restructuring plans, governed by Book Two of the Consolidated Text of the Insolvency Act. They may be used where there is a probability of insolvency, or imminent or actual insolvency.

A restructuring plan alters the composition of the assets, liabilities or capital of the business: deferrals, write-offs, debt-to-equity conversion, new financing or sale of production units. It is negotiated with the creditors, voted on by classes and, if it obtains the required majorities, may be sanctioned by the court, which allows its effects to be extended even to dissenting creditors, within the statutory limits.

Notifying the court of the opening of negotiations has protective effects: for an initial period (up to three months, with possible extensions), enforcement against assets needed for the activity is restricted and the duty to apply for insolvency is suspended. It is a very useful tool if used in time, while there is still room to negotiate.

The first step is to separate the debts by type: banks, suppliers, the Tax Agency, Social Security, mortgages and guarantees. From there, there are several options, which may be combined. The simplest is to negotiate: deferrals and instalment arrangements with the Tax Agency and the General Treasury of the Social Security, refinancing with banks or payment agreements with suppliers. If the business is viable but at its limit, a restructuring plan may be considered.

If the situation is unsustainable, there are court routes. If a self-employed person has fewer than ten employees and meets the turnover and debt limits, they must use the special procedure for micro-enterprises, either with a continuation plan to save the activity or with a liquidation plan. If they have already ceased the activity and have no assets, they may use insolvency without assets. In all cases, they may seek discharge of debts as an individual, subject to the limitations the law sets for public law debts.

What is not advisable is to wait: remember that the law imposes a duty to apply for insolvency within two months of becoming aware of actual insolvency, and that the sooner you act, the more options there are. A complete analysis of income, expenditure, assets and debts is the first step in choosing the way out.

It depends on what was done and how it is assessed. The law excludes from discharge a debtor who is not in good faith and, among the circumstances taken into account, is having provided false or misleading information, or having behaved recklessly or negligently, when taking on the debt. An example would be falsifying income or documents so that the bank would grant the loan. In such cases, creditors may oppose and the court may refuse discharge, at least of that debt.

Not every inaccuracy carries the same weight. The court examines the specific conduct, its seriousness and its connection with the debt: an irrelevant omission is not the same as tampering with documents to obtain finance. In addition, lying during the procedure itself (for example, by concealing assets or income) may lead to loss of the discharge, classification of the insolvency as culpable and even criminal liability.

If there is anything of this kind in your history, the most important thing is to tell your lawyer from the outset, with all the documents, so that the lawyer can assess the real risk, the strategy and, where applicable, which debts may be affected. Transparency is always better than waiting for a creditor to raise it.

Discharge of debts protects the debtor, but not those who guaranteed the debt. As a general rule, discharge does not affect creditors' rights against joint and several obligors, sureties and guarantors: the bank may claim the discharged debt from the person who guaranteed it. It is therefore essential, before entering insolvency, to identify which debts are guaranteed and by whom, because the problem may pass to family or friends.

In that situation there are several options. You can negotiate with the creditor before filing for insolvency, in order to release the guarantor or adjust the debt. You can consider whether it is advisable to pay the guaranteed debts voluntarily within the payment plan. And the possibility can be assessed of the guarantor, if an individual and insolvent, also applying for discharge of their own debts.

The matrimonial property regime and debts in which a spouse or partner is involved as joint and several debtor or guarantor must also be taken into account. A prior analysis of all personal and real guarantees avoids unpleasant surprises for those closest to you.

A declaration of insolvency generally means that creditors cannot commence or continue individual enforcement against the debtor's assets, so seizures of accounts and assets are stayed while the insolvency is processed. In addition, the law protects basic income: the part of a salary equivalent to the statutory minimum wage cannot be seized, and seizures of any higher part are governed by the scale in Article 607 of the Civil Procedure Act.

Under the discharge route with a payment plan, the debtor must apply to the debts all income above the minimum exempt from seizure during the term of the plan, so that a basic standard of living is guaranteed but the rest goes towards payment. Under the liquidation route, the seizable part of income may form part of the estate for as long as the procedure lasts. Non-dischargeable debts, such as maintenance, may continue to be claimed.

The practical effect depends on each case, so the employer and creditors should be informed through the procedure, and you should review with your lawyer how much you earn, how much you owe and which seizures are already in place, in order to request that those that should be lifted are lifted.

Yes, in practice it is essential. Discharge of unsatisfied liabilities is requested within insolvency proceedings before the commercial court, and in these proceedings the debtor must be represented by a court representative (procurador) and assisted by a lawyer. Even the special procedure for micro-enterprises, which is designed to be quicker and cheaper, ensures the involvement of both professionals.

Beyond the legal obligation, there are technical reasons for having a specialist lawyer. The route must be chosen (payment plan or liquidation), compliance with the good faith requirements assessed, the inventory of assets, list of creditors and payment plan prepared, the application defended against possible opposition from creditors (often banks or public authorities), and the time limits and subsequent requirements monitored, as failure to comply may lead to revocation of the benefit.

A mistake in the initial stage (omitting a debt, failing to declare an asset, choosing the wrong route) may cost you the discharge or delay it by months. We therefore recommend a complete prior study before anything is filed with the court.

The law does not prohibit it, and discharged debts cease to be enforceable. After discharge you can again apply for accounts, cards or loans, but in practice lenders will be cautious. It is common for banks to take time before financing you, for you to start with small amounts or with guarantees, and for you to have to rebuild a record of punctual payments.

Several factors play a part. The decision granting the discharge is published in the Public Insolvency Register for a limited period and with access restricted to those showing a legitimate interest, and once that period has ended you should request the removal of the data. Discharged debts must also be removed from credit reference files such as ASNEF, and it is important to check that this has been done and to demand it if not. The Bank of Spain's Central Credit Register is not a list of defaulters, but lenders consult it, and cancelled debts must be correctly reflected.

There are two practical tips: do not take on more debt than you can repay and pay new debts punctually, and make sure your record is cleared. Remember also that a new discharge, if ever needed, is possible only after two or five years, depending on the route used previously.