Extrajudicial Settlement of Payments - Second Chance Lawyer

THE BEPI:

Article 178 bis of the former Bankruptcy Law (Ley Concursal) is to be found today in Article 486 and the following articles of the new consolidated text of the Bankruptcy Law.  However, the debtor must make a prior proposal for an out-of-court payment/settlement agreement to the ordinary creditors, offering something more than the total cancellation of their claims. I.e. a previous proposal must be made in the mediation that amounts to a real agreement proposal. If they do not accept it, the ordinary creditors may find that their claims are entirely extinguished during the  subsequent insolvency proceeding (Judgment of September 7, 2021, 15th Section, Provincial Court of Barcelona, Resolution 1673/2021). 

Written by Josep Conesa

Labour and bankruptcy lawyer

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WHO CAN REQUEST THE BENEFIT OF THE EXONERATION OF UNPAID LIABILITIES (BEPI)

Article 487 establishes the SUBJECTIVE REQUIREMENT that:

The individual debtor must be acting in good faith, which is considered to be the case when:

1. The bankruptcy has not been declared culpable.
   • However, if the bankruptcy has been declared culpable due to the debtor's failure to timely request the declaration of bankruptcy, the judge may grant the benefit considering the circumstances that caused the delay.
2. The debtor has not been convicted by a final judgment for crimes against property, against the socio-economic order, for document forgery, against the Public Treasury and Social Security, or against workers' rights in the ten-year period prior to the declaration of bankruptcy.
   • If there are criminal proceedings pending, the bankruptcy judge must suspend the decision regarding the discharge of unpaid debts until a final judicial resolution is issued.

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WHEN will THE SECOND CHANCE be ADMITTED?

The request for exoneration of unpaid debts will only be admitted for debtors who have acted in good faith and who meet all the following requirements:

1. Non-culpable bankruptcy: The bankruptcy has not been declared culpable. An exception is made for cases declared culpable due to the late filing of the bankruptcy (Article 165.1.1º Bankruptcy Law).

2. No convictions in the last 10 Years: The debtor has not been convicted by a final judgment for crimes:

   • Against property
   • Against the socio-economic order
   • Of document forgery
   • Against the Public Treasury and Social Security
   • Against workers' rights

3. Out-of-Court Settlement Agreement: The debtor has concluded or attempted to conclude an out-of-court settlement agreement (meeting the requirements of Article 231 LC).

4. In the event that an Out-of-Court settlement agreement has not been attempted:

   • The debtor has honoured all claims against the estate and privileged claims (Articles 90 and 91 LC).
   • Or, the debtor has honoured at least 25% of the ordinary bankruptcy claims (Article 89.3 LC).
   • Or, the debtor accepts to submit to the payment plan provided for in Article 178.bis.6, meaning that:
     • Debts must be paid within the five years following the conclusion of the bankruptcy, unless they have a later maturity date. No interest will accrue for five years. A payment plan proposal must be submitted. With the exception of public law claims, which are governed by the general rules.
     • The debtor has not failed to meet the obligations of cooperation (Article 42 LC).
     • The debtor has not obtained this benefit in the last ten years.
     • The debtor has not rejected a suitable job offer in line with their capabilities within the four years prior to the declaration of bankruptcy.
     • The debtor explicitly accepts, in the request for exoneration of unpaid debts, that obtaining this benefit will be recorded in the special section of the Public Bankruptcy Register for five years.

If the bankruptcy administrator and the creditors agree with the debtor's request or do not oppose it, the bankruptcy judge will provisionally grant the benefit of the discharge of unpaid debts in the resolution, declaring the conclusion of the bankruptcy due to the end of the liquidation phase.

OPPOSITION TO exoneration IN THE SECOND CHANCE:

Opposition can only be based on the failure to meet one or more of the requirements in section 3 and will be processed as a bankruptcy incident. No order of conclusion of the bankruptcy can be issued until the resolution of the incident recognising or denying the benefit is finalised.

SCOPE OF exoneration IN THE SECOND CHANCE:

The benefit of the exoneration of unpaid debts granted to debtors as provided in number 5 of section 3 will extend to the unpaid part of the following claims:

1. Ordinary and subordinated claims outstanding at the date of the conclusion of the bankruptcy proceedings, even if they have not been communicated, except for public law and maintenance claims.
2. With respect to the claims listed in Article 90.1, the part of the claim which could not be satisfied by the realisation of the security shall be exempt unless it falls, according to its nature, into a category other than ordinary or subordinated claims..

Creditors whose claims are discharged cannot initiate any action against the debtor to collect them.

The rights of creditors against those jointly and severally liable with the insolvent party and against their guarantors or suretiesremain unaffected, and such parties may not invoke the benefit of exoneration of unpaid debts obtained by the insolvent party nor be subrogated by subsequent payment into the rights the creditor had against the insolvent party, unless the exoneration granted is revoked.

If the insolvent party had a community property matrimonial regime or any similar common property matrimonial regime and this regime has not been wound up, the benefit of the exoneration of unpaid debts shall be extended to the spouse of the insolvent party, even if his or her own insolvency proceedings have not been declared, in respect of the debts incurred prior to the declaration of insolvency proceedings for which the joint assets are liable.

Debts that are not exonerated in accordance with the provisions of the preceding section must be paid by the insolvent party within five years of the end of the insolvency proceedings, unless they fall due at a later date. During the five years following the end of the insolvency proceedings the outstanding debts will not be able to accrue interest.

To this end, the debtor must submit a proposed payment plan which, after hearing the parties within a period of 10 days, will be approved by the judge in the terms in which it was submitted or with the modifications that he or she deems appropriate.

With regard to public law claims, the processing of requests for deferment or instalments shall be governed by the provisions of their specific regulations.

Objection:

Any insolvency creditor shall be entitled to request that the insolvency judge revoke the benefit of exoneration of unpaid debts when, during the five years following its concession, the existence of income, assets or rights of the debtor that have been concealed is ascertained. Assets that cannot be seized in accordance with the provisions of articles 605 and 606 of Law 1/2000, of the 7th of January, on Civil Proceedings (Ley 1/2000, de 7 de enero, de Enjuiciamiento Civil), are exempt from this provision.

Revocation may also be requested if, during the period set for compliance with the payment plan:

1. Any of the circumstances which, in accordance with paragraph 3, would have prevented the granting of the benefit of the exemption of unpaid liabilities, are found to have arisen.
2. Where applicable, the debtor fails to comply with the obligation to pay non-exonerated debts in accordance with the provisions of the payment plan; or.
3. The debtor's financial situation is substantially improved by inheritance, bequest or gift; or gambling, so that he or she is able to pay all outstanding debts without detriment to his or her maintenance obligations.

PROCESSING:

The application will be processed in accordance with the provisions of the Law on Civil Proceedings regarding oral proceedings. In the event that the judge decides to revoke the benefit, the creditors shall recover the full extent of their actions against the debtor to enforce the claims that had not been settled at the conclusion of the insolvency proceedings.

Once the period set for compliance with the payment plan has elapsed without the benefit having been revoked, the insolvency judge, at the request of the insolvent debtor, will issue an order definitively recognising the exoneration of the unpaid debts in the bankruptcy proceedings.

They may also, depending on the circumstances of the case and after hearing the creditors, declare the final waiver of the unpaid debt of the debtor who has not fully complied with the payment plan but has allocated to its compliance at least half of the income received during the five-year period from the provisional granting of the benefit which is not considered to be unseizable, or a quarter of such income when the debtor meets the circumstances set out in article 3. 1, letters a) and b) of Royal Decree-Law 6/2012, of the 9th of March, on urgent measures for the protection of mortgage debtors without resources, with respect to the income of the family unit and family circumstances of special vulnerability (Real Decreto-ley 6/2012, de 9 de marzo, de medidas urgentes de protección de deudores hipotecarios sin recursos, respecto a los ingresos de la unidad familiar y circunstancias familiares de especial vulnerabilidad).

For the purposes of this article, unseizable income is understood to be that provided for in article 1 of Royal Decree-Law 8/2011, of the 1st of July, on measures to support mortgage debtors, control public expenditure and cancel company and self-employed debts contracted by local entities, to promote business activity and encourage rehabilitation and administrative simplification (Real Decreto-ley 8/2011, de 1 de julio, de medidas de apoyo a los deudores hipotecarios, de control del gasto público y cancelación de deudas con empresas y autónomos contraídas por las entidades locales, de fomento de la actividad empresarial e impulso de la rehabilitación y de simplificación administrativa).

No appeal may be lodged against this resolution, which will be published in the Public Bankruptcy Register. However, the final exoneration may be revoked when the cause provided for in the first paragraph of the preceding section arises.

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