With recent financial instability caused by the Covid-19 pandemic and rising costs of living, unfortunately the amount of people going bankrupt is increasing. This article will cover what bankruptcy is, how to file for it in Spain and what consequences it has.
If you are on the other side of the equation and you are owed money, this page might be useful for you.
What is bankruptcy?
Bankruptcy, or insolvency, is recognised in the law as a situation where a person stops being able to fulfil their obligations to pay bills, rents or debts. In other words, their total expenditure amounts to more than their income or savings. This can unfortunately happen to anyone, for various reasons. There could have been a sudden, unexpected change in employment status. Moreover, it could be due to unforseen essential expenditure such as for medical issues. Finally, the amount of people filing for bankruptcy has increased after unforseen economic crises such as the Covid-19 pandemic or the financial crisis of 2008.
However, thankfully there are steps you can take if you find yourself in this situation, which could result in all of your debts being cancelled.
How do you file for bankruptcy (economic insolvency) in Spain?
The procedures are different if you are an individual or a company. This article is going to focus on individuals – if you are reading this as a member of a company who has gone bankrupt or considering insolvency proceedings, please get in touch with one of our lawyers to discuss your individual case.
The first step would be to try to do mediation away from court, as court appearances are timely and costly. A list of mediators and mediation places can be found on this website from the Ministry of Justice. If this fails, it can progress to a commercial court.
The debtor (the person who owes money), the creditor (the person or business to whom money is owed) or the mediator could all request court insolvency proceedings. In case of the debtor applying, Spanish Insolvency Law says that they need to apply within two months from the date that they knew or should have known of the insolvency. No matter who has called the court appearance, what follows is largely the same.
The debtor needs to get a lawyer to represent them. The lawyer will present the declaration of bankruptcy before a judge. This declaration is applied through the Law of Second Opportunity, which is a law allowing people in situations of bankruptcy to start from scratch.
What are the requirements to apply through the Law of Second Opportunity?
To be in a situation of bankruptcy
To have at least two debts with different creditors, whether banks, companies, utility companies, tax authorities etc
To not have already been found guilty in bankruptcy proceedings
To not have debts of over five million euros
To not have already benefitted from the Law of Second Opportunities in the last 10 years
To not have been convicted of economic crimes or falsification of documents in the last 10 years
To have not refused a job offer in the last 4 years
To act in good faith. This is not defined by law, but rather is decided by the judge. This refers to the previous points in this list but basically means that you have not acted deceitfully in any way and are willing to collaborate with the proceedings
These requirements apply to anyone. It does not matter if you are employed, self-employed or retired, if you comply with the requirements above then your lawyer can apply through this Law.
The judge will then decide if the documentation provided proves that these requirements are met. If they are, the negotiations start with the creditors and the judge, until an agreement is made.
What will the outcome be?
Although getting your debts cancelled may seem like a great thing, it is not without consequences and should not be a decision taken lightly. Firstly however, we will start with the positive outcomes of filing for bankruptcy.
Positive outcomes of filing for bankruptcy:
Your debts could be cancelled and written off. This takes an enormous weight off of many people’s shoulders, especially if the debts were large. This applies for private debts. However, in case of debts with tax authorities or social security, debts can be written off up to a value of 10,000 euros
Even if they are not fully written off, a payment plan will be made to pay the debts at a sustainable rate during a maximum time of five years. This will be negotiated during court proceedings
Whilst negotiations are ongoing, having a legal status of bankruptcy offers legal protection against creditors (the person/people to whom you owe money)
It stops forced seizing of property or goods by the creditors
It takes you off the debtors register. These registers make it very difficult to trade or do business with people in future, as you are black-listed as someone who has failed to pay their debts
Notwithstanding, these are some negative consequences that the judge may declare and that you should be aware of.
Negative outcomes of filing for bankruptcy:
Restrictions on your rights and liberties
Economic long-term restrictions
The judge may want to look through your personal communications
Forced to live in a certain place (e.g. your hometown)
The costs involed in declaring bankruptcy (legal costs, court appearance etc.)
Have to do obligatory financial education to try to prevent future debts
Each situation is different and so it is sometimes tricky to know if it is worth it to declare yourself bankrupt. Nonetheless, this law is often the best option and a livesaver for those who need to start over financially. Our expert lawyers can consider your particular situation and advise on the best steps available to you.
DISCLAIMER: this information may not be up-to-date and so cannot be considered legal advice. For more information from our expert lawyers which is relevant to your case, please contact us using the details below.
Piñera del Olmo
c/ Aribau 114, entlo (mezzanine) 2ª
08036 Barcelona
Phone: +34 93 514 39 97
Fax: +34 93 127 07 66
Email: rpinera@pineradelolmo.com