Debt collection proceedings present people with a difficult situation that they struggle to overcome. They cause many problems not only in their personal lives but also in their professional lives.
Although the current legal framework, as established by Act No. 7/2005 Coll. on Bankruptcy and Restructuring and on Amendments to Certain Acts (hereinafter the “Bankruptcy and Restructuring Act”) since 2006, the possibility of debt relief for natural persons (so-called personal bankruptcy) who find themselves in a debt trap, this regulation does not fulfill the function it is intended to fulfill.
Foreign legal systems allow for resolving the insolvency of a natural person in two ways, namely through the so-called:
1. “Fresh Start,” which refers to the liquidation of the debtor’s estate and rapid debt relief, utilized by debtors who have few assets and, at the same time, low income,
2. “No Fresh Start,” which can be characterized as the restructuring of the debtor’s obligations according to a repayment schedule, representing an alternative primarily for debtors who still have sufficient assets and some income, but whose assets are encumbered by security interests of third parties, and who are unable to fulfill their obligations on time or properly.
Our current legal framework for debt relief utilizes the “Fresh Start” concept, meaning that any debt relief for a natural person must be preceded by the (complete) liquidation of their estate. The fact that a debtor cannot achieve debt relief other than by liquidating their entire estate can, in principle, be considered a shortcoming of the current legal framework, as evidenced by the fact that in the Slovak Republic, only 391 individuals took advantage of the debt relief option in 2015 (so-called personal bankruptcy, through which a person is relieved of their debts) in 2015, while in the Czech Republic more than 32,000 people took advantage of this option. This is one of the reasons why the Ministry of Justice of the Slovak Republic prepared a draft law this year amending the Act on Bankruptcy and Restructuring, which is intended to introduce a relatively simple and quick procedure that will not entail high costs. The purpose of this draft bill is to address the bankruptcy of natural persons, which represents an economic and social problem for the Slovak Republic.
In this article, we will outline and analyze in detail the content of the proposed amendment to the law.
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DEBT RELIEF
The proposed amendment addresses debt relief (so-called personal bankruptcy) in its fourth part.
According to the proposed provision of Section 166, every insolvent debtor who is a natural person entrepreneur or a natural person non-entrepreneur may discharge their debts through one of two alternatives: either through bankruptcy (“fresh start”) or through a repayment schedule (“no fresh start”). We will discuss both methods of debt relief for natural persons in greater detail below. However, each natural person will be entitled to seek relief from their debts only once every 10 years from the declaration of bankruptcy or the establishment of a repayment schedule. The question remains, however, whether this 10-year period is too short, which could ultimately result in the debtor lacking motivation to fulfill their obligations.
However, a debtor will be entitled to file for bankruptcy only if enforcement proceedings are currently being conducted against them; thus, the amendment will not help those who wish to resolve their problems before enforcement proceedings begin against their assets.
Under the proposed amendment, a debtor will be deemed insolvent if they are unable to fulfill at least one monetary obligation 180 days after the due date, meaning that the presence of multiple creditors will not be a prerequisite for insolvency. Whether a debtor is “solvent” or “insolvent” will be left to the court’s discretion.
The amendment to the law proposes to stipulate that the following claims shall not be affected by debt relief:
a) a claim by a creditor—a natural person—who was not registered in the bankruptcy proceedings because the creditor was not notified by the trustee that bankruptcy had been declared,
b) a claim arising from a loan provided to the debtor by the Legal Aid Center to cover an advance payment for the trustee’s flat-rate remuneration in bankruptcy, including any accessories to such a claim,
c) a secured claim, to the extent that it is covered by the subject matter of the security interest,
d) a claim arising from liability for damage caused to health or caused by intentional conduct, including any accessories to such a claim,
e) a claim by a minor child for child support, including any accessories to such a claim,
f) a monetary penalty under the Criminal Code,
g) a non-monetary claim.
Claims that may be satisfied in bankruptcy or through a repayment schedule are:
a) a claim that arose prior to the calendar month in which bankruptcy was declared or a petition for a repayment schedule was filed,
b) a future claim of a guarantor, co-debtor, or other person who will have a claim against the debtor if they fulfill an obligation on the debtor’s behalf that arose before the declaration of bankruptcy or before the filing of a petition to establish a repayment schedule,
c) a claim arising from the termination of a contract that was concluded before the declaration of bankruptcy.
The court will decide on the discharge of a natural person’s debts by a ruling, either by declaring bankruptcy or by establishing a repayment schedule. In the ruling, the court will also be required to specify the nature of the debt. Through debt relief, claims that can only be satisfied through bankruptcy or a repayment schedule will become unenforceable against the debtor to the extent that the court has discharged the debts. However, a claim that is unenforceable against the debtor will remain enforceable against a guarantor or another person securing the claim. The court will take the unenforceability of the claim into account ex officio, and thus even without an objection from the debtor. Every public authority will treat a debtor whose claim is unenforceable as if the debtor did not exist.
Under the proposed amendment to the law, creditors whose claims were affected by the discharge of debts have the right to seek the annulment of the discharge before the court that ruled on the declaration of bankruptcy or the establishment of a repayment schedule, against the debtor or his heirs. However, in this case, the creditor will be required to prove that the debtor did not have good faith at the time he sought to be released from his debts. The creditor will be entitled to seek the annulment of the debt discharge within three years of the declaration of bankruptcy or the establishment of a repayment schedule. A final decision on the revocation of debt relief shall have erga omnes effect.
In the event of the debtor’s death, the court shall continue the proceedings against the heirs only if the petitioner insists on it. The enforceability and due date of those claims that were not satisfied shall be restored. However, these claims will not become time-barred until 10 years have elapsed since the cancellation of the debt relief.
At the time the debtor seeks to have their debts discharged, it will be necessary, as we have already mentioned above, for them to have good faith. Good faith is defined in the bill as follows: “The debtor has good faith if, based on the debtor’s conduct after filing the petition, it can be concluded that the debtor made a sincere effort to resolve their debt within the limits of their means and abilities, particularly if, after filing the petition, the debtor provided the necessary cooperation to the trustee and creditors within the limits of their means, strives, in proportion to his or her abilities, to obtain employment, has found employment, or has secured another source of income; in the case of an inheritance that is not insignificant, or a gift or winnings from a bet or game, has voluntarily offered at least half of such a source to creditors to satisfy an unenforceable debt, or is participating in an integration process or has reintegrated into society.”
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The amendment to the Bankruptcy and Restructuring Act, among other things, introduces a previously unregulated obligation for the debtor to be represented by an attorney or the Legal Aid Center. The aim of introducing this obligation is to create teams of lawyers who, if necessary, will provide individuals with qualified assistance throughout the entire debt relief process. Under the proposed amendment, the debtor is required to be represented by a lawyer or the Legal Aid Center when filing a petition for bankruptcy or a petition to establish a repayment schedule, until an administrator is appointed. Mandatory representation of the debtor will not apply to individuals who hold a master’s degree in law.
BANKRUPTCY
Bankruptcy is one of the methods of debt relief. Under the proposed amendment to the law, a petition for bankruptcy is filed by a debtor who is a natural person using the prescribed form. The court shall appoint an administrator no later than 15 days after receiving the petition for bankruptcy and shall invite creditors to file their claims. The court shall proceed in this manner if it determines that all conditions under which bankruptcy may be declared have been met. If the conditions are not met, the court will reject the petition or dismiss the proceedings. If the court declares bankruptcy, it will, without undue delay, stay all enforcement proceedings in which claims are being pursued that can only be satisfied through bankruptcy.
Upon the declaration of bankruptcy, the debtor’s authority to dispose of the assets subject to bankruptcy passes to the trustee, who shall act in the name and on behalf of the debtor. If, during the bankruptcy, the debtor performs legal acts that diminish the assets subject to bankruptcy, such acts shall be ineffective against the creditor. However, this action shall not affect their validity. The debtor and a person closely related to the debtor, with the debtor’s consent, may use the assets that are part of the bankruptcy estate in the usual manner. They shall be obligated to protect it from destruction, damage, or loss. The trustee shall, without undue delay after the realization of the assets forming part of the bankruptcy estate and after the resolution of all disputes that may affect the distribution, but no sooner than 60 days from the declaration of bankruptcy, prepare a distribution of the proceeds. The trustee shall deduct the costs of the bankruptcy from the proceeds and distribute the balance proportionally among all registered creditors according to the amount of their established claims. Each creditor shall bear the costs of satisfaction.
If the trustee determines that the bankruptcy estate is insufficient even to cover the costs of the bankruptcy, he shall announce in the Commercial Gazette that the bankruptcy is being terminated. Likewise, the trustee shall announce in the Commercial Gazette that the bankruptcy is terminated if he or she determines that no creditor has filed a claim within 90 days of the date of the declaration of bankruptcy or that the status of all creditors as parties to the proceedings has ceased. This announcement in the Commercial Gazette shall terminate the bankruptcy. The bankruptcy shall also be terminated by a court order discontinuing the proceedings on the grounds that there are no other grounds for conducting the bankruptcy. In the order, the court shall also decide on the cancellation of the discharge of debts.
If the debtor dies during the proceedings, the court will continue the proceedings without determining the circle of heirs. The heirs must join the proceedings. If any of the debtor’s heirs joins the proceedings, the court will treat them as a party to the proceedings from that time onward. However, if it is proven that they are not an heir, the court will rule that they are not a party to the proceedings. The proposed amendment to the Bankruptcy and Restructuring Act, however, does not specify in detail the timeframe or manner in which the debtor’s heirs must file a claim, which may create room for unnecessary prolongation of the entire bankruptcy proceedings. In this case, the trustee will remain authorized to administer the bankruptcy estate, acting on behalf of and for the account of the heirs. Unknown heirs will be notified through publication in the Commercial Gazette.
REPAYMENT SCHEDULE
Another method of debt relief for natural persons, according to the proposed amendment to the law, is the establishment of a repayment schedule. As with bankruptcy, in the case of a repayment schedule, a natural person who is a debtor is authorized to file a motion for its establishment using the prescribed form. The court shall grant protection to the debtor no later than 15 days after receiving the motion to establish a repayment schedule if it determines that all conditions for establishing the repayment schedule have been met. In the order granting protection from creditors, the court shall appoint an administrator and impose on the debtor the obligation to deposit into the administrator’s account a lump-sum fee or lump-sum reimbursement of necessary costs associated with the performance of administrative duties. If the debtor fails to do so within 7 days of the administrator’s request, the administrator shall publish this fact in the Commercial Gazette. The proceedings shall be terminated by the publication in the Commercial Gazette.
If the court establishes a repayment schedule, the enforcement court shall suspend enforcement proceedings against the debtor that can be satisfied only through the repayment schedule. The debtor is also entitled to request a six-month postponement of the auction of their residence. Within 45 days of receiving the fee, the administrator shall assess the debtor’s financial circumstances and draft a repayment schedule. The court shall establish the repayment schedule unless there are grounds to suspend the proceedings. In this case, the court shall follow the administrator’s proposal but may also take into account creditors’ objections or other known circumstances. If the court determines that the debtor’s financial circumstances do not permit the establishment of a repayment schedule, it will dismiss the proceedings. In this case, the court will instruct the debtor in its ruling regarding the possibility of filing a petition for bankruptcy. Upon the declaration of bankruptcy regarding the debtor’s assets, the repayment schedule becomes ineffective.
If the debtor dies during the proceedings to establish a repayment schedule, the court shall discontinue the proceedings.
The provisions of the draft law amending the Bankruptcy and Restructuring Act concerning the repayment schedule completely lack any regulation regarding the filing of claims by creditors. It is therefore entirely unclear how the administrator is to learn of creditors’ claims, within what timeframe, in what form, and by what means, as well as to whom creditors are required to file their claims. The amendment also does not specify what claims creditors may file, or what consequences failure to file claims will entail. We also consider it a shortcoming of the proposed amendment to the Bankruptcy and Restructuring Act that it does not address the situation of a debtor’s potential failure to fulfill obligations arising from the repayment schedule.
The proposed amendment to the Bankruptcy and Restructuring Act is currently undergoing inter-ministerial review, and if approved, the changes could take effect in 2017.
