Second Chance Act: Possible way out of the COVID-19 health crisis

The current COVID-19 pandemic has generated numerous insolvency situations in Spain and with it, businessmen have lost everything due to unforeseen circumstances that could not be controlled or foreseen. In 2015, through the reform of the Bankruptcy Law, the so-called Second Chance Act was introduced, a benefit, which, in the situation in which we find ourselves, could be of great help. But to see if its application could be considered as a tool that benefits entrepreneurs affected by this crisis, we will proceed to explain what this law consists of. The law of the second chance is about the possibility of extinguishing or canceling debts that the debtor has not been able to satisfy with the liquidation of his assets. With this, and with the intention of reaching an agreement, the person would be protected from creditors, since the judicial enforcement proceedings that were initiated against him are suspended. From now on, the usual thing -and which we will develop later-, is to hold a meeting to reach an agreement in order to renegotiate the conditions which will make the payment of the debt carried out. We must take into account an important fact that limits the use of such a tool, and that is that only individuals (businessmen, entrepreneurs, self-employed workers or family units) who are in a situation of insolvency and who logically cannot afford to pay their debts with their income, the value of their debts being greater than their income, can enjoy this debt exemption benefit. The second chance procedure or mechanism, by way of summary, would consist of two phases: a first consisting of an extrajudicial agreement; and a second, for which the consecutive bankruptcy appears on the scene. With regard to the extrajudicial payment agreement, it is considered a essential procedure for the benefits of the Second Chance Act to be applied. This phase begins through a notary who will be the one who will promote negotiations between the debtor and the different creditors, in addition to appointing a bankruptcy mediator, an indispensable figure in the agreement since he restructures the debt through the well-known withdrawals and waits to obtain the payment of credits. Negotiations are limited in time with a maximum duration of two months, and during them, creditors will never be able to initiate judicial enforcement proceedings. If the proposal is accepted by creditors, the agreement will be formalized in a public decree and the file opened by the notary or by the commercial registry will be closed. If the proposal is finally not accepted, and the debtor is still unable to pay his debts, the second phase will begin to obtain the second chance: the consecutive bankruptcy. This consecutive bankruptcy will be held in the Commercial Court of the debtor's domicile, and through which the orderly liquidation of the debtor's estate will take place. Once the debtor's assets are liquidated, If it had one, or if it didn't, once the judge issues the corresponding order of declaration of bankruptcy and, consequently, the conclusion due to insufficient assets, it is at this procedural moment that the debtor must request the benefit of exemption from the unsatisfied liabilities. Once we have announced the procedure to be followed, it is necessary to determine what are the requirements that are required for the enjoyment of debt exemption: Well, the fundamental requirement to benefit from such a tool, is that the debtor considers himself a debtor of in good faith, that is, that you have acted in good faith to meet the following requirements:

• That the contest has not been found guilty.
• That the debtor does not have a criminal record.
• That an out-of-court payment settlement has been attempted.
• That the debtor has paid the claims against the estate as well as the privileged bankruptcy claims.

Once it has been verified that the requirements for taking advantage of the Second Chance Act are met, the competent judge will exonerate the debts if all the conditions established by law are met, and finally a payment plan will be approved for the debts contracted to settle it within a maximum period of 5 years. In short, it is clearly possible to apply such an instrument established in the Bankruptcy Law to the Covid-19 crisis situation, although, of course, and like everything else, we will have to see how events unfold and if Courts are prepared to face such a challenge.

Pilar Mata (T&L Attorney)