Debt Relief: Successful Stories

In this article, we explain the “Second Chance Law” (Debt Relief), with practical examples of real cases processed by our team of lawyers in the first quarter of 2022.

What is the second chance law (debt relief)?

The second chance law (debt relief) is a mechanism established in July 2015 by Law 25/2015, allowing judges to eliminate natural persons’ debts under certain conditions.

The result can be complete (100% of the debts) if all the requirements to access the second chance are met, which are the following:

1. Having attempted an agreement to pay the debts, and doing so in the manner established by law: with the intervention of a bankruptcy mediator and usually before a Notary Public, following the legal protocol.
2. File an insolvency proceeding before the judge. It is declared fortuitous, which means that the debt has not been caused voluntarily by the debtor (the bankrupt person) to harm his creditors.
3. Not have a criminal record for crimes against property (theft, robbery, fraud, misappropriation) or against workers or public administrations.
4. Not having tried to take advantage of the second chance before.

If all these requirements are met, the judge will consider that the bankrupt person is a “debtor in good faith” and declare that his debts (up to a limit of five million euros) can no longer be claimed.

Debts relief is the result obtained after the second chance process and means settling the debts, which cease to exist.

When a person obtains a declaration of exoneration, all liens against him are cancelled, all legal proceedings against him are filed, and all his records are removed from the delinquent files.

The debts of those affected disappear, so it is known as a second chance mechanism because it allows them to resume their lives again, freed from their debts.

Can individuals be exempt from all their debts?

The answer to this question is not the same for all people, and each particular case and each specific situation must be assessed, but, in the abstract, YES it is possible to obtain the exoneration of all the debts of a person, although it is convenient to note any nuance.

Specifically, there are some debts that, if they exist, cannot be exonerated as in these cases:

Debts for alimony in favour of children.
The mortgage receipts (if the house is kept).
Water, electricity and gas bills.
Contest expenses.

There is also another type of debt that raises a lot of debate among experts, and they are the debts of public administrations (basically with the Treasury and Social Security).

Debt Relief success story

Apart from this debate, the reality is that, in April 2022, we have managed to get a Court of Seville to declare for one of our clients the exoneration of all his debts, expressly including 100% of the debts with public administrations.

In this case, Enrique P.M. He had been the administrator of a company hit by COVID, which during the pandemic had obtained different ICOs from various banks. Enrique’s problem was that, after closing his company, the banks sued him and claimed the ICOs, because he had personally endorsed them.

Therefore, once the company had spent all the money, and when it had already closed, Enrique was left in charge of all the debt from the ICOs, and could not pay it.

In December 2021, we initiated the second chance mechanism for Enrique before a Notary Public, and then we presented his bankruptcy proceedings before the Mercantile Court of Seville, which in record time – less than four months – declared the exoneration of all his debts ( including 100% of debts with public administrations).

Is there a limit to the amount that can be exempted?

There is a maximum limit to declare the exoneration of debts set at five million euros.

Another Debt Relief success story

It may seem like a very high figure for many of us, but from our practise, we know those millionaire debts are not as challenging to achieve as it looks, as happened to Román R.C., who came to us in 2021 when a financial institution claimed 2,700,000 EUR.

Román had been the administrator of a company dedicated to real estate development, which went bankrupt in 2010.

After closing the company, a financial entity demanded that Román pay him a considerable amount of money (more than three million euros) for unpaid debt by the company that Román had guaranteed.

Román handed over his home to the bank to pay his debt, but two years later, the bank sued Román to claim the remaining part of the outstanding debt, and he went to our offices.

After examining his case, we started his second chance procedure, and eight months later, a Barcelona Mercantile Court exonerated Román of all his debt with the bank, and the lawsuit he had filed was filed.

Second chance appraisal

The second chance mechanism was not regulated in Spain until July 2015. Before then, it was not applied, and the insolvencies of natural persons that were presented were few, reaching the figure of 769 cases throughout the year 2015.

However, in 2021 -just over six years after the mechanism was established- 5,650 contests were processed in Spain, that is, seven times more than those that had been processed in 2015[i].

These figures are far from other countries in which there is a greater tradition in the second chance mechanism, as is the case in the United States, where 413,616 procedures[ii] were initiated in 2021, or Germany, with 79,620 contests[iii].

It is clear that there is still a lot of work to be done in Spain to publicize a tool that is very effective in correcting unforeseen situations, or unavoidable crises, in those cases in which the debtor has not voluntarily caused his situation.

It must be taken into account that most of the debts that are exonerated are from banks and financial entities that, in many cases, have granted their clients much more credit than they could really assume or have forced them to sign guarantees without any guarantee limitation, which is entirely meaningless.