This post will be my last one, and I would like to start it thanking Bob and the rest of the Credit Slips team for inviting me again to guest blog. I felt flattered and excited to share my experiences with Spanish insolvency law the first time, and the feeling remained throughout my second blogging stint. The experience has been so interesting (and a bit challenging) that I would not mind returning for a third time in the future.

My previous post covered the basics of the recent amendment of the Spanish Insolvency Law regarding refinancing and restructuring agreements. I left for this final post the analysis of two specific issues: judicial authorization and promotion of debt for equity agreements. The changes introduced by this amendment are, for sure, of great importance.

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As I mentioned in my previous post, in the final two posts in my stint as guest blogger detailing the latest amendment of the Spanish Insolvency Law, I’ll take a break from discussing personal insolvency to focus on another current issue in Spain that very recently led to a partial amendment to the Insolvency Law: out of court refinancing and restructuring agreements. I have a personal interest in sharing the situation here in Spain because I am deeply interested in hearing comments on the main issues I identify as regards the amendment. To begin, I will briefly outline the amendment’s main features. I’ll then identify four main issues with the amendment – two in this post and two in my final post.

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In my first post I advanced some basic ideas on the situation of Spanish mortgage debtors. The Spanish situation following the housing crisis may be familiar to readers because it shares many of the same characteristics of problems in European countries. The U.S. media has covered these stories, for example here.

For different reasons, seemingly sociological, the situation of these debtors was a center of the Spanish discussion about the effect of the crisis on households and individuals (leaving aside unemployment, of course). Therefore, different legislative measures were adopted during these years trying to offer specific solutions to mortgage debtors. In this post I will try to outline, in a more detailed way, the present situation. 

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In this post I will explain the extent of the discharge given to insolvent individuals under the new Spanish insolvency law. Different problems arise from the way it has been introduced, ranging from its extent to the differences depending on the nature of the debtor. As in other provisions, looking at the newly introduced discharge one receives the impression of some sloppiness in the amendment or, worse, window dressing. It is hardly believable that the discharge given could be a useful tool for individuals in difficulties, engaged in business activities or not. Some debts that should reasonably be excluded are included while others that should be rationally excluded are included.

If discharge is given, because it is the most effective way to achieve the rehabilitation of the debtor, which is the main purpose of any insolvency system for individuals (or, at least, one of the main purposes, see World Bank Report, par. 359), it should be one of its more carefully thought and drafted parts. I do not dare to decide whether it is the consequence of sloppiness or of window dressing, but the results are clearly inconvenient, in my opinion (and this opinion is shared by others, once again see CUENA, 2013).

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My previous post announced my intention to focus on the new Spanish Insolvency Law’s differences between individual debtors with or without business activities. As I mentioned, the new model clearly differentiates between these two categories of debtors in terms of discharge, offering a more
extended debt remission to debtors engaged in business activities. I will explain in a later post the extent of the difference. In this post, I will focus on the eligibility requirements for discharge that, once again, might lead to differing treatment among insolvent individuals.

To understand the difference, it is important to remember that the extent of the discharge varies depending on whether pre-insolvency mediation has been sought or not. Recall also that eligibility for pre-insolvency mediation is limited to individuals with business activity. Considering that the access to this mediation procedure is, in its turn, conditioned to certain requirements, the net effect is that the terms of eligibility result in a difference in the discharges individual debtors receive.

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The recent World Bank Report on the Treatment of the Insolvency of Natural Persons  highlighted in its first pages (13 and ff.) the alternatives regarding which debtors to be include in this special regime. Although the solutions to this question are not the same among different countries, the problem is identical: whether to include persons without any business activity—that is, “pure” consumers—or to limit its particular provisions to individuals engaged in business activity.

Although it has different grounds, the discussion reminds me of the classic insolvency/bankruptcy problem of limiting these proceedings only to businesses. As many of the readers know, this was a classical question when the old insolvency and bankruptcy procedures were part of a special set of

Nr. of personal insolvencies and debtor condition. Spain

norms for businesses (for instance, the mandatory accounting or a special public register). Seeing this question arise again in the context of personal insolvency brings back memories of the good ol’ times when I started studying our old quiebra and the discussions on the nature of the debtor and his eligibility for that procedure (a problem usually present in the old spanish suspensión de pagos). To avoid nostalgia for those times, and for the sake of our readers, I’ll turn my eyes to the present. How has the amendment of the Spanish Insolvency Law dealt with the problem of the nature of the debtors?

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First of all, I would like to thank the Credit Slips team and, in particular, Bob, for hosting me here again. I guess that after six years, memory is weak, and it is easier to believe that I could have something interesting to share with their readers. I hope that, at least, my posts will help to understand the present situation of Spanish Insolvency Law as regards personal bankruptcy. The latest amendments are said to be a dramatic change in our system. My personal view, however, is not so optimistic, as it looks more like window dressing.

Six, almost seven years ago, I wrote here:

The situation described above could change somehow, as the increment in individuals' indebtedness and the eventual problems faced in case of an economic downturn could push politicians to pass a law for consumer bankruptcy or a reform in the insolvency law. But if it were the case, the discussions will probably focus on mortgages, as it can be clearly seen in how trade unions or consumer associations speak about this question right now. That situation will undoubtedly be a test for the bank and credit industry power in our society.

What happened since then?

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This post will be the last one. I want to thank Bob for his invitation. I felt really happy when he asked me and although the responsibility of writing here was a bit overwhelming, it has been a real honor for me. I hope the readers have found these posts as interesting as I always find the other ones of Credit Slips.

In this final post, I would like to offer my own point of view about both models of consumer bankruptcy. We could speak about two different models, even though the US has served as an inspiration for many of the European laws. The reason is that in European law, it seems that debtors must fulfill more conditions in order to get the discharge of the precedent obligations. It is clear that the transfer of the future income for a few years puts him (or her) in a worse position than the one achieved by debtors filing for Chapter 7 of US Bankruptcy Law. Although the debtor can keep several incomes (something that varies form one country to another and that is tied to the protection in garnishment), the fresh start seems to be more demanding here. A second question is the requirement of honesty in a debtor to be eligible for discharge. Here the contrast is really clear for any reader. Just make a comparison between the sec 707 of US Bankruptcy Code (if I am not wrong, the purpose seems to be avoiding the abuse of discharge) with §290 of the german InsO, art. 238 of the Portuguese Insolvency Code or art. 142 of Italian Legge Fallimentare. Of course, the aim of these provisions is not exactly the same. Honesty of the debtor and avoid of abuse are different things, but we could compare them as they are intended to achieve the same goal: limit the access to discharge to the debtors that deserve it. European rules are much clearer and reading the whole sec. 707 is a kind of torture that should be banned by doctors. I do not know if our rules will work better when we analyze their effect in a few years, but honestly, I prefer them. They cover more situations, they are more flexible and they are easier to understand. The proposed reform in Germany (there is a Bill of January 2007) may be used as an example that they are doing their job. The Bill focuses on the specific problems of debtors who cannot even bear the cost of the proceeding and changes only a few lines in the § 290 InsO to improve its performance in avoiding non honest debtors to get the discharge. I should say, anyway, that the Bill imposes some costs to the debtor, even if it is the case of a "Nullplanverfahren," that is to say No-assets-at-all to offer a payment plan to the creditors. It seems that the gratuity of the procedure has lead to some abuse of this proceeding.

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Two or three examples of EU national laws on consumer bankruptcy were given in the previous post. Now is the time for Spain: what’s the situation here? The title of the post suggests that we are out of the main trend in EU in this subject. That is why I put that "Spain is different" slogan that has been widely used to describe my country in tourism ads, that fits perfectly here: we have no consumer bankruptcy provisions in our Insolvency law, dating from 2003. This could sound surprising, taking into account that all the recent reforms of insolvency laws in the countries surrounding us have implemented them (Portugal’s reform is less than one year younger and, as already seen, the discharge for individuals is part of its content).

The reasons for this are not clear, but in my opinion, two facts were relevant. The first one is that consumers’ indebtedness is much lower than in other European countries and mainly in mortgages. Data collected by EU in 2002 showed that average use of credit per household were as low as 942€ (it is almost 18.000€ in UK) and consumer credit per disposable income rate was just 10% (28% in the UK). Figures are increasing, but even now, the main part of credit in every household is mortgage (Spanish national statistics show different results, but all of them ranges from 84% to 93% of the whole household indebtedness in 2006). The second relevant fact (and this view is personal) could be the huge impact that the reform of 2003 was intented to have in our insolvency law. After almost 50 years trying to update our legislation (with rules dating back to the middle nineteenth century in their original form), without success, it was very important to pass this law and probably the discharge was a secondary issue opposite to the most relevant things to be discussed. You should take into account, for instance, that our typical insolvency proceedings (quiebra and suspension de pagos) were just for businesses and to make the new proceeding accessible to individuals were already a dramatic change. In fact, media paid a lot of attention to the first case of a familiy filing for bankruptcy and discharge was not even mentioned (well, they were not very technical in their appreciations, anyway).

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This post, regarding consumer bankruptcy in Europe, was initially intended to be just one, but its length made it better to divide it in two parts. I will deal here with some European countries and leave the second part to explain Spanish present situation. It is impossible to go in depth on this subject in a blog post and I will focus, like in the previous posts, on the main lines. I should be clear that I will not deal with the need of a shorter proceeding. In fact, in my opinion, that is not a consumer issue because it is the same for small debtors, whether consumer or small businesses or professionals. The complexity of the proceeding is not tied to the personal characteristics of the debtor, but to the amount of debts and creditors, something sometimes forgotten, even if the need of a simpler proceeding is much clearer for individuals. As is well known for the readers of Credit Slips, when we talk about consumer bankruptcy we are thinking mainly about fresh start or similar relief mechanisms. That is what this post is going to be about. Part of its content follows the Report on legal solutions to debt problem in credit societies, by Johanna Niemi-Kiesiläinen and Ann-Sofie Henrikson, already mentioned here by Jason Kilborn.

Consumer bankruptcy and fresh start is recent in Europe. It is usually said that it expanded in the continent as late as in the nineties of the past century (the first country to introduce a law for this purpose was Denmark in 1984). The reason was the economic crisis of the middle nineties, which showed the problems faced by middle class consumers in a more indebted society. From this starting point, most of the countries in the EU have already passed a law that faces in one form or another the problem of consumer insolvency. After the esdebitazione was introduced in the latest reform of insolvency law in Italy (arts. 142 ff. Legge Fallimentare), the most prominent country without a fresh start Spain (at least, in the traditional EU countries, I do not know the situation for the newest EU members, sorry for that). I will use the example of the countries that we usually use in Spain for comparative purposes, i.e., Germany, France and Italy, (we use the UK and the USA too, but the situation in those two countries is better known for the readers of this post than for its writer, so he won’t take the risk of writing about them).

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