Bankruptcy – Second chance
The second chance law (Law 4738/2020), enacted following the 1023/2019 European Directive, leads to a debt relief for individuals and legal entities (micro entities) from 1 to 3 years and is effective from 1/6/2021.
This law introduces two important innovations. The first one concerns the bankruptcy of natural persons (previously, in order to be “bankrupt” a natural person had to have the status of a trader) and the second innovation concerns the Small Object Bankruptcy procedure, which is faster and simpler than the normal bankruptcy procedure.
What is the basic condition for bankruptcy?
A debtor (individual or company) is bankrupt when it is in “suspension of payments”.
The debtor is in “suspension of payments” when he/she fails to pay arrears to the State, EFKA, Banks, Loan Administrators (Servicers) of at least 60%(for small-scale bankruptcy) or 40% (for other cases) of his/her total debts for a period of at least 6 months, provided that the arrears exceed €30,000.
What is “Small Object Bankruptcy” and who is it for?
Small-scale bankruptcy (Art.172-188, Law 4738/2020) is a simplified bankruptcy procedure for legal and natural persons.
For legal entities, the debtor must not exceed two of the three criteria for determining a micro entity (article 2 of Law 4308/2014), i.e. up to €350,000 in assets, up to €700,000 in turnover and up to 10 employees.
However, according to Article 78(2) of Law 4738/2020, the only condition for the inclusion of legal persons (and sole proprietorships) in the small-scale bankruptcy proceedings is that they do not exceed a turnover of € 2 million.
For natural persons (not engaged in a business activity), the value of all their assets must not exceed €350,000.
For the calculation of the real estate of both the legal entity (very small entity) and the natural person, the most recent ENFIA value is taken into account, while for land outside the city and settlement, the objective value is taken into account (Article 11, Law 4738/2020). If the real estate is located outside Greece, then its value is determined by a real estate appraiser’s report or, if available, by its objective value.
Other cases of natural and legal persons are included in the normal bankruptcy procedure.
Is the debtor obliged to file for bankruptcy if he is in default?
Yes, it is. That is, in the event that the debtor finds himself in “suspension of payments” under the conditions mentioned above, and is unable to meet his outstanding obligations, in a general and permanent manner, he must file for bankruptcy. In fact, the legislator has stipulated that the bankruptcy petition must be filed within 30 days after the conditions for bankruptcy have been met.
In addition, the bankruptcy petition for the debtor may be filed by a) creditors who have a legitimate interest and meet the requirements of a bankruptcy creditor (Art.96, Law 4738/2020) and b) the prosecutor of the first instance if there are reasons of public interest.
What is Bankruptcy Property and what does it include?
According to article 92 of Law 4738/2020 “The bankruptcy property includes all the property belonging to the debtor at the time of the declaration of bankruptcy, wherever it may be”.
The bankruptcy property is available to satisfy the debtor’s creditors who have been declared bankrupt (bankruptcy creditors).
Exemptions from the Bankruptcy estate
As a general rule, the bankruptcy estate does not include property acquired by the debtor after the declaration of bankruptcy, unless interest, or periodic payments or claims and rights, derive from a legal relationship prior to the declaration of bankruptcy.
For the debtor natural person, his annual income is excluded from the bankruptcy estate, regardless of the amount, when the bankruptcy estate includes his main residence or other fixed assets exceeding 10% of his total debts and at least €100,000 (excluding those acquired in the last 12 months prior to the filing of the bankruptcy petition).
Moreover, the bankruptcy estate does not include unseized amounts such as wages, pension, horizontal unseizure, unseizable social benefits, unseizable agricultural subsidies, etc.
How to file a small property bankruptcy petition?
The small-scale bankruptcy petition is completed and finally submitted by an attorney through the Electronic Insolvency Register.
After its final submission, the bankruptcy petition is forwarded to the competent Magistrate Court for processing.
The bankruptcy petition, once filed, is made public for 30 days. During this period, creditors have the right to submit to the Electronic Insolvency Register either a main intervention requesting the rejection of the petition or an additional intervention requesting the appointment of a trustee of their choice.
In the event that the 30-day period expires without the main intervention of the creditors, then the application is accepted by the Magistrate’s Court (bankruptcy court) with only a finding that the 30 days have expired.
In the same decision, the court appoints the rapporteur (bankruptcy judge) who in turn appoints the trustee.
It should be noted that the debtor has the right to nominate a specific person as a trustee in bankruptcy, but he/she must choose him/her from the register of Insolvency Administrators.
However, if the creditors do not agree with the person proposed by the debtor as a trustee, they can make an additional intervention to choose another trustee, which is accepted. If more than one creditor makes an additional intervention to select a trustee, the proposal of the creditor with the largest claim is accepted.
Finally, the debtor may not propose the choice of a specific trustee in his application if he submits a solemn declaration stating that it has not been possible to find a candidate trustee who accepts the appointment.
What are the supporting documents for the Small Object Bankruptcy Petition?
According to article 174 of Law 4738/2020, the necessary documents are the following:
1.Financial statements for legal entities (if any)
- Income declaration (latest) & property declaration for natural persons
- List of all creditors,
- A certificate from the competent financial service regarding the debts of the debtor to the State,
- Other supporting documents at the discretion of the debtor,
- A declaration, in the event that no specific name of a trustee is given in the application, stating that it has not been possible to find a candidate trustee who will accept the appointment.
- Deposit Note of the Deposit Fund for the amount of € 250 for the purpose of bankruptcy of a small object. This amount is intended for use by the trustee in connection with the costs of the bankruptcy (e.g. publication costs, etc.).
When does the discharge of debts occur?
The discharge of debts occurs when:
a) in 1 year in the case of assets (minimum value of €100,000) which must be liquidated. The 1 year is calculated from the date of the relevant court decision. If the debtor’s income exceeds 5 times the reasonable cost of living, the difference will have to be paid to the creditors.
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b) in 3 years in the case of no property or of little value (which should be liquidated). If the debtor’s income exceeds the reasonable cost of living then the difference should be paid to the creditors for the duration of the 3 years.
It should be noted that the time periods of 1 and 3 years for the discharge of debts may be differentiated in the event of an appeal by anyone with a legitimate interest against the discharge.
When is the Bankruptcy solution appropriate?
The choice of filing for bankruptcy for a natural or legal person should not be taken “lightly” because its implementation means the liquidation of the debtor’s assets and the payment of additional income from the debtor’s side (exceeding reasonable expenses) for the entire period until the discharge. In addition, the debtor is also controlled for the offence of bankruptcy, in case he has acted in bad faith in order to benefit (art. 197, Law 4738/2020).
Therefore, the choice of bankruptcy of a natural or legal person may be the only solution if done for the right reasons.
The debtor should first consider – exhaust the solutions for the viable settlement of his debts, such as direct settlement with the Banks-Servicers-Funds, when it comes to loans or the available ways of settlement for debts to the State and/or EFKA.
Moreover, the Extrajudicial Mechanism is a solution that should be considered, as it can offer regulation for all the debts of the natural or legal person, to Banks, Servicers – Funds, the State, Insurance funds, in long repayment periods and with the possibility of cancellations.
However, if none of the above solutions leads to a viable debt settlement, the debtor should seriously consider bankruptcy as a last resort.
Bankruptcy of a small object – Indicative solution
As mentioned above, the Small Claims Bankruptcy solution is a simplified and faster process than the normal Bankruptcy process.
Usually, the bankruptcy option should be adopted when the debtor has no real estate or other property or, if he has, it is burdened with a large amount of debts.
For example, if a debtor has real estate worth €200,000 and his debts to his creditors (including private creditors) amount to €1,000,000, then he should seriously consider this option in order to be able to obtain a discharge, i.e. a write-off of debts of €800,000 over a period of 1 to 3 years, provided that the creditors do not react legally.