A dilemma that troubles
From our daily contact with debtors (natural and legal persons), perhaps the most frequent question we are asked is the following:
Which settlement method should I choose to find a solution to my debt problem? The Out-of-Court Mechanism or Bankruptcy?
Obviously, the answer cannot be one and cannot be the same for all different cases of debtors.
However, let’s take things from the beginning.
In the beginning is the law!
The current law 4738/2020, commonly known as the “Second Chance Law”, came as a requirement of the implementation of a European directive (2019/2013) and unified-replaced the entire existing legislative framework on the regulation of private debt, such as the old Extrajudicial Law (4469/2017), the Katseli Law (n.3869/2010), the old bankruptcy law (n.3588/2007), etc.
Thus, this law set a sequence in dealing with private debt, first by preventing insolvency, then by dealing with it through the procedures of (a) the Out-of-Court Mechanism, (b) Resolution (exclusively for legal entities) and (c) Bankruptcy.
This law went into effect in parts on 1/3 & 1/6 of 2021.
Different processes that are NOT linked to each other
First of all, it is good to clarify that the two procedures are not linked. In other words, the Out-of-Court Mechanism procedure is not the same as, nor does it lead to, the bankruptcy procedure.
Extrajudicial Mechanism
The procedure of the Extrajudicial Mechanism (carried out through an electronic platform of the law) concerns households, self-employed persons and legal entities with debts to:
α) Banks & Funds,
b) Insurance funds and
c) Public,
total amount of more than 10.000€.
The arrangements offered are up to 240 instalments with the possibility of write-offs for debts to the State and the Insurance Funds (they offer mandatory arrangements to viable debtors) and up to 420 instalments for debts to Banks-Funds (they participate in the process on an optional basis).
Bankruptcy
Bankruptcy proceedings, on the other hand, lead to a full discharge of debts of a natural or legal person pursuing an economic purpose (exceptionally also those who are engaged in economic activity).
The basic condition for a debtor to be declared bankrupt is to be in default, i.e. to be unable to fulfil his/her due financial obligations in a general and permanent manner (Art.77(1)).
What does this mean in practice?
When the debtor does not pay his/her overdue financial obligations to,
α) Public,
b) the Social Security Institutions
(c) financial institutions,
in the amount of at least forty percent (40%) of its total overdue obligations for a period of at least six (6) months, (if the non-performing obligation exceeds the amount of thirty thousand 30.000€) (article 77, paragraph 2).
Also, the threatened inability to fulfil financial obligations is a reason for declaring bankruptcy when the Debtor requests it (Art.77, par.3).
Important Note: The declaration of bankruptcy is, in any case, decided by the competent court.
When is the debtor exempt?
From 12 to 36 months from the declaration of bankruptcy, depending on whether there are assets to be liquidated (Art. 192-195).
Read more about Bankruptcy in our article ” ”
How do I know which of the two procedures is the best for my particular debt situation?
Each case is unique and any decision on how to deal with it should be made after careful study of the evidence. However, for someone who is wondering which course of action to take, it is advisable to ask themselves the following questions first:
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Do I qualify to join this procedure?
Each procedure sets out specific conditions that the debtor must meet in order to apply for membership.
For example, the Extra-Judicial Mechanism, among others, requires legal entities to be active and not in dissolution or liquidation, the total debts to be regulated to be over 10.000 €, not to have been regulated with the old Extra-Judicial Mechanism (Law 4469/2017), as well as other conditions (for more details New Extra-Judicial Mechanism – Answers through 16+1 Questions).
Similarly, there are specific conditions for the bankruptcy procedure and, unlike the Extra-Judicial Mechanism, the decision to declare bankruptcy “passes through” the court.
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Am I able to respond to the arrangement that will result from the Out-of-Court Mechanism procedure?
This is perhaps the most basic question to decide whether it makes sense to enter the Extra-Judicial Mechanism procedure in the first place.
Obviously, the debtor, whether a natural or legal person, should be able to make a monthly payment, which will be necessary for the resulting arrangement. Otherwise, it should be clearly directed towards the Bankruptcy procedure.
However, what that arrangement will be, of course, turns out to be the million dollar question!
The reason is that the debtor who enters the procedure of the Extra-Judicial Mechanism cannot know in advance the result, i.e. the monthly instalment and the duration of the arrangement.
In order for the arrangement to be “out”, the debtor’s final application to the system, the calculation by the calculation tool and the processing of the arrangement by the creditors must be preceded by the final application, so that it can then be approved.
However, a very basic way to calculate the worst-case scenario of the settlement that may result from the procedure (to get an idea) is to divide the total of the debts to the State and the Insurance Funds by 240 (maximum number of instalments) and the total of the debts to the Banks & Funds by 420 (maximum number of instalments). The result in both cases, gives an estimate of the worst case scenario of the monthly instalment that can arise for the maximum period of the arrangement that can be approved by the creditors.
Illustrative Example of Calculation
Public & 100. 000€/240 monthly instalments = 417€/month
Banks & Funds: 200.000€/420 monthly instalments = 476€/month
Of course, for an accurate calculation, other factors such as the approved interest rate, the amount that may be written off and the duration of the arrangement (number of instalments) that will be approved must be taken into account.
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What is the minimum amount I need to owe to enter both procedures?
Both procedures require a minimum amount of debt to apply.
The Extrajudicial Mechanism provides for a minimum amount of €10,000 and the Bankruptcy procedure provides for a minimum amount of €30,000 in non-performing debts.
Therefore, the amount to adjust is the first element from which the debtor should start thinking. That is, whether the amount owed is worth “entering” into the process, considering the cost of the adviser’s fees to maximise the chances of success.
In the procedure of the Extra-Judicial Mechanism, the claimant can formally submit the application himself, but the complexity of the procedure does not allow this in practice, so that the assignment of the case to a certified advisor is a one-way street.
As far as the Bankruptcy procedure is concerned, the debtor should contact a lawyer.
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Which of the two procedures will give me a definitive solution to my problem, but without damaging my income or assets?
The main purpose in the mind of a debtor, whether a natural or legal person, before entering into either of the two procedures, should be to find a definitive solution to the debt problem he or she is facing.
That is, to ask the question, “If the process I choose goes well, am I addressing my debt problem on a realistic basis?”
If the answer is positive, then you are heading in the right direction.
However, it is important for the debtor to take into account whether and to what extent the procedure he or she chooses will affect his or her income and/or assets.
The procedure of the Extra-Judicial Mechanism does not affect in any way the debtor’s income or financial situation, even if the debtor ultimately refuses the arrangement proposed.
In the case of Bankruptcy, however, the liquidation of the debtor’s assets is necessary in order for the debtor’s remaining debts to be discharged. In fact, the law “premiumizes” the liquidation of the debtor’s assets by giving a shorter time for the discharge, i.e. one (1) year, compared to three (3) years in the case where there are no assets or they are not valued as being of sufficient value. In addition, for individuals and for as long as the time to discharge is “counted”, excess income is deducted from the amount of their excess income as “reasonable expenses” to reduce the debts.
What is certain is that each procedure has its advantages and disadvantages, which are different for each debtor’s case.
However, it is advisable that any decision on which procedure to follow should be taken by the debtor (whether a natural or legal person) with the help of an experienced and qualified adviser.
Besides, the purpose of this article is not to give the reader advice on how to manage his private debt, but to inform him about the basic concepts of the two procedures, as well as their main advantages and disadvantages.
Why Us?
But why trust us to take on your case?
Because we are a multidisciplinary team of executives with many years of experience in debt financing and debt restructuring as well as legal support for debtors, with a focus on results, a pragmatic approach and strict professionalism.
