Insolvency proceedings and the Second Chance Law: what they are and how they can help you

Insolvency law is the branch of law that regulates situations of insolvency, both for legal entities (companies) and individuals. Its objective is to manage debts in an orderly manner and offer solutions so that companies and individuals can overcome a critical economic situation.

In this article, we explain, in a clear and practical way, what options are available and when it is advisable to use each one.

Insolvency proceedings for companies: pre-insolvency law

When a company is unable to meet its debts, the first step is to determine whether it wants to continue operating or proceed with an orderly closure.

In recent years, it has become clear that many insolvency proceedings end in liquidation and that legal proceedings can be long and costly, partly due to the saturation of the commercial courts. For this reason, pre-insolvency tools have gained importance, as they allow companies to act in advance and increase the chances of avoiding insolvency.

The main pre-insolvency tools are:

• Notification of the opening of negotiations with creditors
• Restructuring plans

Their purpose is to:

• Avoid insolvency proceedings.
• Maintain the company's activity.
• Reach agreements with creditors.
• Reduce the impact on employees.

Good restructuring carried out in time can prevent liquidation and save the business project.

Insolvency proceedings: when there is no other alternative

If it is not possible to reach agreements in the pre-insolvency phase, insolvency proceedings must be initiated through the courts.

There are currently three types of proceedings:

• Voluntary insolvency proceedings: filed by the company when it anticipates or suffers insolvency.
• Compulsory insolvency proceedings: requested by a creditor when the company is unable to pay.
• Special procedure for micro-enterprises: designed for companies and self-employed persons who meet certain requirements, with a more streamlined and economical process.

Insolvency proceedings may result in:

• Agreement with creditors: possibility of continuity.
• Liquidation: closure and sale of assets to pay debts.

The Second Chance Law: a real way out for individuals

Since 2015, any individual (families, self-employed persons or workers) can take advantage of the Second Chance Law, a legal mechanism that allows debts to be cancelled permanently.

Its objective is simple but powerful: to allow a person to start from scratch, without debts and with a new financial opportunity.

The ways to obtain debt relief are:

1. Liquidation of assets: sale of the debtor's assets, with the possibility of retaining the primary residence in some cases.

2. 3- or 5-year payment plan: no need to liquidate assets.

3. Insufficient assets: when there are no assets to liquidate, immediate opening and closure of proceedings.

To get an idea of the impact of this tool in our country, 90% of the insolvency proceedings filed at the state level during the third quarter of 2024 were by individuals, of which 9,296 were filed in Catalonia, making it the leading autonomous community in the processing of these proceedings. These data show that it is an effective, fast and widely used process.

In conclusion, insolvency law is essential to ensure a healthy business environment and to enable individuals to restart their economic lives. Recent reforms seek to make processes more agile, economical and recovery-oriented, both for businesses and individuals.