The second chance mechanism: another future without debt is possible

Yes, debts are not for life; debts can be canceled, and a fresh start can be made.

The second chance has been in force since 2013 for individual entrepreneurs and since 2015 for any non-entrepreneurial individual. It may not be, from a technical point of view, and in my opinion, the best possible second chance law, but it is a law that allows for the exoneration of debts, and that is what is important. The law must be useful and functional, and for this reason, it must be utilized so that thousands of over-indebted, insolvent individuals can achieve the exoneration of their debts and start again as active members of society.

In this article, I will talk only about the Extrajudicial Payment Agreement (AEP), which is a pre-bankruptcy tool to reach an agreement with creditors by making debt reductions and delays outside the judicial sphere. Both individuals and legal entities that are insolvent or in pre-insolvency can participate, as long as they meet a series of requirements demanded by the law.

How is the procedure developed? It is very simple; the debtor must fill out a form that has been published in the BOE since 2015, and it must be presented to the Notary of the debtor's domicile, in the case of individuals, and to the Mercantile Registry of the debtor's domicile or Chamber of Commerce, in the case of legal entities. The organ receiving the application will appoint a bankruptcy mediator (who must be distinguished from the bankruptcy administrator), who will compile the list of creditors, meet with them, propose a payment proposal together with the debtor, which means when and how the debtor will pay, benefiting from the debt reductions and delays established by law (for debt reductions of up to 25% and delays of less than 3 years, the approval of 60% of the creditors is required, and for debt reductions greater than 25% and delays of up to 10 years, 75% is required. However, when the credit is associated with a real guarantee, the majorities are more reinforced, like 65% and 80%, respectively.)

Once the procedure is initiated, the debtor can continue with their work activity and retain their administrative and disposal faculties. Judicial executions cannot be initiated or continued while the agreement is being negotiated, up to a maximum of 2 years, and the accrual of interests will be suspended.

If the proposal is approved, it is simply made public, and the Notary, Mercantile Registry, or Chamber of Commerce, as appropriate, will communicate the achievement of the agreement to the Court that would have had to process the bankruptcy. If the agreement is not approved, the mediator has the obligation to request consecutive bankruptcy, and the judicial phase will begin.

This pre-bankruptcy institute was also conceived to offer solutions to self-employed individuals and SMEs or micro-enterprises, and I am of the opinion that the extrajudicial agreement can prevent many companies from ending up in a bankruptcy proceeding, as long as we anticipate events. This is where the role of the lawyer lies, in advising in this sense when it is foreseen that the client's indebtedness is unsustainable.