The Slovak personal insolvency regime will change on March 1, 2017. The new system is aimed at opening personal insolvency to a wider debtor audience, while keeping it simple and cost effective. Today, only those individuals with assets over EUR 1,659.70 could seek a declaration of bankruptcy. Otherwise, the proceedings would be stopped and the doors to a “fresh start” would be closed for “poor” debtors (also called No Income No Asset debtors (NINAs)).
It is important to understand the motivation behind the new rules as one may find the new proceeding too open and accessible, leaving a lot of room for abuse and little protection for the creditors. The new insolvency proceedings could have been made more complicated, with lots of pre-opening scrutiny, much bigger involvement of a court, but that would obviously have raised the costs of such proceedings to much higher figures.
So what is changing?
First of all, the law introduces two ways for a debtor to be relieved from his/her debts.
- One is bankruptcy proceedings where a debtor is basically giving up all his/her property.
- The second is an installment payment plan, in which case a debtor keeps his/her assets but has to pay to unsecured creditors at least 30% of their claims over a five-year period.
The final effect of both these proceedings is that any debt that remains outstanding at the end of these two procedures, irrespective of whether they were registered in the proceedings or not, becomes unenforceable.
Also unenforceable is (i) interest exceeding 5% p.a., accrued before the decision on insolvency is issued by a court, (ii) any interest accruing after the declaration of bankruptcy or after creditor protection kicks in (so called “decisive date”), (iii) any debt arising under a promissory note (thus turning promissory notes of individuals into worthless security), (iv) contractual penalties and penalties imposed by state authorities (if the obligation triggering the penalty was breached prior to the decisive date), (v) claims of affiliated parties and (vi) fees incurred by the parties to the insolvency proceeding in relation to the proceedings.
There is also a group of claims that are not affected by the insolvency proceedings such as (i) the debt of any individual creditor that has not been registered in the proceedings due to the fact that such creditor has not been notified in writing of the insolvency proceedings, (ii) secured claims up to the value of the pledged assets or (iii) non-monetary claims. These claims survive.
The law introduces a so called “homestead exemption” that applies to one property identified by a debtor. The purpose is obviously to secure some housing for a debtor or at least some proceeds for future rent. The amount has not been determined yet but secured creditors should be safe as the exempted amount will be deducted only if the sale proceeds exceed the secured claim. Plus, pledged property is sold only if (i) a creditor with the first ranking pledge registers its claim in the bankruptcy proceedings or (ii) if the value of the pledged asset exceeds the priority secured claim and the second ranking creditor registers its claim in the bankruptcy. In other words, despite pending bankruptcy proceeding, the priority creditor still has a right to sell the pledged assets outside of the bankruptcy. There is one restriction related to the homestead exemption. The sale proceeds, after deducting the homestead exemption amount, have to cover the costs of sale and at least part of the registered claims. For this purpose, it will be up to the trustee to estimate the property’s value and decide whether he will proceed with the sale or not. If the creditor disagrees with a trustee, he may pay for an expert opinion but if the sale proceeds are not sufficient, the creditor would have to cover costs of auction.
For those debtors who decide to keep their assets, an installment payment plan is available. An installment payment plan has been available already under the existing regime but it missed a lot of details. Under the new regime, there is a minimum recovery threshold for unsecured creditors – 30% which at the same time must exceed the potential recovery in bankruptcy by 10%. The debtor should be still left with some money to cover the living costs of his family and if not, only bankruptcy would be available. How much is needed for living is to be decided by the trustee and the court and let’s hope they will use their discretion wisely.
Installments can be made monthly, half yearly or annually, depending on the overall amount to be paid. In the case of a secured debt, the installment plan starts to apply once the asset is sold and there is still some part of the claim outstanding. The amount of installments is determined by a court. The debtor and creditor are free to agree on different installments. Creditors will also have a right to object to the draft installment plan within 90 day period after its publication in the Official Journal. The plan runs for five years, no trustee is appointed and the court does not supervise its fulfillment. If the debtor fails to follow the plan due to other than material reasons, creditors can ask the court to cancel the debt relief.
A petition for cancellation of debt relief is basically the only protection creditors have and it can be filed within 6 years from either termination of the bankruptcy proceeding or approval of an installment payment plan and only based on specific grounds. One can expect that creditors will find this protection insufficient but, as mentioned above, the reason behind the changes was to avoid prior scrutiny which would substantially complicate and slow-down the proceedings.
The changes are not restricted to insolvency law only. Court enforcement is changing substantially as well. Let’s just hope that the courts will be familiar with them and will have capacity to deal with expected increased number of filings.