Amendment to the Insolvency Act – unlocking debt relief

1. Introduction

 On January 16, 2018, the government approved an amendment to Act No 182/2006, the Insolvency Act, that profoundly revises the conditions for debt relief.

Debt relief is a way of tackling a debtor’s insolvency, i.e. a situation where a debtor has multiple creditors, has defaulted on his liabilities (debts), and is unable to meet those obligations.

The essence of the current debt relief model is basically that a debtor pays off at least 30 % of all of his debts within five years of the decision granting him debt relief. The remaining outstanding debt is then forgiven.

Debt relief is available to individuals and non-commercial legal entities whose debts are not business-related. Under legislation as it stands, however, one of the conditions of debt relief is that the debtor must be able to repay at least 30 % of all debts within the next five years. This requirement is frequently unachievable for debtors who are weighed down by heavy debt or are on low incomes, so the concept of debt relief remains beyond their reach.

While the above debt relief model is to remain in place following the amendment, two additional possibilities are being ushered in.

2. Fast-track model

The first new model (the “fast-track” model) envisages debt relief of just three years rather than the standard five. However, in those three years the debtor is required to repay at least 50 % of all of his liabilities. The remaining outstanding liabilities are forgiven if this requirement is met.

This model is more suited to debtors who have low debts or higher income and are able to repay at least half of their debts within three years.

3. No-limit model

The other model introduced by the amendment relies on seven-year debt relief with no minimum limit on the amount of debt to be repaid. In practice, this may lead to situations where the debtors repay hardly anything to creditors during the seven-year debt relief, yet their debts are forgiven entirely after that time.

4. Conclusion

The government is presenting the two models described above as an offer for debtors who are motivated and want to re-enter the normal economy. The aim is to tackle the situation, where people either lose all hope of earning money and get by on welfare, or work under the table, in which case their earnings remain hidden from both the state and creditors.

The government contends that the amendment should give debtors an incentive to return to the job market and, instead of living off of benefits, start contributing to the national budget by paying taxes.

On the other side, creditors are concerned that this concept of debt relief may be abused and make recovery of their claim all the more difficult. A system where debtors can run up sky-high debts and then have them forgiven after seven years, without having to pay anything back, could spawn even greater financial debtor irresponsibility than today.

The amendment is likely to be felt hardest by providers, whether from the banking or the non-banking sector, of credit and other financial services provided to customers, who tend to make up the biggest share of debtors – individuals who do not run their own businesses.

With this in mind, creditors would best be advised to pay more attention to their choice of debtors, in particular to their economic background.

As the amendment still needs to be approved by the Czech Parliament before it takes effect, there is a chance that it will be revised or scrapped altogether during the legislative process. If the amendment is adopted in the version submitted by the government, it will take effect on January 1, 2019, in which case the new debt relief options will be available from next year.

For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail:jkucera@kuceralegal.cz ; tel.: +420604242241.

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