Most of us have heard about consumer bankruptcy, but few know what it means in practice. We explain what a consumer bankruptcy is, who can declare it and the consequences.
Consumer bankruptcy – what is it?
Consumer bankruptcy is a special court procedure for people who have become insolvent. Insolvency is understood as an inability to settle liabilities on time, e.g. mortgage installments or debts to debt collection companies, lasting at least 3 months. In other words, it is a situation where the income obtained is too low to pay off debts and at the same time pay for your maintenance.
In the event of a declaration of consumer bankruptcy, each private person – i.e. a natural person who does not conduct business activity – may free himself from his (part or all) debts, while losing the assets accumulated so far. Consumer bankruptcy does not apply to entrepreneurs – the exception from 2020 are only sole proprietors.
Importantly, consumer bankruptcy is announced not by the debtor, but by the court. In order to announce it, therefore, it is necessary to submit an appropriate application on an official form to the economic department for bankruptcy in the competent district court. It is then verified, as is the debtor’s financial situation.
Consumer bankruptcy – procedures
Bankruptcy proceedings may be conducted in a simplified manner. In this procedure, the activity of the court has been limited to the most important decisions, such as the declaration of bankruptcy itself, establishing a creditors’ repayment plan, and considering possible complaints about the actions or omissions of the trustee. The procedure should not take longer than 6-8 months.
As the Ministry of Justice explains, it is not always possible to conduct bankruptcy in a simplified manner. If it turns out that your financial situation is quite complex (e.g. you have run a business in the past, have significant assets or have an unclear legal status, you have a large number of creditors), it may happen that your proceedings will be conducted on an ordinary basis. The participation of the court is then significantly greater, and the proceedings are managed by the judge – commissioner. It usually lasts for at least one or two years.
The third option is to make an arrangement with your creditors.
In court proceedings, a very important aspect, apart from the declaration of consumer bankruptcy itself, is the creditors’ repayment plan. It is a document in which it will be determined whether the consumer has led to insolvency intentionally or as a result of gross negligence, to what extent the liabilities will be canceled and to what extent and in what period the remaining liabilities will be repaid.
Only after the court confirms that the creditors’ repayment plan has been implemented, all outstanding liabilities will be definitively redeemed. Then the consumer becomes free from all restrictions and obligations related to consumer bankruptcy.
As the Ministry of Justice explains, if the insolvency occurred without the fault of the consumer or inadvertently, the basic period for implementing the creditors’ repayment plan is 3 years. However, the court may shorten this period to 2 years or 1 year. But if the court finds that insolvency has been brought about intentionally or with gross negligence, the creditors’ repayment plan will be implemented over a period of 3 to 7 years.
Consumer bankruptcy – consequences
The main consequence of declaring consumer bankruptcy is the loss of the insolvent person’s right to further dispose of their property. From that moment on, this right passes entirely to the receiver. This means that all property decisions of the person who declared bankruptcy, e.g. the donation or sale agreements concluded by them, will be ineffective.
All assets of an insolvent person become the so-called a bankruptcy estate from which debts are paid and the costs of bankruptcy proceedings are paid. The bankruptcy estate comprises all real estate and movable property of the debtor, incl. apartments, land and cars. However, it does not include equipment needed in everyday life, such as electronics and household appliances. The official receiver may also seize a part of the remuneration received by the debtor for work.
A person against whom bankruptcy has been declared is obliged to hand over all assets to the receiver, who will take care of their sale. In this way, the official receiver may also sell the real estate in which the insolvent person and his dependents live.
In this case, however, the debtor is allocated an amount corresponding to the average cost of renting a flat in the same area for a period of 12-24 months. In this way, the person is prevented from being left homeless.
At the same time, after the declaration of bankruptcy, creditors will not be able to initiate new court and enforcement proceedings. If ordinary bankruptcy is conducted, all court proceedings will be suspended. In the event of simplified bankruptcy, the proceedings may be continued, however, in the place of the person applying for bankruptcy, they will be joined by a trustee.
Consumer bankruptcy – why declare it?
The main purpose of consumer bankruptcy and bankruptcy proceedings is to reduce the debt of the person concerned. Debt relief may consist in the payment of all creditors from the debtor’s property, or in the cancellation of part or all of its debts. Most often, the purpose of declaring consumer bankruptcy is the complete cancellation of debts.
It should be remembered that, according to the law, not all debts may be canceled – this does not apply to, for example, alimony and fines. However, complete cancellation of debts is possible only if the court proves that the debtor has no assets.
Bankruptcy of one of the spouses
What happens when one of the spouses declares personal bankruptcy?
First of all, separation of property arises between the spouses. However, if the spouses previously had a community of property, all their joint property is included in the bankruptcy estate. The spouse of the person declaring consumer bankruptcy may only later claim his debts on account of the share in the joint property as part of the bankruptcy proceedings.
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