The word is that a major economic crisis will hit us once the state of alarm generated by COVID-19 ends. The truth is that the timid measures approved by the government and the situation of the Spanish business sector before the COVID-19 crisis do not help much to contradict this bad omen. And although we must still encourage and recognize the great effort of  healthcare professionals in our country, soon, the battlefield against the virus and its consequences will move from the hospitals and the white coat, to the courts and the black robe.

Hard times are coming, and there is no doubt that legal practitioners will have a leading role in trying to “heal” the approaching legal-economic problems. In this sense, it is worth highlighting one of the possible solutions to the economic disease that is brewing during quarantine, which I will call, if I may be so bold, "the Second Chance vaccine."

What is the Second Chance?

What we call the “Second Chance” is nothing more than the exoneration of outstanding liabilities set forth in Article 178 bis of Bankruptcy Act 22/2003 of July 9, that is, what is commonly known as “debt forgiveness".

Debt forgiveness is got through a special procedure, either judicial or out-of-court, of bankruptcy nature and content which is aimed at individuals. This procedure was introduced in the reform of Bankruptcy Act in 2015 implemented through Law 25/2015, of July 28, whose quantitative impact has not been relevant even though it allows freelancers, employees and individuals who are not businesspersons, to be relieved of their debts as long as they meet a series of requirements.

For the employer, the freelancer or the entrepreneur who are held personally liable for the debts of their company; for the guarantor of family members or of business transactions; for the workers or unemployed persons whose houses have been foreclosed and whose banks still claim the debt, for all of them, the Second Chance means the possibility to start from scratch without dragging the burden of unaffordable debt. It does not matter if the applicant is a foreign citizen or a national, as long as the debts originate in Spain.

Requirements to obtain debt forgiveness: debtor in good faith.

First, in order to be able to apply for the Second Chance, the debtor must be a "bona fide debtor" but, what does it mean for a debtor to be in good faith (bona fide)? The bankruptcy regulations establish the requirements for the debtor to be considered as acting in good faith which are as follows:

• The debtor who files for bankruptcy cannot be held liable for wrongful trading. We will explain later what it means.
• The debtor cannot have a criminal record for economic crimes;
• The debtor must have tried to reach an out-of-court payment agreement, which we will also explain below;
• All the debtor's assets must be liquidated [1] unless the debtor has no assets to liquidate;
• The debtor must pay all debts incurred after the bankruptcy proceedings have been initiated which we will call claims against the bankruptcy estate and priority bankruptcy claims and we will explain them below;

After having analysed whether we are debtors in good faith or not and once we have gathered all the necessary documentation, we must initiate the procedure provided by Bankruptcy Act. Said procedure is divided into two main stages: the out-of-court stage and the judicial stage.

Out-of-court stage

The out-of-court stage coincide with one of the requirements imposed by Article 178.3 bis of Bankruptcy Act to be declared a “bona fide debtor” which is that the debtor must try to reach an out-of-court payment agreement with creditors. This stage must be processed either before a Notary Public; in the Companies Registry or in a Chamber of Commerce depending on the location and the case of the debtor in question. Then, the corresponding officer, that is, the Notary, the registrar or the officer of the Chamber of Commerce shall appoint a mediator who will intervene to help the debtor and the creditors reach an agreement. In the case of Notaries, the Notary Public can process the procedure without the need to appoint a mediator as long as the debtor is an individual who is not a businessperson.

Then, once the above aspects are clear and having recourse to the corresponding extrajudicial entity, we must submit a series of documents certifying our assets and liabilities pursuant to the requirements of Bankruptcy Act. Next, the mediator or the Notary, as appropriate, will analyse it and check if it is enough according to the legal requirements and if it is so, they will accept our request.

Subsequently, the mediator, with the consent of the debtor, shall propose an agreement based on debt reliefs (deferrals and/or cancellations), a feasibility plan and a payment schedule, which will be sent to all creditors via reliable communication. This notification shall include the call for a meeting between the debtor and all creditors, stating the date and time, where all creditors will be able to vote for or against the agreement proposed by the debtor, and they may even propose changes and other alternatives to said proposal.

If at the meeting, most creditors accept the out-of-court agreement proposed, the procedure will end at that very moment. However, if an agreement is not reached, the mediator or the Notary, as appropriate, will draft a report certifying that the debtor has attempted an out-of-court agreement with creditors but, since it has been  fruitless, the debtor files for bankruptcy before the competent Court.

Judicial stage

Once the out-of-court stage ends without the creditors having approved the agreement proposed by the debtor, begins what we call the “judicial stage”. Thus, the Notary, the mediator or the debtor with legal representation, or even the creditors themselves, will initiate bankruptcy proceedings before the competent Court.

Subsequently, the Court will make a bankruptcy order and will appoint the Trustee, a freelance professional, usually a lawyer or an economist, who will carry out, among other things, an orderly realization (selling) of the debtor's assets, will pay the creditors with the money realized and will freeze the debtor's accounts in order to be able to control the financial management of the bankrupt as long as the bankruptcy process lasts. Among the steps to be taken by the Trustee there is the payment of all debts incurred after the bankruptcy petition has been approved (claims against the bankruptcy estate) which, as stated above, is another of the requirements provided for in Article 178.3 bis of Bankruptcy Act to be considered a debtor in good faith.

In addition to the claims against the bankruptcy estate, the debtor must also face priority bankruptcy claims. Most common priority claims in the case of individuals are mortgage loans (where, once the mortgaged property has been sold, the part of the loan that remains unsettled after the sale of the property is no longer priority); and fifty percent of the debts incurred with the Tax Agency and National Social Security (that is, 50% of tax claims and social security contributions).

It is important to note that, during this judicial stage, the debtor will not be allowed to freely manage his/her accounts and assets, and the Bankruptcy Trustee will control all his/her incomes and expenses. This situation is not permanent and will only last while the bankruptcy process is in progress.

Then, once the Trustee has proven that all the debtor's assets have been realized (sold) and that the debtor has not been held liable for wrongful trading — that is, that the debtor is not responsible for the insolvency situation — the Trustee will submit a request for bankruptcy discharge. Next, the debtor will request the Judge to release him/her from outstanding liabilities (exoneration) what we have also called "debt forgiveness" by justifying that all the requirements to be a debtor in good faith are met.

Thus, on expiration of the time fixed for filing complaints objecting to discharge, the Judge will enter a bankruptcy discharge order closing the bankruptcy process, releasing the debtor from certain debts and lifting the bank account freezing measures that prevented the debtor from freely managing his/her income.

Which debts are discharged?

The question that any reader of this article would ask is: What debts are discharged through the Second Chance mechanism? The answer is not easy, since the wording of Article 178 bis is not clear and has been subject to multiple doctrinal and jurisprudential interpretations, some of them quite clarifying thanks to the latest Supreme Court Judgments which have shed some light on multiple questions that were unclear or contradictory in said Article (as an example, the recent Supreme Court Plenary Judgment, dated July 2, 2019).

Thus, the debts that are usually discharged through the “Second Chance” mechanism, are as follows:

• bank debts;
• interests, distraints and fines;
• debts owed to individuals, suppliers of goods and services, etc.
• the part of the debts owed to the Tax Agency and the Social Security that is not considered a priority claim.

However, dischargeable debts may vary depending on the way we choose to request debt forgiveness. The out-of-court and the judicial procedures explained above loosely summarize a very complex procedure full of vicissitudes which is impossible to explain in depth in a single article like this one. In order not to oversimplify such a complex subject and for didactic purposes only, we will explain here the different types of debt forgiveness. Once we are in what we have called the "judicial stage", we shall be required to choose between two different ways to get our debts discharged: the so-called "fast or final" way (art. 178.3. 4 bis) or the "slow or provisional” way of the payment plan (art. 178.3. 5 bis).

• The first way allows the debtor to obtain forgiveness of all his/her debts at the moment the bankruptcy discharge order is entered, as long as the debtor pays, as we have already mentioned, all claims against the bankruptcy estate,  all priority bankruptcy claims and 25% of ordinary claims in case an out-of-court payment agreement had not been attempted (this is the case we have explained above which is the most usual case where the debtor always tries to reach an out-of-court payment agreement before the judicial stage, where appropriate) .
• But what happens if the debtor does not have enough cash to pay the claims against the bankruptcy estate and/or the priority claims? In that case, the debtor will resort to the payment plan where all claims against the bankruptcy estate and all priority claims [2] shall be subject to a payment plan of at most five years, which must be approved by the Judge. The debtor will obtain debt forgiveness if he/she complies with the payment plan or, in the event that he/she is unable to fully comply with it, when he/she has allocated at least half of the incomes received which are not considered as unseizable to try to comply with said plan.

As we have seen, the Second Chance procedure is complex and multiple factors must be considered in order to guarantee success. Therefore, a good expert advice on time will help us make the best possible decision and establish a roadmap to best choose the bankruptcy instruments to be implemented in order to achieve the objectives we have set and, above all, to be able to obtain debt forgiveness.

[1] The General Council of the Judiciary (CGPJ) has made thirteen proposals for the Government to study their inclusion in the Royal Decree-Law of urgent measures for the Administration of Justice. Regarding bankruptcy, it is proposed to introduce an Article 148 bis on the habitual residence of the bankrupt. The measure is intended to prevent the realization (selling) of the property that constitutes the bankrupt's habitual residence provided that certain requirements are met. The most relevant of said requirements is that the foreseeable value of the property realization is not enough to cover the outstanding part of the debt guaranteed by the mortgage. Besides, the mortgage loan must be up-to-date with payment otherwise, the consent of the priority creditor concerned will be needed and the amount of the mortgage monthly payments will have not to be excessive compared to the price of the rent of a property suitable for the needs of the debtor and his/her family.

If the Government accepts and includes this proposal, the bankrupt will be allowed to preserve an important asset although being granted debt forgiveness.

[2] The Court's Judgment of July 2, 2019 has clarified that the claims to be subject to the payment plan are the claims against the bankruptcy estate and priority claims.