Analysis

Changes in the Bankruptcy and Reorganisation Law

Legal alert (16/2014)

The amendment of the Bankruptcy and Reorganisation Law, which will come into force on 31 December 2014, will finally make the so-called consumer bankruptcy an effective instrument to help individuals who do not carry on a business activity and who are unable to pay their debts on their own.

The bankruptcy proceedings with respect to individuals who do not carry on a business activity, the so-called consumer bankruptcy, was made law nearly 6 years ago. Unfortunately, hopes that the provisions of the Act of 5 December 2008 would help thousands of people who, not through their own fault, are unable to pay off their debts, were soon dashed by court rulings. The Government Legislation Centre states that since the regulations came into force until the end of 2012 out of 2,161 applications for consumer bankruptcy only 60 were approved. This was mainly the effect of:

  1. restriction of the declaration of consumer bankruptcy to situations when the insolvency was the result of extraordinary circumstances, outside the control of the debtor;
  2. numerous procedures involved and a rule that failure to meet the formal requirements inevitably leads to discontinuation of the proceedings;
  3. high costs of the proceedings and application of the rule that lack of funds to cover such costs leads to rejection of the application for bankruptcy or discontinuation of the proceedings.

According to the reasons given to the amendment, its main objective was to eliminate the above obstacles, but, at the same time, respect the interest of the creditors.

The first provisions of the amendment state that the key premise of the consumer bankruptcy is to conduct the proceedings so as to forgive the debts which have not been paid off during the bankruptcy proceedings and — if (and as much as) possible — satisfy the claims of the creditors. This way the provision in the first place emphasises the debt relief.

To achieve this objective it is, however, necessary to instigate and conduct proceedings.

Pursuant to the amendment the application for bankruptcy must absolutely be rejected, if it is established that the debtor caused the insolvency or materially contributed to its extent, intentionally or through gross negligence. Other reasons to reject the application — e.g. if it is established that during the ten years before the application was filed the debtor was subject to bankruptcy proceedings in which all or part of their debts were forgiven or that the details given by the debtor in the application are false or incomplete — are relative and may be disregarded in the events provided for in the act, especially when the proceedings are instigated for equity or humanitarian reasons.

The cost barrier is lowered mainly by the provisions of Article 4917whereby, in the event when the assets of the insolvent debtor are not sufficient to cover the costs of the proceedings or there are no liquid assets in the bankruptcy estate to cover the costs, they are temporarily paid by the State Treasury. Eventually, they will have to be paid by the bankrupt debtor. The costs, in full, are included in the creditors’ repayment schedule. They may be repaid in instalments, however, over a period of time that is not longer than the creditors' repayment schedule. Additional savings will be made by specific rules for publishing announcements — free of charge in Monitor Sądowy i Gospodarczy — and new rules for paying the receivers whose pay should, generally, not be lower than one fourth of the average monthly salary in enterprises (excluding profit sharing) in Q4 of the prior year and not higher than two such salaries.

Particular care for the debtor’s assets is reflected in Article 49113 whereby, in the event when the bankruptcy estate comprises an apartment or a single-family house in which the bankrupt debtor lives, and it is necessary to address the housing needs of the bankrupt debtor and their dependants, the bankrupt debtor receives a portion of the amount from the sale of the apartment/house which corresponds to the average rent for an apartment in the same or neighbouring location for the period from twelve to twenty four months. The amount is determined on request of the bankrupt debtor by the judge-commissioner, considering the housing needs of the bankrupt debtor (including the number of dependants), their earning power, the amount from the sale of the apartment or a single-family house and the opinion of the receiver.

Just like in other proceedings under the Bankruptcy and Reorganisation Law,the key element of the consumer bankruptcy is the final distribution plan. Once the final distribution plan is drafted and — in the event when due to lack of an estate, the plan was not drafted, once the list of liabilities has been approved — the bankrupt debtor, receiver and the creditors have been questioned, the court establishes a creditors' repayment schedule which specifies the extent and time (not longer than thirty six months) in which the bankrupt debtor is obliged to pay off the approved liabilities, not paid off during the proceedings based on the distribution plans, and which portion of the debt from before the declaration of bankruptcy, will be forgiven once the creditors’ repayment schedule has been carried out.

During the time of the repayment of the creditors, the bankrupt debtor may not perform any legal acts with respect to their assets which could undermine their ability to pay off their creditors. In exceptional circumstances, on the request of the bankrupt debtor, the court may agree to the performance of a legal act of the bankrupt debtor or approve such legal act. If the bankrupt debtor is unable to fulfil the obligations specified in the creditors’ repayment schedule, on the request of the bankrupt debtor and upon hearing the creditors, the court may change the creditors' repayment schedule. The court may extend the deadline to pay off the debt, however, the deadline may not be longer than 18 months.

Once the bankrupt debtor has fulfilled the obligations specified in the creditors' repayment schedule, the court issues a decision saying that the plan has been fulfilled and that the debts from before the declaration of bankruptcy and not included in the creditors’ repayment schedule, have been forgiven. Debts related to alimony/child support; compensation payments for causing illness, inability to work, disability or death; obligation to pay fines adjudicated by a court; obligation to redress damages or compensate for losses; obligation to pay exemplary damages or make cash contributions adjudicated by a court as a punitive or probation measure; obligation to redress damage resulting from a crime or offence adjudicated in a final ruling; or obligations deliberately concealed by the bankrupt debtor, if the creditor did not take part in the proceedings are not forgiven.

Currently it is hard to determine whether the amendment will revive the somewhat-forgotten consumer bankruptcy. Rulings issued by courts will be of key importance. We may, however, say that the changes go in the right direction.

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