Last year saw the promulgation of a major amendment to the Insolvency Act, which came into force mid-2017. Following in its wake is the so-called “debt-relief amendment”, highly debated in the past and set to take effect as of 2019.
This amendment bill was passed in mid-January 2018 by the government. The goal is to give a broader circle of individuals access to personal debt relief, but the courts are seriously concerned that their insolvency departments will be swamped with work if and when this amendment comes into force.
For now, being granted debt relief – that is to say, obtaining approval for entering a process whereby one’s personal insolvency is resolved by partial repayment and discharge by fiat of the residual debt – is conditional upon having some form of adequate income (and if personal income is too low, then the debtor must arrange for the injection of third-party capital in the form of a donation agreement or an agreement on regular maintenance payments), or upon having enough assets which can be turned into cash and used to repay the debtor’s debt. If the debtor meets this principal requirement, i.e., if they have the wherewithal to repay debts over time, a second requirement kicks in according to which the debtor must discharge at least 30 percent of their liabilities within the debt relief procedure.
The debt relief amendment would allow debtors to go through debt relief irrespective of the size of their debt. Personal insolvency would take three, five, or seven years, depending on the proportion of debt that is being discharged. The amendment bill envisions the following new requirements and criteria for debt relief:
30 per cent repayment over five years
Over the course of five years, the debtor must discharge at least 30% of their liabilities. They are allowed only a non-attachable minimum income; any additional income beyond this minimum is used to satisfy the debtor’s creditors. Provided that the debtor settled 30% of its liabilities in this manner within five years, the rest of their debt will be wiped out.
50 per cent repayment over three years
The debt relief amendment would allow debtors to accelerate the process of personal insolvency, provided that they manage to repay 50% of their debt within three years. This alternative speaks to debtors who are loathe to be within the special regime for debt relief over an extended time period, motivating them to satisfy their creditors to a higher degree in exchange for an accelerated procedure.
Zero repayment over seven years
A final, hotly-debated alternative would allow debtors to repay “as much of their debt as possible” over the course of seven years without stipulating any minimum threshold of repayment which must be met after the seven-year period before the rest of the outstanding liabilities is forgiven. The idea is to make debt relief attainable for debtors who have extremely low income. Under this last alternative, the debtor would de facto be let off the hook even if they pay next to nothing to their creditors throughout seven years.
The debt relief amendment has triggered a great number of discussions, especially as regards the third alternative mentioned above. The declared objective of the amendment is to help people escape the debt trap and allow them to return to a normal life. Creditors oppose it, citing their concern that, quite to the contrary of the intended effect, the amendment might invite debtors to keep getting deeper into debt, and disincentivize the proper fulfillment of financial obligations. According to creditor organizations, there lies a particular risk inherent in the possibility that debtors won’t have to repay a single crown of the money they owe – namely, that lenders and other creditors will have to reflect the possibility of default in their prices for goods and services, for instance by charging higher interest rates (in the case of banks), etc. In this spirit, creditor representatives argue that the debt relief amendment addresses symptoms, not causes, and feel that the state is passing on to them its responsibility for resolving a social issue – i.e., the “debt trap”.
The amendment bill will now be read in the House of Representatives as a part of the parliamentary approval procedure. In other words, it remains an open question whether and in what form debt relief and residual debt discharge become a part of Czech insolvency law.