Published and draft legislation - Spain

New second chance mechanisms

Law on second-chance mechanisms, reducing financial burden and other social measures

This law, passed in July, introduces rules on debt relief, providing a mechanism by which borrowers acting in good faith but with outstanding payments could have a second chance under the country’s bankruptcy regulations

Extension of the mechanism to individuals

For the first time under Spanish bankruptcy law, debt relief is extended to individuals. This has entailed setting up a more flexible, more effective system to give borrowers a second chance to repay their debts, which becomes applicable after completion of bankruptcy arrangements with creditors.

The law introduces a new alternative payment exemption for retail borrowers. After completing bankruptcy proceedings, borrowers unable to pay outstanding instalments and wishing to benefit from this mechanism must commit to a five-year repayment plan. During this period, no further interest will accrue.

The law extends the possibilities of reaching amicable agreements out of court, and accords the bankruptcy mediator a more important role. The mediator must be appointed by a notary public and after analysis of relevant documents may put a stay on foreclosure proceedings.

Purpose

The main purpose of the Law is to enable individual borrowers who have had problems with their business or personal economy to undertake new initiatives without being burdened for life with a debt they are unable to meet. It establishes tools designed to help such borrowers without prejudicing the interests of creditors and without encouraging borrowers who have acted in bad faith.

Spanish law is thus responding to the demands of international bodies such as the IMF or the OECD, which have demanded better, more effective regulation to mitigate the debt overhang affecting too many Spanish households in the aftermath of the crisis.

While many Spanish citizens are still reeling from the economic recession, this law could provide a much needed boost for entrepreneurs with a feasible business plan.

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