HW Legal
Debt relief is a way of dealing with insolvency, open to individuals, married couples, and non-business legal entities alike. It is a way out of the debt trap. So how and where do you start?
What is debt relief?
Debt relief is a process for resolving the financial difficulties of people who have fallen into a debt trap. It helps those who can no longer meet their obligations to their creditors, often because they kept borrowing to repay other loans until the situation became unsustainable. Debt relief is also a path back to a normal life for debtors who have had fruitless enforcement proceedings running against them for years.
As part of debt relief, the debtor, as a party to the insolvency proceedings, has a duty to try to pay off their creditors' claims. This effort, and the debtor's compliance with their obligations more generally, is overseen by an insolvency administrator appointed by the insolvency court. What the debtor has to look forward to is the prospect that, after a certain period (usually 3 to 5 years), the court will write off whatever debts are still unpaid. An amendment is currently going through the legislative process which is meant to unify this period, that is to shorten debt relief in all cases to 3 years.
The application for debt relief
Together with the insolvency petition (which a creditor can also file against the debtor), the debtor needs to file an application for debt relief. If a creditor files an insolvency petition against them first, the debtor still has 30 days to file an application for debt relief.
The debtor does not draw up and file the application themselves, but does so through an accredited person: a lawyer, a notary, a court enforcement officer, an insolvency administrator, or a charitable or advisory organisation. The debtor should not pay the fee for drawing it up in cash, because if debt relief is granted, the fee is paid as a priority claim. The debtor should cooperate with whoever drafts the insolvency petition and supply documents and supporting materials, in particular information about:
- their assets;
- the number of creditors and the amount of their claims;
- the debtor's income over the last 12 months, and their expected income over the next 12 months;
- any maintenance obligations.
After the application is filed
The insolvency court, which is the regional court for the area where the debtor lives, opens the insolvency proceedings by a notice published in the insolvency register. Once the proceedings have begun, most claims can no longer be enforced; priority claims (known as claims against the insolvency estate, and claims treated as equivalent to them) can, however, still be enforced with the insolvency court's consent. Priority claims include, for example, maintenance, taxes, and health and social security contributions.
The court decides on the application for debt relief by a ruling that usually establishes the debtor's insolvency, appoints an insolvency administrator, and invites creditors to register their claims against the debtor within 2 months.
Debt relief can take one of two forms: (i) following a repayment schedule combined with realising the estate, or (ii) realising the estate.
A repayment schedule combined with realising the estate
Under this option, the debtor mainly makes instalment payments to unsecured creditors out of their income, for a period of up to 5 years. The size of the instalments depends on several factors, including not just the income itself but also the number of dependants. The instalment payments are shared among the unsecured creditors in proportion to the size of each creditor's claim. Along with the instalment to creditors, the debtor also pays an advance towards the insolvency administrator's fee and out-of-pocket expenses, which comes to 1,089 CZK for an individual and 1,634 CZK for a married couple.
Alongside the regular payments, the debtor's property is also realised, though not all of it. Just as with enforcement proceedings, in insolvency proceedings the debtor does not have to fear a forced sale of ordinary household equipment. As long as the debtor is not living "beyond their means", they keep their furniture and everyday appliances.
The protection of the debtor's reasonable home, by contrast, is relatively new. If the real value of the debtor's home does not exceed the reference value set out in a government regulation, the property need not be sold off. This does not apply where the property serves as collateral and the creditor secured by it gives instructions for it to be sold.
Realising the estate
Realising the estate means selling all of the debtor's movable and immovable property. Under this form of debt relief there is no protection for a reasonable home, but ordinary household equipment is still protected.
(Not) completing debt relief
Ideally, the debtor completes debt relief by paying 100% of the claims of the creditors who registered, or at least of the unsecured creditors. Debt relief is also successfully completed where the debtor gradually pays off at least 60% of unsecured creditors' claims within 3 years.
Debt relief can also be completed by the debtor making, over 5 years, every effort that could fairly be expected of them. This takes account of debtors whose situation does not allow them to earn enough to repay their debts (old-age or disability pensioners, for example). If the debtor pays unsecured creditors at least 30% of their claims within 5 years, they are presumed not to have breached the duty to make every effort.
The court acknowledges the completion of debt relief by a ruling. The debtor can then apply to the court to be discharged from paying the rest of their debts. The claims of creditors who either did not register in the insolvency proceedings in time, or were not paid in full, are extinguished. The claims of secured creditors are not extinguished, however, nor are other priority claims, such as maintenance or claims for compensation.
The debt relief process does not always end happily, though; debt relief that has been permitted can also be cancelled. This most often happens because the debtor persistently fails to meet essential obligations, above all because they stop making the regular instalments. The grounds for cancellation can also lie in the debtor culpably running up further debts, or in it coming to light that they were pursuing a dishonest aim through the debt relief (for example by falsifying documents or hiding valuable assets). After debt relief is cancelled, the court decides to convert it into bankruptcy, or else stops the proceedings outright if the debtor's assets are wholly insufficient to satisfy the creditors. In bankruptcy, much as with realising the estate, all of the debtor's property is sold, the difference being that the debtor no longer has the option of asking to be discharged from the remaining debts. So once bankruptcy ends, creditors' claims are not extinguished, and creditors can go back to enforcing them through enforcement proceedings.
If you are dealing with financial problems and thinking about debt relief, we recommend using the services of accredited bodies to draw up and file the insolvency petition.
Open register of bodies relating to accreditations (justice.cz)