The Bankruptcy Proceedings Act in article 178 bis provides a beneficial procedure for exemption from unpaid debt for debtors. This is known as the second chance mechanism, and it is applicable only to individuals, not companies.

The purpose of this mechanism is to enable those individuals who have lost their assets to start over without having to carry a debt all their lives that they can never settle. To this end, a judicial procedure is stipulated by which over-indebted individuals, who have acted in good faith, can be released from the responsibility of most of their outstanding debts after bankruptcy liquidation proceedings.

As a preliminary step to the procedure for debt exemption, first the bankruptcy proceedings must be carried out, and once they are completed due to liquidation or insufficient assets, exoneration from unpaid debt may be requested.

The law provides two options to debtors to benefit from the procedure. One entails immediate debt exoneration and requires that the debtor has paid all the credits against the bankruptcy estate and the priority bankruptcy credits. In these cases, the debtor will be exempted from the payment of ordinary and subordinate credits.

In the event that the debtor was unable to pay the above credits, there is an alternative that will entail debt exoneration in five years. This requires the submission to a Payment Plan to pay debts which the debtor has not been except from in 5 years.

In this second case, the debt exoneration will apply to the ordinary credits and subordinated credits pending the date of conclusion of the bankruptcy procedure. With respect to secured credits (mortgage debts), the debt exoneration will affect the pending amount that has not been satisfied with the completion of the guarantee, unless it were not of an ordinary or subordinated nature.

The remainder of the credits not affected by the exemption, that is, both bankruptcy estate and priority credits, must be paid within a period of 5 years according to a Payment Plan. Accordingly, the Supreme Court Judgment (Civil Chamber) number 381/2019, of July 2, interprets article 178 bis and clarifies that public credits are subject to the judicially approved payment plan, without the need for validation by the Tax Authorities or Social Security.

This procedure discharges individuals from their debt liabilities, providing them with a fresh start and a second chance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.