Personal insolvency is the legal term given to the bankruptcy filing of individuals. This is the final step for those who are unable to pay their debts and are over-indebted.

What is personal insolvency?

The law considers a debtor to be insolvent if they are unable to meet their due obligations.

Personal insolvency may be a last resort for over-indebted individuals who are unable to repay their debts. The goal is to prevent debtors from being indefinitely burdened with debts they cannot repay.

Personal insolvency can also be of two types:

• personal, because it only affects the debtor personally;
  Family or marital property, when it encompasses the elements of a couple whose marriage regime is either community property or community of acquired property.
• There are two types of personal insolvency that you need to know about: insolvency with the discharge of remaining liabilities and insolvency with a payment plan.

Under what situations should you file for personal insolvency?

First, it's important to try renegotiating your loans with the banks. Additionally, you can choose to transfer your mortgage to another financial institution to obtain a more competitive spread and thus reduce this burden on your family budget.

Therefore, only after exhausting all these options and if you truly cannot find another solution for paying your debts should you consider the possibility of personal insolvency.

When should you file for personal bankruptcy?

Filing for personal bankruptcy should only be done after all other alternatives to balance your personal finances have been exhausted.

If, even so, the insolvent person or family cannot cope with the situation they are in, they should consider the possibility of... seek legal counsel to help file for personal bankruptcy.

Personal insolvency cases are generally complex and require specialized help and support.

How is personal insolvency handled?

This can be requested by either the debtor or the creditor. When it comes to a consumer who is in debt, they must contact a lawyer, as only a lawyer will be qualified to file for personal insolvency and initiate this legal process.

In short, this means that after the procedural steps have been completed, if you have requested a payment plan or if there is a court order for the sale of assets, either will be fulfilled through the Judicial Administrator, who will act as manager of all your assets and income.

What happens after insolvency?

Following the court ruling, you will face limitations in managing your finances. When you receive a salary, it will be used to pay off the debt.

If you have extra income, this will also go towards paying off the debt. However, you will have some disposable income to cover your daily expenses.

What are the main consequences of personal insolvency?

Note that when a person is declared insolvent, their life becomes conditional upon the insolvency process. Among the consequences, we highlight a few:

• Limiting the use of bank accounts up to the amount determined in the court ruling;
• Name registered with the credit risk center;
• Any amount exceeding the minimum value declared in the judgment is delivered to the judicial administrator;
• faithful adherence to the payment plan, among other things.

After a period of five years, the situation returns to normal. Therefore, despite the complexity of the procedure and the efforts and limitations you will face, in the end you will be able to experience:

• The financial situation remains without any restrictions;
• You can try to access new loans, financing, or any other banking product;
• Your name will no longer appear on the credit risk database, etc.

It is quite true that filing for insolvency is considered a last resort in a situation of over-indebtedness, as the debtor will necessarily need to adjust many of their habits to successfully overcome all stages of the process.

How long does personal bankruptcy take?

The personal insolvency process generally takes about 100 days plus 5 years for the period of discharge of remaining liabilities.

That's how it is:

• Approximately two weeks (average timeframe) from the filing of the initial insolvency petition to the pronouncement of the insolvency declaration judgment;
• 80 days (the period stipulated by law) from the declaration of insolvency until the issuance of the initial order for the discharge of remaining liabilities, which determines: the start of the 5-year assignment period and the closure of the insolvency proceedings;
• 5 years (the period stipulated by law) from the initial order for discharge of remaining liabilities and the order to close the insolvency proceedings (which today coincide in time, even if there are still assets to be liquidated: see below) until the final order for discharge of remaining liabilities that determines the forgiveness of all debts covered by the insolvency proceedings that, after the lapse of 5 years, are still pending payment.

Personal insolvency: Garnishment of minimum wage

Only one-third of a debtor's salary can be garnished. In other words, if an individual earns a net income of €1000, €333 can be garnished, leaving them with a monthly disposable income of €666.

There is one exception to the rule: the insolvent person must always retain an amount equivalent to at least one minimum wage.

What happens after 5 years of personal insolvency?

In the context of personal insolvency with discharge of remaining liabilities, after the 5-year assignment period has elapsed, if the debtor fulfills all their obligations, a final order for discharge of remaining liabilities is issued, which determines:

• the extinction and consequent forgiveness (exoneration) of all debts (with the exception of debts to the Tax Authorities and others) that the debtor had on the date of the initial order for the discharge of remaining liabilities;
• the cessation of the insolvent's duties during the assignment period; and also,
• The termination of the trustee's functions.

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