Amendment to the Insolvency Act: Helping debtors avoid debt traps?

The amendment to the Insolvency Act approved by the Czech government in mid-January brings about changes in the domain of debt relief. The amendment is expected to enter legislation in 2019, however, it has not yet been approved by the Czech Parliament.

Current legislation

A debtor is considered bankrupt if he has more than one creditor and pecuniary obligations that have been outstanding for more than 30 days. If the debtor does not have business debts, he may propose to the insolvency court that his bankruptcy be solved by debt relief. If approved, the debtor is obliged to repay the creditors a determined amount from his income for 5 years, and must be able to pay at least 30% of his creditors' claims. This means that the borrower must have an appropriately high income or assets that can be monetized to discharge debts.

Proposed changes

The proposals include:

Paying scheduled instalments by monetizing assets;
Amending the time frame for repayment so that debt relief would take three years (if 50% of the creditors' claims are met), five years (if at least 30% of the creditors' claims are met) or seven years (if less than 30% of the creditors' claims are met); and
The opportunity to suspend the entire debt relief process for up to 12 months or extending the time required to assess the repayment of the claims by up to six months.

However, the insolvency court shall refuse the submitted proposal to grant debt relief if it can reasonably be assumed that a dishonest intention is being pursued or if the results of the proceedings thus far demonstrate the debtor has a reckless or negligent attitude towards them.

The proposed changes are therefore aimed primarily at honest debtors who have been unable, under current legislation, to reach the 30%-level of honoured debts needed to obtain debt relief.

Conclusion

The draft amendment sparked numerous discussions, particularly regarding the possibility of a 7-year repayment schedule. The legislator’s intention to help people escape debt traps has been countered by disagreement from creditors who fear recovering claims will become more difficult. At the same time, it is likely insolvency courts will be more burdened.