Closing insolvency: how insolvency closes and what awaits you after it ends

How insolvency works and why termination is not automatic

Insolvency (technically insolvency) is a statutory process that has two main functions – to protect the debtor from creditors and to ensure that creditors recover at least part of their claims. Throughout the insolvency process, the debtor is under the supervision of the insolvency trustee and the court.

At the outset, the method of insolvency is determined. This is usually a repayment plan, where the debtor pays a portion of his or her income to the insolvency administrator on a regular basis. The trustee then distributes it to the creditors. An alternative is asset monetisation, where the debtor’s assets are sold and the proceeds used to satisfy claims. In practice, the two methods are often combined.

Importantly, the end of insolvency is not automatic. The fact that the relevant statutory period has expired does not mean that it is over. There must be a court process to confirm that the debtor has fulfilled its obligations. Only then will the court issue a decision that the debtor is discharged from the rest of the debts.

How long does insolvency take

New rules on the length of insolvency apply from 2024. The standard duration of insolvency has been reduced from five years to three years. The aim is to allow debtors to return to normal life more quickly, provided they comply honestly with all their legal obligations. Proceedings initiated before the amendment comes into force (i.e. before 1 October 2024) are governed by the old rules (i.e. 5 years)

Thus, the debtor must pay part of his income to the insolvency administrator for three years, cooperate with the court and the administrator and behave honestly – for example, not taking on new liabilities, not hiding assets and providing truthful information about his income and expenses.

Previously, only certain groups of debtors could benefit from the shortened three-year debt relief. These were mainly old-age pensioners, second- or third-degree invalids, or those who fulfilled special conditions within three years – for example, they paid at least 60% of their debts to registered creditors, or if most of their debts (at least two-thirds) were incurred before they reached the age of majority.

How insolvency is closed step by step

The actual winding-up of insolvency is administratively and legally important. The court must verify that all conditions have been met and that the debtor has acted honestly. Usually, the whole process looks like this:

1. Filing of the final report by the insolvency administrator: the administrator submits to the court an overview of how much has been repaid, whether creditors’ claims have been satisfied and whether the debtor has not breached its obligations.
2. Scrutiny by the court: the court scrutinises whether the debtor has provided all the necessary information, whether he has concealed income and whether he has behaved dishonestly. If serious breaches are found, the court could retrospectively cancel the arrangement.
3. The court will issue anorder granting the discharge if everything is in order. This confirms that the debtor has exhausted the statutory period and conditions of the arrangement.
4. Decision to discharge the rest of the debts: This is the most crucial step. The court releases the debtor from all debts that have not been satisfied in the insolvency proceedings.
5. End of insolvency proceedings: only with this decision does the insolvency really end and the debtor can start a new life without old debts.

Debts after insolvency: What may remain

Many people mistakenly believe that they will not be left with any debt after insolvency. However, this is not always true. While insolvency protects against most debts, there are exceptions that even the court will not dismiss:

• Child support – these debts are always priority and are never discharged. Unless new arrears are incurred during the insolvency, they must continue to be paid.
• Criminal fines and penalties – court-imposed fines or criminal damages are not discharged through bankruptcy.
• New debts after the insolvency has started – any debts incurred after the insolvency has been declared are not covered by the insolvency and you will have to pay them off separately.
• Certain tax and administrative penalties – depending on the circumstances, these may remain after the insolvency ends.

So completing insolvency honestly will relieve you of most debts, but not all.

Insolvency annulment: when it is possible and what it means

Not every debtor who enters insolvency will also successfully complete it. The court will order an insolvency annulment in cases where the debtor is in breach of the rules. The most common reasons are long-term non-payment of mandatory repayments, concealment of income or assets, creation of new debts or dishonest intent when entering insolvency.

If the court revokes the arrangement, bankruptcy usually follows, when the debtor’s assets are sold. The debtor loses the chance to be debt-free after three years. It is therefore extremely important to behave honestly and transparently in insolvency.

The court can annul the insolvency and stop the proceedings if the debtor’s assets are not sufficient to satisfy creditors.

What are the advantages and pitfalls of insolvency termination

There is a huge amount of relief in successfully completing insolvency. The debtor is relieved of most liabilities and can start financial planning again. At the same time, however, the debtor must take into account that the insolvency will remain on the insolvency register for several years, which can make it difficult to obtain a mortgage or a loan, for example.

On the other hand, even this obstacle is temporary and the importance of insolvency gradually fades with the passage of time. At the same time, it is possible to apply for removal from the debtors’ register.

Summary

Insolvency is a legal process that allows a debtor to get rid of a debt trap, most often through a repayment plan or a shorter three-year option. The termination of insolvency is not automatic – after the repayment period is over, the insolvency trustee has to file a final report, the court verifies the debtor’s honesty and only then decides on the fulfilment of the debt relief and possible discharge of the remaining debts. Nevertheless, some debts remain, in particular child support, fines and penalties from criminal proceedings or new debts incurred after the start of the arrangement. If the debtor violates the conditions, the court may cancel the arrangement and declare bankruptcy, which means loss of assets and the possibility to get rid of debts. But a successful exit from insolvency brings a fresh start, even though a record in the insolvency register may make it difficult to obtain loans or mortgages for several years.