Financial literacy is still quite low among many citizens. However, sometimes situations arise where even a relatively educated person in this area gets into debt and is no longer able to repay. Business also carries great risks, and sometimes a person ends up with nothing left but insolvency. Read on to find out how insolvency works, how the insolvency procedure works and what you can expect in the insolvency court.
Insolvency is a legal condition where the debtor is unable to meet its monetary obligations to creditors in a proper and timely manner. Both natural persons and legal entities can be in financial distress and unable to repay their debts. In such a case, the simplest step is to initiate insolvency proceedings.
Insolvency, often also called bankruptcy, is when a person or legal entity becomes indebted when it is no longer able to meet its financial obligations on time and in full. The Insolvency Act defines insolvency in two main ways: insolvency and over-indebtedness. Insolvency occurs when a debtor has multiple creditors and fails to meet its monetary obligations for more than three months after they are due. Over-indebtedness is a situation where the liabilities exceed the value of the assets. This applies to legal persons and entrepreneurs.
The Insolvency Act then specifies that bankruptcy can be resolved in three basic ways: bankruptcy, reorganisation and insolvency. Each of these methods has its own specifics that affect the debtor in different ways.
Getting into debt is sometimes much easier than it might seem. All you have to do is enter into one unfavourable contract and you’ll find yourself in a cycle of financial distress. So don’t see your situation as an embarrassment to be kept quiet about and deal with it early. The sooner you start insolvency proceedings, the easier it will be for you to resolve the situation. Similarly, don’t delay if you are waiting for a sale payment to arrive in your account but the due date has already passed. In this case, the debtor may be on the other side and you would not be able to wait. In either case, we will provide you with legal representation and help you resolve the debt.
In our next article, we focus on insolvency-related offences that a debtor may commit against creditors in an attempt to improve his or her position.
In insolvency proceedings, people can “get rid” of their debts. This is a legal process that allows bankruptcy to be resolved through the courts. In this case, the insolvency court is there to ensure that creditors get at least some of their money back, while giving the debtor a chance to start with a clean slate.
If you need to resolve your debts and insolvency is the only possible solution for you, then you need to file an insolvency petition. As this petition can also be filed by creditors, it is better not to delay and file it as soon as you are fully aware of your situation regarding your inability to pay. The insolvency petition must contain all the necessary information about you, your assets, debts and creditors so that the court can make a decision based on complete information.
At the same time as filing the insolvency petition, you can apply for debt relief. If you are not sure how to fill in the documents and the specific procedure, please contact our law firm. We can help you sort out all the details and make sure you get the most out of the process.
Once the insolvency petition has been filed, the insolvency court comes into play. It assesses whether the debtor is actually insolvent. If it decides that this is indeed the case, it issues a bankruptcy decision. This means that you, as the debtor, are officially designated as insolvent and some form of insolvency resolution can be initiated.
The insolvency decision is published in the insolvency register, which is a publicly accessible database that holds all the key documents of the insolvency proceedings. Anyone can consult the register, which can affect your credibility with creditors, business partners and employers. Therefore, if you are entering into an important transaction, it is advisable to check the other party in this register.
Once the court has decided that you are truly unable to pay and you are officially insolvent, you will face one of three main forms of bankruptcy resolution.
In the case of bankruptcy , you will face a complete liquidation of your assets. In other words, you will lose all your assets, which will be sold. The proceeds will be distributed to creditors to pay off at least some of your debts. Bankruptcy most often takes place in companies that cannot be reorganised.
It is reorganisation that allows the debtor to continue its business. However, if you want to use this form, it has one condition: You must comply with a reorganization plan that is approved by the court and creditors. Such a plan usually includes a restructuring of debts and a change in the management of the company in question. Restructuring can be used by companies that have a chance of recovering from debt and being able to continue operating if they make certain changes to their management or financing.
Insolvency, often referred to as personal bankruptcy, applies mainly to individuals (including self-employed persons). It allows the debtor to repay a proportion of his or her debts to a reasonable extent and to discharge the rest of the debts under specified conditions.
Thanks to an amendment effective from July 2024, a debtor can be insolvent in as little as 3 years if he or she duly complies with the conditions of insolvency and makes every effort to satisfy his or her creditors. Exceptionally, a longer period, for example 5 years, can be set if the court finds that the prerequisites for shortening have not been met. Compared to the previous practice, it is no longer a condition to repay at least 30% of the debts – the overall assessment of the debtor’s good faith and efforts is decisive.
Debt relief is not automatic – it has to be approved by the court and is only for persons who do not have debts from business (or exceptionally do, if creditors agree) and who are not excluded from debt relief, for example because of a previous failure in insolvency proceedings.
To avoid insolvency, plan early and manage the flow of personal and business finances carefully. If you are already in debt, check regularly that all payments are going out as they should and actively seek solutions at the first sign of financial problems.
Insolvency proceedings are formally opened by filing an insolvency petition, but the insolvency proceedings themselves only start when the insolvency court issues a decision on insolvency. This decision also appoints the insolvency administrator, who plays a key role in the whole process.
The insolvency administrator takes control of the debtor’s assets, determines their value and ensures that they are used as efficiently as possible to satisfy creditors’ claims. This may involve selling the property, leasing it or otherwise monetising it – all under the supervision of the court and in accordance with the law.
The debtor is obliged to cooperate fully with the insolvency administrator. He or she must provide him or her with all necessary documents, truthful information about his or her assets, income and liabilities and comply with other obligations set out in the Insolvency Act. Since the bankruptcy decision, the debtor may not dispose of his/her assets independently, unless expressly authorised by the insolvency court – this is to protect creditors and ensure the fairness of the proceedings.
As a debtor, you have the right to demand fair and reasonable treatment throughout the insolvency process. If you feel that your right to be protected from unjustified creditor claims or your right to a fair judgment based on evidence has been violated, you can take legal action.
Once insolvency proceedings have run their course, different situations arise depending on which form of insolvency resolution has been used in a particular case. If the insolvency is successful, the debtor’s remaining debts may be forgiven and the debtor starts afresh without a debt burden. However, the law excludes some debts from debt relief. For example, if you owe child support or fines, you must continue to pay your debts after the insolvency is over.
Insolvency deals fairly with the situation of a debtor in bankruptcy, whether it is an individual or a legal entity. If you find yourself unable to repay, do not delay and file for insolvency proceedings. The insolvency court will then decide whether this is justified. The debtor can then face bankruptcy, reorganisation or personal bankruptcy. Throughout the proceedings, the debtor is under the supervision of the insolvency practitioner and may not dispose of his or her assets on his or her own.
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Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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