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Despite the fact that most people apply for loans with the intention and plan to repay them on time, sometimes plans are not in line with reality. We lose our jobs, our expenses skyrocket due to illness, for example, and the desire to repay quickly dissipates. Insolvency is a rather extreme solution, but sometimes unfortunately unavoidable. But one bank loan is unlikely to lead to insolvency.
To declare insolvency, several basic conditions must be met:
- the debtor has at least two creditors,
- the debtor has at least two debts more than 30 days past due,
- the debtor is unable to pay his debts.
Subsequently, a proposal for insolvency must be filed and approved by the insolvency court. A person in insolvency must gradually start to repay his debts, but at the same time he is left with a certain amount of uncollectible money. This can increase, for example for married people and parents with children. The amount of the non-forfeitable amount can be calculated in the insolvency calculator, which is also available on justice.cz.
If the debtor has filed for insolvency, he is obliged by law to list all creditors to whom he owes money. If one of the creditors has filed a petition, it is up to the other creditors to add their claims.
Tip: Are you closing an important deal and need to vet your potential business partner well? Or have you already closed the deal, the money isn’t coming in and you want to find out where the catch is? Use the public registers to find out. In our article, we advise you on what can be found in them and what to do if the counterparty is indeed insolvent.
Your apartment or house is primarily at risk in insolvency if it is directly subject to a security interest. This means that there is a lien on them, typically if you have a mortgage. In this case, you can expect the lender to apply to sell and monetise the property. But of course, it depends on the amount of the claim and other circumstances.
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Obligation to monetise the property
The secured property is sold in the insolvency proceedings on the basis of the secured creditor’s instruction. If the secured creditor issues an instruction to sell the collateral (real estate), the insolvency administrator is bound by it and must initiate steps to sell the collateral.
The secured creditor is typically the bank that granted the mortgage. It is always worthwhile to seek an individual agreement on a modification of the repayment schedule. In the case of low repayments, the borrower can pay them out of his/her non-chargeable amount in the context of insolvency. For higher repayments, the accession of another person to the loan agreement can sometimes be negotiated. Any solution is usually more advantageous for the insolvent debtor than selling the property. There is a lot at stake and it is therefore worth consulting a solicitor.
If there is a decision to monetize the property, then the secured property will be sold without the creditor’s request. However, if the valuation of the property shows that the realisation of the remaining property may be sufficient to satisfy the claims of unsecured creditors, the secured creditor may request that the property not be sold. Similarly, if the amount of his claim is higher than the value of the property.
Tip: Typically, enforcement proceedings are used to recover debts owed to creditors and are initiated by the creditors. In the case of insolvency proceedings, the roles are reversed and the debtor takes more activity, but this does not mean that the creditor’s role is passive. What is the procedure in insolvency proceedings and what is the position of the creditor? And what is the difference between secured and unsecured creditors? This is the focus of our text.
When is a property not for sale?
It follows from the above that, on the contrary, the property will not be sold when the secured creditor does not request the sale of the secured property or prohibits the sale outright.
This may be due to the inefficiency of the sale in a period of a significant fall in property prices. In such a specific case, however, the secured creditor retains the right to satisfy its claim from the secured property even after the end of the arrangement.
The real estate does not have to be sold even by the debtor who lives there and, at the same time, the value of the real estate does not reach the price set for the release of the real estate for realisation.
What is a protected dwelling?
Since 2019, the insolvency law has enshrined the institution of a so-called protected dwelling. If you own a property that meets the statutory conditions and you live in it (typically a house or flat, but also a cottage, for example), then it does not have to be realised in insolvency proceedings. However, the value of the dwelling must not exceed the value set by government regulation. The essential condition is, however, that the property is not subject to a lien. If the law were to protect the dwelling even in such a case, it would de facto negate the purpose of liens and mortgages.
Ordinary household furnishings are also protected, even if the property is eventually sold. Thus, the usual household furnishings of the debtor, such as bed, table, chairs, stove, kitchen, washing machine, radiators, bed linen, refrigerator and other items that serve to satisfy basic needs, are never (or should never be) monetised. The exception in this case would be equipment that goes very far beyond the normal range of equipment (e.g. appliances costing many tens of thousands to hundreds of thousands of crowns).
How are assets sold in insolvency proceedings?
According to the law, there are a total of four methods of sale. They are:
- Public auction
- Sale in court under the Civil Procedure Code
- Auction by a bailiff under the Execution Code
- Sale of the property outside the auction (direct sale of the property by the insolvency administrator to a potential buyer)
The specific method of sale is chosen by the insolvency administrator. However, this requires the approval of the creditors’ committee or the court’s decision. However, as can be seen from the above, if the real estate is subject to security, the secured creditor decides on the method of sale. The insolvency administrator is obliged to respect its instructions.
What can I influence as a debtor?
The debtor’s dispositions of property are relatively small at the time of the insolvency declaration, but he still has certain rights as regards the real estate. As mentioned above, there is the institution of a protected home which he should seek. At all times, the debtor should communicate and negotiate with the insolvency practitioner, the court and, of course, the creditor. It is the helpfulness of the negotiations, the willingness to cooperate and the declaration of a commitment to repay as much as possible that can influence the creditor when it is up to him whether or not the sale takes place.
If the sale is decided, the debtor may eventually have influence over the buyer. This means that he himself can try to secure a buyer and communicate this fact to all interested parties. The buyer can be any person, natural or legal. In certain circumstances, a person close to the debtor may also be the buyer , but the creditors’ committee or the court must give its opinion.
The influence of the buyer of the property can be very significant for the debtor, as it can be a person with whom he can easily agree on the possibilities of remaining in the property. Especially if it is a close person.
Another situation in which I can become actively involved as a debtor is when a property is sold at a suspiciously low price. In such a case, the insolvency court can be asked to review the insolvency administrator’s handling of the sale of the property. The second option is to file a criminal complaint. For example, on suspicion of committing a criminal offence of insolvency fraud.