A Spanish judge can declare the debts of an individual extinguished when that person will never be able to pay them. This applies to employees and to the self-employed alike, against banks, finance companies, credit cards, suppliers and, up to a cap, against the Tax Agency and Social Security. The mechanism is called discharge of unsatisfied liabilities. It is governed by the Recast Insolvency Act (Royal Legislative Decree 1/2020) and has operated under different rules since the reform introduced by Law 16/2022, which removed several of the obstacles that made the previous route almost useless. What follows are the conditions for obtaining it, the two routes that exist, and what is cancelled and what is not.
What the law requires of the debtor
Two substantive requirements. The first is insolvency, either current or imminent. A person is insolvent when they cannot regularly meet their obligations as they fall due, or when they foresee that they will shortly be unable to do so. There is no need to have stopped paying everything, to have reached a minimum amount of debt, or to have been sued. Someone who can already see that their income will not cover the instalments falling due this month meets the requirement.
The second is being a debtor in good faith. The law does not leave that expression to the judge’s discretion but sets it out as a list of grounds for exclusion. Excluded is anyone who in the previous ten years has received a final custodial sentence, even if suspended, for offences against property, against the socioeconomic order, forgery of documents, offences against the Public Treasury and Social Security, or against workers’ rights. Also excluded is anyone who in that same period has received a final penalty for very serious tax, Social Security or labour infringements, anyone whose insolvency has been declared culpable, anyone who has breached their duties of cooperation and disclosure in the proceedings, anyone who has provided false or misleading information or run up debt recklessly, and anyone who has already obtained a discharge in the immediately preceding years.
Outside that list, the law does not ask why you got into debt. It makes no difference whether the debt comes from a business that closed, a divorce, «revolving» credit cards or a guarantee that was called in. At the firm we go through this list with the client first, because a forgotten tax penalty or an old conviction can close the door and it is better to know before filing anything.
What is no longer required after the 2022 reform matters as much as what is. The obligation to first attempt an out-of-court payment agreement with creditors disappeared, a step that in practice almost always failed and merely added months. So did the requirement to have paid in full the claims against the estate and the privileged claims in order to qualify for discharge.
Two routes, with liquidation or with a payment plan
Since Law 16/2022 the debtor chooses between two routes, and may switch from one to the other within certain limits.
In discharge with liquidation, the debtor’s assets are sold, except those that cannot be seized, and the proceeds are distributed among creditors. Whatever remains unpaid is discharged. If the debtor has no assets with realisable value, which is the usual situation for those who turn to this mechanism, the insolvency is declared without estate and the procedure is shortened considerably. The judge declares it and, unless a creditor holding at least five percent of the liabilities requests the appointment of an insolvency administrator to investigate, the case moves straight to the discharge application. This is the fast route for those with no assets to protect.
In discharge with a payment plan, the debtor keeps their assets and undertakes to pay creditors whatever they can afford over a period of three years, which rises to five in certain cases, including where the family home is kept. The plan is approved by the judge, creditors may object, and once it has been complied with the discharge goes from provisional to definitive. The plan does not have to cover the entire debt, only what the debtor’s financial capacity allows. This is the route designed for someone with a home whose mortgage is up to date, a vehicle they need for work, or a small business still trading.
The choice goes beyond asset protection. With liquidation, discharge arrives sooner. With a payment plan, the debtor lives for three or five years under a court-approved commitment, and breaching it can cost them the discharge. The decision has to be made with real income and expenditure figures.
Which debts are cancelled and which are not
The general rule is that all unsatisfied liabilities are discharged. The exceptions are set by the law itself and generate the most dispute.
Maintenance debts are not discharged, nor are debts arising from civil liability for a criminal offence, nor non-contractual civil liability for death or personal injury. Nor are wages for the last sixty days of actual work, within a cap, where the debtor is an employer. Nor criminal fines, very serious administrative penalties, or the costs of the discharge proceedings themselves.
Debts backed by security in rem, in practice the mortgage, are not discharged up to the value of the security. The bank keeps its rights over the property. What is discharged is the part of the loan left uncovered after a mortgage foreclosure, which was the classic trap of losing the house and still owing money.
For the Tax Agency and Social Security the law sets a cap. Up to ten thousand euros of debt to the Tax Agency and a further ten thousand to Social Security are discharged, per debtor. Within each figure, the first five thousand euros are cancelled in full and half of the remainder is cancelled up to the maximum. Anything above that is still owed and will have to be deferred or paid in instalments through the administrative route. This cap has been heavily litigated and is likely to remain so, which means in every case you have to check how the competent court is applying it at that moment.
Guarantors, the home and what happens afterwards
Discharge benefits only the debtor who obtains it. The creditor retains its full claim against guarantors, sureties and joint debtors. If your parents guaranteed your loan, the bank can continue to pursue them even though you have been discharged. Where several members of a family are liable for the same debt, it has to be considered whether more than one insolvency should be filed.
On the family home, the only honest answer is that it depends. Through the payment plan route with the mortgage up to date it can be kept, and the law expressly provides for this by extending the plan to five years in that case. Through the liquidation route, the house forms part of the estate and is sold, unless it has no realisable value once the mortgage is deducted, which is a common situation and one the court assesses in each file.
The discharge can be revoked during the following three years if it is discovered that the debtor concealed assets or income, or if their situation improves substantially through inheritance, legacy, gift or gambling to the point of being able to pay what was discharged. Once that period has passed, the cancellation is final.
The procedure requires a lawyer and a court agent (procurador). It is handled by the court of first instance if the debtor is not a business owner and by the commercial court if they are. During the insolvency, individual enforcement actions against the debtor are stayed, with the particular rules that apply to mortgage enforcement, and interest stops accruing on ordinary debts.
At Perseus & RC Abogados we handle personal insolvencies and discharge of unsatisfied liabilities in A Coruña, from the initial viability assessment through to the order granting definitive discharge, within our civil law practice. If you want to know whether your case fits the mechanism before taking any step, you can contact the firm and we will review it with your actual figures.
Frequently asked questions
Can I use the Spanish second chance law if I owe money to the Tax Agency?
Yes, but with a limit. Up to ten thousand euros of debt to the Tax Agency and a further ten thousand to Social Security are discharged. Anything above those figures is not cancelled and will have to be deferred or paid in instalments. Owing money to the Tax Agency does not bar you from the mechanism, unless you have a final penalty for a very serious tax infringement in the previous ten years.
Will I lose my house under the second chance law?
It depends on the route. With a payment plan and the mortgage up to date it is possible to keep it, and in that case the plan lasts five years. Under the liquidation route the home is sold, unless it has no realisable value once the mortgage is deducted. In any event, the bank keeps its mortgage security, which is not discharged.
What happens to my guarantor if my debts are discharged?
Nothing changes for them. Discharge benefits only the debtor who obtains it and the creditor can continue to claim the full amount from the surety or guarantor. If the guarantor cannot pay either, it will be necessary to consider whether they should file their own insolvency.
Do I have to try to reach an agreement with creditors first?
No. Since Law 16/2022 there is no need to attempt an out-of-court payment agreement before applying for insolvency and discharge. The insolvency application is filed directly with the court, with a lawyer and a court agent.