Consumer agreement - a chance to preserve real estate

You do not have to be an entrepreneur to enter into an arrangement with creditors. A private debtor (consumer) who has become insolvent and is unable to pay his or her due debts may apply to the bankruptcy court to open proceedings for the conclusion of an arrangement at a meeting of creditors.

Many people associate consumer bankruptcy with the complete liquidation of assets, including, for example, an apartment or a house where they live with their family. Meanwhile, the law also provides an alternative solution – consumer arrangement, which allows insolvent people to avoid selling all their assets and repay their debts on changed, more favourable terms.

Listen to what the consumer agreement is.

In this article, we explain what a consumer agreement is, what the conditions are for its conclusion, and what benefits it can bring to the debtor and creditors. We also discuss the process of approving the agreement by the court, its implementation, and the role of the court supervisor. If you are facing financial problems, it is worth getting to know this form of debt restructuring as a real chance to get out of a difficult situation.

Contents:

Consumer bankruptcy is often seen as a process leading to the liquidation of the debtor's assets and complete debt relief. However, bankruptcy law also provides for the possibility of concluding an arrangement, which may allow for a more flexible solution to the debt problem. In this article, I will present the basic principles of a consumer arrangement in bankruptcy proceedings. A consumer arrangement is a legal institution that allows individuals who have found themselves in a state of insolvency to restructure their debts within the framework of bankruptcy proceedings. Thanks to this solution, the debtor can avoid the complete liquidation of their assets and work out a compromise with creditors, which allows them to gradually repay their debts on the terms specified in the arrangement. The possibility of concluding an arrangement arises when the debtor is in a state of insolvency, but their financial situation allows them to settle their liabilities thanks to modifications made to the terms of their repayment.

What is a consumer agreement?

Consumer arrangement in bankruptcy proceedings is an agreement between the bankrupt and their creditors regarding the repayment of liabilities in a specific manner. It may consist of dividing the debt into installments, deferring payment deadlines, partial cancellation of liabilities or other solutions adapted to the financial situation of the debtor.

Concluding an arrangement allows the bankrupt to avoid the complete liquidation of their assets, which may be beneficial, especially when the bankrupt has valuable assets (e.g. real estate) that would be sold in the event of liquidation.

In order to conclude an arrangement, the debtor who is a consumer applies to the competent bankruptcy court to open arrangement proceedings at a meeting of creditors.

According to the applicable provisions, the bankruptcy court may also refer the debtor who has filed a bankruptcy petition to proceedings for approval of an arrangement at a meeting of creditors, unless the debtor has made a statement in the bankruptcy petition that he does not consent to participate in the arrangement proceedings at a meeting of creditors. The factor that determines whether the court will refer the debtor to such proceedings is the debtor's earning capacity and professional situation, based on which the court assesses the debtor's ability to cover the costs of the arrangement proceedings and to execute them without harming the creditors.

Practical example – how does the consumer arrangement work?

Mr. Marek, a 45-year-old teacher, had been taking out loans for years to renovate his apartment and treat a sick family member. At first, he paid the installments on time, but after losing his additional source of income, he was no longer able to meet his obligations. Banks and debt collection companies began to demand immediate repayment of the debt, and the bailiff seized part of his salary.

Mr. Marek faced a dilemma: declare bankruptcy and lose your apartment or find another solution. He decided to use consumer system. With the support of a restructuring advisor, he presented the creditors with a proposal to repay the 60% debt over 5 years, spread over affordable installments. The creditors agreed to the arrangement because it allowed them to recover a larger portion of the debt than in the case of a standard bankruptcy.

Thanks to this, Mr. Marek kept his apartment, could continue working and gradually pay off his debts, avoiding the complete liquidation of his assets. This shows that a consumer agreement can be an effective tool for getting out of debt without having to lose your life's work.

Formal requirements of the application and the method of its submission

The application to open the proceedings for concluding an arrangement at the meeting of creditors should contain elements corresponding to the application for declaring bankruptcy, and therefore it should include:

• name and surname, place of residence, address and PESEL number of the debtor, and if the debtor does not have a PESEL number – other data enabling his unambiguous identification;
• the debtor's Tax Identification Number (NIP), if the debtor had such a number within the last ten years prior to the date of submission of the application;
• indication of the places where the debtor’s assets are located;
• indication of the circumstances justifying the application and their plausibility;
• an up-to-date and complete list of assets with an estimated valuation of its components;
• a list of creditors with their addresses, the amounts owed by each of them and the payment deadlines;
• a list of disputed receivables, indicating the extent to which the debtor disputes the existence of the receivable; indicating a receivable in the list of disputed receivables does not constitute its recognition;
• information on the income earned and the costs incurred for the maintenance of themselves and the persons supported by the debtor in the last six months prior to the date of submission of the application;
• information on legal acts performed by the debtor in the last twelve months prior to the date of submission of the application, the subject of which were real estate, shares or stocks in companies;
•  information on legal acts performed by the debtor in the last twelve months prior to the date of submission of the application, the subject of which were movable assets, receivables or other rights whose value exceeds PLN 10,000;
• declaration of the truthfulness of the data contained in the application

Moreover, an element necessary for taking such a request into consideration is the indication of preliminary arrangement proposals.

Together with the application to open the arrangement proceedings at the meeting of creditors, the consumer also pays an advance payment for the expenses of the proceedings, in the amount of the average monthly salary in the corporate sector, excluding profit bonuses, in the third quarter of the previous year, as announced by the President of the Central Statistical Office.

In the event that the court decides to refer the case to composition proceedings, the consumer shall pay an advance to the court supervisor within 30 days from the date of opening of the composition proceedings, under penalty of discontinuation of the proceedings and consideration of the bankruptcy petition.

Who can submit arrangement proposals?

In accordance with applicable regulations, arrangement proposals may be submitted by:

• Fallen – a debtor who is a consumer who wants to settle his obligations on terms that will enable him to continue functioning,
• Creditor – an entity interested in recovering as much of its receivable as possible,
• Trustee – the body conducting the proceedings, which may propose a solution beneficial to all parties.

Importantly, the provisions of bankruptcy law provide for the possibility of concluding an arrangement also after the declaration of bankruptcy, in order to optimally satisfy the creditors from the bankrupt's assets.

Examples of arrangement proposals

Example 1: Debt payment in installments with partial interest cancellation

Situation:
Mrs. Anna, an administrative employee, has a total debt of 80,000 PLN (with interest) to several creditors. Her current income allows her to repay some of her debts, but she is unable to repay the full amount in a short time.

Arrangement proposal:

• Debt divided into 60 monthly installments 1,000 PLN each.
• Write-off of 30% accrued interest by creditors.
• Postponement of the first installment by 6 monthsto enable the debtor to stabilize financially.
• Obligation to pay additional contribution in case of higher income (e.g. bonus or salary raise).

Benefits for creditors: Gradually repaying a larger portion of the debt instead of lengthy bankruptcy proceedings.
Benefits for the debtor: Possibility of repayment in reasonable installments without the need to sell assets.

Example 2: Partial debt cancellation with lump sum repayment of the remainder

Situation:
Mr. Krzysztof, a former entrepreneur, has incurred debts amounting to 120,000 PLN. Has savings of 50,000 PLN, but there is no stable income. Creditors expect quick repayment and do not want long-term installments.

Arrangement proposal:

• One-time repayment of PLN 50,000 for the benefit of creditors within 30 days.
• Cancellation of the remaining part of the debt (70,000 PLN) as a form of settlement.
• Creditors waive the charging of further interest and collection costs.

Benefits for creditors: Quick and certain repayment of part of the debt, instead of lengthy enforcement proceedings.
Benefits for the debtor: Complete closure of the case without the need for further debt service.

Is it possible to suspend the liquidation of assets?

Submitting an arrangement proposal may involve a request to fully or partially stay the liquidation of the bankruptcy estate until the arrangement is approved.

However, this will not always be possible – the regulations provide for several significant restrictions:

• Liquidation cannot be stopped, if the arrangement does not provide for immediate satisfaction of receivables not covered by the arrangement after approval of the arrangement and completion of the proceedings.
• The liquidation of assets encumbered with a mortgage, pledge, registered pledge, fiscal pledge or maritime mortgage cannot be suspended., if the secured creditor objects.

In practice, this means that a debtor who wants to retain his or her assets must present a credible, feasible repayment plan to his or her creditors and obtain their acceptance.

What does the process of accepting the arrangement look like?

If the judge-commissioner considers that the arrangement has a chance of being implemented, i.e. it is probable that the arrangement will be accepted by the creditors and implemented, he convenes a meeting of creditors, during which a vote is held. The arrangement is approved if the majority of creditors vote in favor of its acceptance. After the final approval of the arrangement, the court issues a decision to terminate the bankruptcy proceedings.

In order for the arrangement to be accepted, the judge-commissioner must decide to convene a meeting of creditors, which will vote on the arrangement proposals. The conditions for this stage are as follows:

• Judge-Commissioner may convene a meeting of creditors, if there is a high probability that the arrangement will be accepted and implemented.
• Convening a meeting is mandatory, if the arrangement proposals are supported by creditors having a total of at least 50% of the sum of receivables.
• The vote on the arrangement takes place after the approval of the list of receivables.

In the event that the list of claims has been approved by the judge-commissioner only partially, to the extent not covered by the objections, the said meeting shall be convened if the sum of the claims covered by the objections does not exceed 151 TP3T of the sum of the claims covered by the arrangement.

The period of execution of the system

The arrangement in consumer bankruptcy is concluded for a period not exceeding 5 years. However, it should be remembered that in the case where it covers receivables secured in kind, the time of its execution may be set for a period exceeding 5 years, taking into account the possible need to secure the receivables of mortgage creditors.

Completion of the proceedings and the trustee's remuneration

After the final approval of the arrangement, the court issues a decision to terminate the proceedings and the trustee may be granted a final remuneration on more favorable terms.

The role of the judicial supervisor

According to the provisions of bankruptcy law, the debtor in consumer bankruptcy executes the arrangement with the help of a court supervisor, whose duty is to maintain control over its proper execution. The debtor is therefore obliged to pay the necessary funds to the supervisor's account for the execution of the concluded arrangement. This comes down to the need to appoint a supervisor in the arrangement proceedings, who should contribute to increasing the trust of the creditors.

Summary

A consumer arrangement in bankruptcy is an attractive alternative for debtors who want to avoid total liquidation of assets and at the same time settle their obligations. Although this process requires the consent of creditors, it can be an effective tool for debt restructuring and returning to financial stability.

Every situation is different, so it is crucial to match the solution to the individual possibilities and expectations of creditors. If you are wondering whether a consumer arrangement is the right option for you, it is worth consulting with specialists who will help analyze the situation and choose the best path to regain control over your finances.

Are you considering such a step? We will be happy to help you through the entire process and find a solution tailored to your situation.

Karolina Kaminska

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