Over-indebted people experience social exclusion, and this is particularly evident in the financial sphere. Many times, these people escape into the shadow economy to hide from bailiff enforcement. The declaration of bankruptcy can lead to the discharge of debts with little or no repayment. The institution of consumer bankruptcy is intended to help over-indebted people in a so-called fresh start, i.e. it is intended to bring these people back to full participation in society.
As a general rule, bankruptcy should be used in exceptional circumstances, and its excessive popularization could have negative consequences and lead to an imbalance in the market. Nevertheless, the vision of debt cancellation without the need to repay them may seem exceptionally tempting and encourage many abuses. In order to prevent abuses and audacious indebtedness, the legislator has introduced restrictions that can effectively discourage people looking for a way to easily getting rid of debts. The subject matter in this area is quite extensive, therefore the considerations in this area will be presented in two articles, which I cordially invite you to read.
In 2020, significant changes were introduced to the Law bankruptcy, which were largely intended to relieve the Courts and transfer some of their work to trustees, but above all to make it easier for insolvent private individuals (natural persons) to discharge their debts and return to full participation in social life. For this purpose, the premises on the basis of which bankruptcy of natural persons (private persons) who do not run a business were changed business activities. Since 2020, the basis for declaring insolvency has only been the existence of a state of insolvency. Previously, it was also necessary for the Court to examine how the insolvency occurred.
Where the debtor has brought about his insolvency or significantly increased its degree intentionally or due to gross negligence, then the Courts dismissed bankruptcy petition. In addition, there were several other grounds for dismissing a bankruptcy petition, such as the debtor providing false or incomplete data in the petition, unless the inconsistency or incompleteness was not material or the conduct of the proceedings was justified by reasons of equity or humanitarian reasons.
In the described state of the law, bankruptcy proceedings could also be discontinued in cases where the circumstances justifying the dismissal of the petition have already come to light after the declaration of bankruptcy. We encountered such a situation in one of our proceedings.
From PMR Restructuring practice
As part of the bankruptcy petition, the bankrupt did not disclose that she had been validly convicted of offences under Article 269 par. 1 kkk, art. 284 par. 1 of the CC and Article 294 par. 1 of the CC, which are intentional offences against the credibility of documents, property. In the case described, the perpetrator falsified documents regarding income and, in addition, by impersonating another person, defrauded a loan. The sentences imposed were not erased. As a result of the fines and the obligation to make good the damage, the bankrupt did not pay the remaining outstanding debts, thus acting to the detriment of her creditors and aggravating her state of insolvency. In the described case, the Court did not see the possibility of applying equitable and humanitarian considerations,
"because the debtor, acting for several years, committed the same criminal acts and was fully aware of the significance of her actions. (...) Her reprehensible behaviour cannot therefore be protected by the law and, as such, should not ultimately lead to the cancellation of her debts at least to a minimum extent" (Order of 02.02.2021 ref. V GUp (...) /19).
Consequently, the bankruptcy proceedings were discontinued.
Currently, at the insolvency petition stage, the Court no longer analyses the causes of insolvency, but these causes nevertheless affect the possibility of obtaining debt relief. Under the current legislation, there will be no waiver of liabilities if the bankrupt caused his insolvency or materially increased the degree of insolvency in a deliberate manner. In particular, this refers to the squandering of constituent parts of the assets and the intentional non-payment of due liabilities. In addition, waiver of liabilities may also be refused if, within a period of ten years prior to the date of filing the bankruptcy petition, bankruptcy proceedings were conducted against the bankrupt in which all or part of his liabilities were waived. However, as in the previous legal state, equitable or humanitarian considerations may be taken into account here.
However, the question arises as to how the court is to gain knowledge of such circumstances?
Well, the Receiver is obliged to examine whether the data provided by the debtor in the bankruptcy petition are truthful, and if there are discrepancies, he is obliged to notify the bankruptcy judge. And this in turn may lead to the discontinuation of the bankruptcy proceedings. If it is revealed that the data provided by the debtor in bankruptcy petition are untrue or incomplete, the Court may issue a decision to discontinue the proceedings, unless the non-compliance or incompleteness is not material or the proceedings are justified on equitable or humanitarian grounds. Thus, also in the current state of the law, the legislator has left a gateway for unreliable debtors in the form of the aforementioned reasons of equity and humanitarian grounds. However, it is worth noting that they will not be applicable in every situation, and everything will depend on the individual realities of the case.
In addition, the basis for discontinuation of insolvency proceedings is also the widely understood lack of cooperation of the bankrupt with the trustee and the bankruptcy judge, by which it can be understood:
- failure to identify or release all assets to the receiver,
- failure to issue the necessary documents,
- failure to fulfil the bankrupt's obligations.
It is clear that what matters is the scale of such omissions and the degree of their materiality. A refusal to hand over real estate to the trustee, for example, will be perceived completely differently than, for example, failure to issue a current decision to the trustee on property tax rates (if the bankrupt requests it). Also in these cases, the legislator left a loophole in the form of the justification for conducting the proceedings dictated by reasons of equity or humanitarian reasons.
At every stage of the entire insolvency procedure, there is ample scope to manipulate the facts, disinformation, silence, concealment of certain information, assets, motives, etc., which may serve to conceal assets or to obtain more favourable redemption terms. Any of such actions may face negative consequences if detected. It is worth realising that the trustee has a wide range of instruments at his disposal to verify the information provided by bankrupts. It is also not uncommon for outsiders or, for example, creditors or persons aggrieved by bankruptcy to signal certain issues to the trustee or the court. Let us not forget that information on declared insolvencies is made public, thus anyone interested may check who has been declared insolvent, which Court is conducting the proceedings, as well as who has been appointed a trustee in the given proceedings. This includes the trustee being able to verify whether, for example, bankruptcy proceedings have already been conducted against a certain bankrupt. Therefore, taking into account the comments made above, it is reasonable to conclude that a person facing bankruptcy proceedings runs a high risk already at the stage of filing a bankruptcy petition by giving untruths or covering up the existence of certain relevant facts. All issues concerning assets and liabilities are relevant to the insolvency proceedings under way and should not be a justification for concealing information.
It is a common mistake not to indicate in the application for the opening of proceedings the fines imposed, or measures of compensation or maintenance obligations. Claimants often point to the legitimacy of such an action, arguing that they are not written off in bankruptcy proceedings. This is not a correct interpretation, because also claims that are not written off in bankruptcy proceedings are obligations of the bankrupt, which the bankrupt is obliged to disclose in the petition and additionally show how the state of insolvency was created or deepened.
In addition, it is important to emphasise how important it is to list all creditors in the bankruptcy petition, because the liabilities which the bankrupt person deliberately failed to disclose are not subject to write-off if the creditor did not participate in the proceedings. So, is it true that it is worth concealing important information in the consumer bankruptcy process, since this may lead to the destruction of the purpose for which the application is submitted? The answer is clearly negative. If the arguments presented so far were not sufficient, I will present the next ones in the next article. I invite you to read.
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