Do you know what personal insolvency is? “When debts become overwhelming and all other options to overcome over-indebtedness are exhausted, the debtor can resort to declaring insolvency,” advises DECO PROTeste.
“This process can only be initiated through the court, with the assistance of a lawyer. If financial resources are insufficient to hire legal counsel, one can seek legal aid through Social Security’s service centers,” as stated on the consumer protection organization’s website.
What is its purpose?
“A declaration of personal insolvency can prevent a heavily indebted person from being permanently burdened with unpayable debts and aid in financial recovery. However, this solution carries significant consequences for the debtor’s life. Beyond its complexity, an insolvent individual will lose control over their assets and face severe financial restrictions,” it explains.
How does it work?
In practice, “the court orders the sale of the debtor’s assets (for instance, their house and car) to repay the debts. Any ongoing execution actions on the insolvent person’s assets, like garnishments, are suspended.”
“If the asset sale does not sufficiently cover the debts, the debtor remains liable for them after the personal insolvency process concludes. To prevent this, an initial insolvency petition can include a request for debt forgiveness for any debts not settled during the process or within three years following its conclusion – known as the discharge of remaining liabilities,” DECO PROTeste elaborates.
Furthermore, “should this discharge be granted, the debtor must pay a specified amount, determined by their income, over the three years following the process completion.”
“During this period, any income earned by the debtor will be handed over to the insolvency administrator. The funds received will be directed towards repaying creditors. The debtor will live on an allowance set by the court, which cannot exceed three times the national minimum wage, amounting to 870 euros in 2025,” it reads.
What happens after insolvency?
“After the three-year period, the insolvent individual is finally relieved of the obligation to pay any remaining unsettled debts. Excluded from this forgiveness are debts to the Tax Office and Social Security, fines, penalties, compensations, and alimony, which must still be paid even if discharge of remaining liabilities is granted,” according to the information provided.
Additionally, “as an alternative to discharge of remaining liabilities, the petitioner may submit a payment plan to creditors along with the initial personal insolvency request.”
“The payment plan may include deferrals, forgiveness, setting up guarantees, a scheduled payment program, a single lump-sum payment, and measures adopted by the debtor to improve their financial situation,” the consumer protection organization explains.
