What is Spain's Second Chance insolvency law?

Spain’s Insolvency or Second Chance Law (La Ley de Segunda Oportunidad in Spanish) is a legal process that gives people the chance, both employees and the self-employed in most cases, to get rid of their debts and reset their financial situation.

First passed in 2015, the Second Chance law basically creates different ways for those in debt or going bankrupt to meet their financial obligations and make a new start. Often this is done by making some kind of settlement or having the rest wiped by a judge.

This can be done fully or partially, and it essentially allows debt-ridden individuals and those going bankrupt to wipe what they owe and get a ‘second chance’ in their financial lives without having too many negative consequences.

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Who is eligible?

According to Leynver & Jaquero Abogados : “Any individual facing insolvency can apply for the Second Chance Law. This includes employees, self-employed individuals, and, in some cases, former entrepreneurs. It’s important to note that individuals cannot have been convicted of economic crimes or attempted to defraud creditors.”

Are there any requirements?

For those wanting to benefit from a financial second chance, there are some requirements you'll need to meet in order to qualify for the Second Chance Law.

In particular, note that in order to be eligible the total debts cannot exceed €5 million.

It’ll also be important to prove that you’re acting in good faith and have found yourself in difficult circumstances that mean you can’t pay your debts. This essentially means being able to demonstrate that you've fallen on hard times financially through no fault of your own, rather than making poor financial decisions that indicate a pattern of behaviour.

As mentioned above, it's also important that you haven't been involved in insolvency proceedings before. According to law firm and financial advisors García Taboada, you cannot have “been convicted of economic, social, patrimonial or documentary falsehood crimes in the 10 years prior to the application.”

On that, applicants cannot benefit from the second chance law more than once in a decade. The law is intended to be a one off case for more urgent cases of financial insolvency and bankruptcy and not is not something to be abused.

The law also requires some sort of agreement between the parties in dispute (so an out of court settlement between the debtor and creditor) and you'll need to demonstrate that an agreement has been reached or, at the very least, that the debtor has tried to come to terms with the creditor and settle the debts.

Finally, you can't have turned down a job offer in the last four years before starting proceedings. As García Taboada note: "Although it is difficult to prove that a job offer has been refused, it is a requirement for this law not to have refused to work in a position for which one has professional capacity in the 4 years preceding the application."

How does the process work?

If you satisfy all those criteria and want to move ahead with the Second Chance Law process, you'll need to go through several steps.

Layner & Jaquero state that the first port of call is, as noted above, attempting to reach an out of court settlement.

If no settlement can be reached, proceedings to make a legal declaration of insolvency can begin.

An application for insolvency must be sent to a judge and, if approved, insolvency will be legally recognised.

Next comes the liquidation of assets. As per Layner & Jaquero: "If an agreement cannot be reached, the debtor’s assets are liquidated to pay creditors. However, essential assets will be protected, and efforts will be made to preserve what is necessary for the debtor’s basic needs.

Then the 'second chance' aspect comes into play.

With the assets liquidated and demonstrable proof that the debtor has made a genuine attempt to pay creditors at least some of that is owed, the judge may grant what is called "a discharge of the remaining debts" (wiping them, essentially) which gives the debtor the opportunity to reset their financial life free of the burden of debt.