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Personal bankruptcy finally possible in Lithuania

EcovisLithuanian Law on the Bankruptcy of Natural Persons (hereafter – Law) came into force on 1 March 2013. The discussions about personal bankruptcy started with the economic crisis in 2008. Natural persons who had debts and were not able to pay them out had no chance for a fresh start – the recovery of debts could be executed for unlimited time, i.e. for the lifetime. This means that broken natural persons were doomed to work for recovering their debts for the rest of their lives even if it was obvious that the recovery was not possible. That brings to another problem - they had no interest to have any legal income or to purchase any property because it would be taken from them anyway. Legal possibility for natural persons to file for the bankruptcy gives them a chance to restore their solvency and to restart commercial activity.

The purpose of the Law is to allow the restitution of the solvency of a natural person, as well as of farmer and of natural person who is performing economic commercial activity and to ensure the satisfaction of creditors’ claims under the order established by this Law and in pursuance of achieving the balance between debtor’s and his creditors’ interests. Only honest natural persons will be allowed to file for bankruptcy. If the court establishes that the person was not honest in his activities, became insolvent because of his bad habits (alcohol, drugs, gambling etc.), he was convicted for certain crimes (credit fraud, debtor’s dishonest, criminal bankruptcy etc.) the bankruptcy procedure will not be started.

Often people think that those who file for bankruptcy are financially irresponsible or dishonest. Off course there are always tries to abuse this system but debtors may also have serious personal problems like losing their jobs, divorce, illness and these circumstances might cause person’s insolvency.

According to the Law only the person in debts can initiate his own bankruptcy procedure, his creditors do not have this right. And his debts have to be more than 25 minimum monthly wages, which now would be about 25 000 litas. But even then it’s not always worth to file bankruptcy because the debtor will have to pay bankruptcy administrator and for 5 years (that’s the maximum term for the execution of the plan of creditors’ claims’ settlement) he will live very modestly because the bankruptcy administrator will control all his incomes and assets.

The Law indicates that one month before filling the bankruptcy the debtor has to inform in written about that all his creditors. Only then he can apply to the court with a request to start his bankruptcy procedure where he has to explain the reasons of his insolvency, provide the documents proving that (if available), provide his contact details and he also might suggest a bankruptcy administrator. Also the debtor has to provide:

  • Documents proving all his actual and possibly future incomes
  • List of his assets
  • Information on mortgages he has
  • List of creditors
  • List of debtors
  • Information on the cases at the courts if there are any claims of assets
  • List of persons supported by the debtor

The court analysis provided information and takes a decision to start or not bankruptcy procedure. If the court decides to start the bankruptcy procedure then the debtor is obliged to provide a plan for settlement of creditor claims’. The plan must include reasons explaining why the debtor cannot pay out his debts, all incomes he is actually getting and will get within all bankruptcy procedure, list of assets to be sold, money the debtor might get form his own debtors, actions he will take to restore his solvency, money amount per month as living expenses for the debtor and persons depending on him, list of contracts he concluded, list of creditors and schedule of debts paying. The maximum term for the plan’s execution is 5 years. This provision of the Law was criticized as the term allowed is too long but that’s the maximum term. Settlement plan might provide the schedule for a shorter term.

After the plan is confirmed by the court all debtor’s accounts and assets are managed by the   bankruptcy administrator

At the end of bankruptcy procedure all unsatisfied creditors’ claims are discharged but bankruptcy doesn’t give a completely fresh start. There are types of debts which are not discharge. The debtor still has to pay out:

  • Restitution for debtor’s caused by damage, injury or death
  • Alimony for children support
  • Fines the debtor has to pay to the state for the administrative law violations.

Bankruptcy is not an easy solution or a cure-all. Not only a bankrupt person is losing all his property including his house, he has to live a very modest life while the plan for settlement of creditor claims’ is executed but there is one more bad side of the bankruptcy. A broken person gets a bad image on his credit history. Information on the persons who have filed for bankruptcy will be available for 10 years since the end of bankruptcy procedure on the internet site of the Enterprise Bankruptcy Management Department under the Ministry of Economy. The same person is allowed to file for the bankruptcy again not earlier than 10 years after his previous bankruptcy procedure ended.

Law on the Bankruptcy of Natural Persons also has a preventive role. As a natural person can file the bankruptcy and his debts might be discharged the creditors will be more responsible while lending money, especially while giving so called “fast credits”. Formerly creditors had unlimited time to require the payment of the debt. Now before giving a credit they’ll analyze more carefully the information on the credit’s receiver and his solvency.

Personal bankruptcy has its good and bad sides. The bankruptcy should be considered as a possibility for a fresh start but not as an easy way to get discharged from the debts. Every person before starting this procedure should evaluate all circumstances and possible consequences. But one is for sure – this new law provides a chance for a broken person to get back on his feet.

Giedre Uleviciute