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New law targets dodgy debtors

Rules give creditors more teeth to collect on money owed

By Victor Velek
Staff Writer, The Prague Post
January 3rd, 2008 issue

ISIFA
Justice Minister Jiří Pospíšil says the new bankruptcy law will strengthen the position of creditors in the Czech Republic.
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A new Czech bankruptcy law is expected to give creditors more teeth to collect the money they’re owed.
At the same time, it’s also expected to boost the business environment with quicker court proceedings and more help to temporarily insolvent but economically viable businesses. It also offers remedies for more indebted individuals.
The sweeping new insolvency rules came into effect Jan. 1.
“The law significantly strengthens the role of creditors ... and enables them to hold sway over the course of bankruptcy proceedings,” Justice Minister Jiří Pospíšil said.
The old law gave excessive powers to bankruptcy administrators and judges and downplayed the influence of creditors. Under the old law, failed businesses were closed, as there was no room for reorganization or rescue of insolvent companies, Justice Ministry spokeswoman Zuzana Kuncová said.
As a result, Czech creditors formerly had the lowest chance of recovering the assets they were owed among all European Union countries. They got back on average a mere 18.50 Kč ($1) from a bankruptcy claim worth 100 Kč, according to World Bank statistics.
Czech Economic Chamber officials were some of the most vocal critics of the old bankruptcy law. Under past regulations, bankruptcy proceedings dragged on and favored debtors, said spokeswoman Viktorie Plívová.
“We expect that the new law will cut the bankruptcy proceeding time by half, companies will be revitalized more often, and creditors’ claims will be better satisfied,” Plívová said.
However, the new law has its pitfalls, some people in the industry say.
There is little continuity between the old and the new bankruptcy laws, which means everyone involved will have to make painstaking adaptations, according to Olga Humlová, a lawyer with the Prague office of Salans, an international law firm.
“What actual improvements the law is to bring will be seen a year after it comes into effect,” Humlová said.
Electronic backbone
An online register of all bankruptcy proceedings is the backbone of the new law. It took so long to prepare, however, that the ministry postponed legal changes originally set for July 1, 2007.
“The cornerstone of the reform of bankruptcy law is the freely accessible insolvency register, by means of which all important information on pending bankruptcy proceedings will be published in real time,” Kuncová said.
She added that the new register also helps the courts communicate, since it serves as a filings delivery system in bankruptcy cases and court rulings.
As of Jan. 1, the insolvency register contains bankruptcies declared since the beginning of the year at www.justice.cz.
Personal bankruptcy
In addition, the new law offers help to those unable to repay their debts. With the rising popularity of consumer credit loans, the number of property seizures has also been on the rise, leaving many Czechs impoverished and indebted for the rest of their lives.
The bankruptcy law offers individuals an alternative to property seizures. Instead, they can be freed of debt after repaying at least 30 percent of the money owed.
If approved by the creditor, the debtor must submit to a five-year repayment plan, sell his or her property and turn over any income above the subsistence minimum to settle the debt. After completing these requirements, the person is considered debt free. All personal bankruptcy cases will also be published in the insolvency register.
The new personal debt remedy has been hailed by organizations helping the increasing ranks of indebted people.
“The law is helpful especially to households trapped in a debt spiral, which are willing to actively solve their problems,” said Andrea Běhálková, Chairwoman of SPES, a civic association helping people to pay their bills.
However, the system is not open to just anyone.
People entering the debt recovery plan will have to meet strict criteria and will be screened by bankruptcy administrators so that the system is not abused by people seeking an easy way out.
The new streamlined bankruptcy law is a government reform step designed to make the judicial system more effective, transparent and public-friendly.
Judicial reforms are badly needed since slow court proceedings and poor law enforcement have long plagued not only the business community but all of society, according to both Plívová and Humlová.
The old bankruptcy system exemplified all the flaws of the Czech justice system, Plívová said. Because people felt there was poor law enforcement in the past, it created an atmosphere of impunity.
Often, bankruptcy administrators’ first priority is to fill their own pockets, not to satisfy creditors, Humlová said, so, unless administrators are punished when they don’t follow the rules, even the best laws are fruitless.

Victor Velek can be reached at vvelek@praguepost.com


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