Co-author of Czech Insolvency Act warns debt-relief amendments could trigger judicial system collapse

A co-author of the Czech Insolvency Act of 2006 has warned that a proposed amendment to the law would “unintentionally” give debt relief to hundreds of thousands of people. Tomáš Richter, a renowned expert on both Czech and European insolvency law, said in an interview that lax rules set out in the current amendment could potentially mean adding another 600,000-700,000 to the list of people qualifying for debt relief.

Photo: Barbora Němcová

The Czech judicial system is unprepared to handle such an influx, Richter, a lawyer in the Prague office of the international firm Clifford Chance, told the business daily Hospodářské noviny. Under current law, the debt relief process cannot begin without the permission of creditors, unless it appears that the debtor will settle at least 30 per cent of their debt, which can also include crippling interest and fines.

In October 2016 then justice minister Robert Pelikán (ANO) laid out plans to amend Czech insolvency law with the aim of allowing more people who would otherwise declare bankruptcy climb out of debt. The current debt relief model allows a debtor who pays off at least 30 per cent of all of their debts within five years to receive debt relief. The remaining outstanding debt is then forgiven.

Robet Pelikán, photo: Prokop Havel

"The entire insolvency system has processed about 300,000 cases over the past 10 years, and now it's possible that twice as many petitions will be filed," Richter said, which could lead to a collapse of the judicial system.

People who now enter the debt relief process must also forfeit property they own exceeding the value of CZK 100,000, with some exceptions. The courts then have the authority to sell off such assets with the proceedings going to creditors, while the debtor is given a timetable to pay off a portion of their remaining debt from their monthly income.

Richter told Hospodářské noviny that there are now fewer than 30,000 Czechs in personal bankruptcy down from 35,000 at the height of the crisis. The threshold for being eligible to apply for debt relief in the country is relatively strict, he said:

“In the government's draft proposal, you will read that there are hundreds of thousands of people with multiple executions, i.e. people who are in fact insolvent. For some reason, perhaps because of the 30 per cent threshold, they do not go through a system of formal debt relief.”

Tomáš Richter, photo: Clifford Chance

A study by the non-profit Open Society found that in 2017 no fewer than 836,000 people in the Czech Republic were under some form of distraint, that is some of their property had been seized as compensation to creditors.

While the average principal in distraint cases is CZK 65,000, according to that study, half of debtors owed less than CZK 10,000, most of which related to costs and interest. The majority of debts are claimed by institutions, including transport authorities, telecoms and the country’s own social services agency, according to the Open Society.

A proposed new “fast-track” model envisages debt relief after just three years, but the debtor is required to repay at least 50 per cent of all of their liabilities. This model is more suited to debtors who have low debts or higher income.

There is also a proposed “no-limit” model with a seven-year debt relief and no minimum limit on the amount of debt to be repaid in that time. In practice, that could lead to debtors repaying hardly anything to creditors but still having their debts forgiven entirely.