Surviving Bankruptcy: The Best Options for Personal Insolvency in the EU

If you are insolvent or at risk of insolvency and are unable to generate future income to pay creditors, you will usually file for personal insolvency. And then what? Naturally, a Perpetual Traveller has more than one ace up his sleeve and, as is often the case, staying in your home country is often not the best option. Simply being able or willing to deregister can often lead to creditors accepting a settlement that is disadvantageous to them, as debt securities are almost never enforceable in certain suitable countries outside Europe. However, this article is not intended to address insolvency flight, as this can best be solved proactively by choosing in time the right legal form for the management of own assets – such as a foundation or trust in Nevis and/or an IBC or LLC, for example. Instead, today we will explain how a temporary relocation within the EU can make it much easier to declare personal insolvency – which will also be fully recognised in your home country – through an analysis of the different options available.

Personal insolvency in Germany

In Germany, the first step after filing for personal insolvency is to reach an out-of-court debt settlement with creditors. To do this, you must submit a so-called debt settlement plan to all creditors. If only one of the creditors rejects it, the out-of-court debt settlement will have failed, and you will have to file an application for the opening of a personal insolvency. However, even in the personal insolvency phase, the proceedings are not opened immediately: there is another attempt to reach an out-of-court settlement. In this case, however, it is sufficient that at least 50% of the creditors agree to the debt settlement plan. The next step is the good conduct phase, in which a trustee administers the debtor’s assets and distributes the insolvency estate among the creditors.

This phase lasts a whopping 3 years, during which time the debtor must fulfil other obligations. You must, for example, engage in a professional activity or at least make an effort to do so and, in case of changes in your professional and residential situation, immediately inform the insolvency administrator and the insolvency court. Here we can no longer speak of freedom and privacy. After three long years in this kind of prison surveillance, the whole nightmare disappears with the discharge of the residual debt – if the obligations of the period of good behaviour have been fulfilled, of course. The court then discharges the debtor with the remaining debts. The procedure in neighbouring Austria is relatively similar.

Is it possible to transfer personal insolvency to other EU countries?

As you can see, German insolvency proceedings are certainly lengthy and often complicated. Insolvency in other EU countries, on the other hand, is much simpler and much shorter. But why should I, as an EU citizen, be able to handle my insolvency in another EU country? Ultimately, this is precisely what was decided in Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015. It provides that every EU Member State must recognise an insolvency carried out in another Member State, as well as the settlement of the resulting residual debt.

It is essential that the centre of vital interests has actually moved to the country in question. Spouses and children must come with the debtor and, except in the case of short visits, a stay in the country of origin must be waived. Depending on the country of personal insolvency, this is examined with particular intensity. With a fictitious residence, you will only make your situation worse.

Comparison of personal insolvency arrangements in different countries

And so, we come to the big question: which country is better for insolvency proceedings? To do so, let us compare some European countries with Germany and Austria. We will not consider all aspects of each country, of course. In the end, we will take a closer look at what we consider to be our “winning” destination.

Ireland

Period until settlement of residual debt

12 months.

Good behaviour phase

12 months.

Amount of income tax

Individual calculation, on average between 5% and 10% of income.

Obligations during good behaviour phase

No obligation to work, the attachable part of the earned income must be paid for 3 years, and self-employment requires authorisation, but in any case, the debtor cannot direct any Irish Ltd.

Advantages

Remaining debt can be written off after 12 months and for all debts that have not been imposed as a fine or court sanction.

Disadvantages

The attachable part of earned income must be paid for 3 years, self-employment requires authorisation, and under no circumstances may an Irish Ltd. be set up. In addition, future pension rights may be seized in certain cases.

Prerequisites

You must have an actual residence (to which the family must move), the Centre of Main Interest (COMI) must be established in Ireland, you must be proven to have a social life in Ireland and debts must be at least €20,000.

Latvia

Period until settlement of residual debt

Between 12 and 36 months (after the end of the good behaviour phase). Under optimal conditions, it can last only 6 months, although this is not usually the case. The length of the good behaviour phase depends on the amount of registered debt you can pay:

• 50% or more: the good behaviour phase lasts 6 months;
• at least 35%: the good behaviour phase lasts 12 months;
• at least 20%: the good behaviour phase lasts 18 months;
• less than 20 % for debts below €30 000: the good behaviour phase lasts 12 months;
• less than 20% for debts between €30 001 and €150 000: the good behaviour phase lasts 24 months;
• less than 20% for debts over €150 000: the good behaviour phase lasts 36 months.

Good behaviour phase

Up to 36 months.

Amount of income tax

33.33% (one third) of income.

Obligations during good behaviour phase

Income must be generated as far as possible to satisfy creditors (also feasible as a self-employed person or entrepreneur). Funds (including cryptocurrencies) must be transferred to the administrator within 10 days of the insolvency announcement. You must make a repayment plan and cover procedural costs, as well as carefully store and manage the assets. Assets must be transferred at the request of the trustee.

Advantages

The process is shorter, it is possible to obtain immediate discharge of the residual debt and it is not necessary to prove that an out-of-court settlement has been attempted. In addition, from the date of commencement of insolvency, creditors lose the right to interest or late payment surcharges.

Disadvantages

The debtor is no longer entitled to dispose of its property and assets from the moment of the opening of the insolvency proceedings, as this right is granted to an administrator. Without the consent of the administrator, it is not possible to enter new payment obligations or carry out any transactions (except for a single transaction per month of maximum €500). The discharge of residual debt is often impossible in cases of unlawful claims (e.g., fraud).

Prerequisites

You must move your centre of vital interests to Latvia at least 6 months before the application, and you must pay taxes there during this time. Current debts must be at least €7,000 and total debts over €14,000 due within the next year and inability to pay.

Spain

Period until settlement of residual debt

Between 12 and 16 months.

Good behaviour phase

Between 12 and 16 months.

Amount of income tax

Gradual system (approximately 10% of income).

Obligations during good behaviour phase

You can obtain exemption from the residual debt after 12 to 16 months, without going through the German good behaviour phase.

Disadvantages

There is a kind of “liability issue” whereby the burden of proof is on the debtor, which can also be a disadvantage: if the court concludes that the insolvency is malicious, you could be prosecuted and your business activities restricted. No discharge of residual debt is granted in case of maliciously accumulated debts, and alimony claims are not included in the discharge of residual debt.

Prerequisites

The debtor must have lived in Spain for at least 3 months prior to the filing of the application, and the debtor’s vital interests must have been in Spain for the whole of that period.

Portugal

Period until settlement of the residual debt

3 to 5 years.

Good behaviour phase

3 to 5 years.

Amount of income tax

To be calculated individually.

Obligations during good behaviour phase

You must fulfil your obligations according to the debt settlement plan, cooperate with the administrator and report regularly on your financial situation.

Advantages

There is the possibility to receive discharge of the residual debt after 3 to 5 years. In addition, there are flexible provisions for the good behaviour phase.

Disadvantages

The procedure takes longer, and restrictions may apply during the good behaviour phase.

Czech Republic

Period until settlement of residual debt

3 to 5 years.

Good behaviour phase

3 to 5 years.

Amount of income tax

To be calculated individually.

Obligations during good behaviour phase

You must fulfil your obligations according to the debt settlement plan, cooperate with the administrator and report regularly on the financial situation.

Advantages

There is the possibility to receive discharge of the residual debt after 3 to 5 years. In addition, there are flexible provisions for the good behaviour phase.

Disadvantages

The procedure takes longer, and you may be subject to restrictions during the good behaviour phase.

Bulgaria

Period until settlement of residual debt

2 to 5 years.

Good behaviour phase

2 to 5 years.

Amount of income tax

To be calculated individually.

Obligations during good behaviour phase

You must fulfil your obligations according to the debt settlement plan, cooperate with the administrator and report regularly on your financial situation.

Advantages

There is the possibility to apply an abbreviated settlement of the residual debt. In addition, there are flexible provisions for the good behaviour phase and it offers a lower cost of living compared to other EU countries.

Disadvantages

You may have to overcome the language barrier, and having to adapt to the local culture and way of life may be a problem for some.

Romania

Period until settlement of residual debt

2 to 5 years.

Good behaviour phase

2 to 5 years.

Amount of income tax

To be calculated individually.

Obligations during good behaviour phase

You must fulfil your obligations according to the debt settlement plan, cooperate with the administrator and report regularly on your financial situation.

Advantages

There is the possibility to apply an abbreviated settlement of the residual debt. In addition, there are flexible provisions for the good behaviour phase and it offers a lower cost of living compared to other EU countries.

Disadvantages

You may have to overcome the language barrier, and having to adapt to the local culture and way of life may be a problem for some.

Poland

Period until settlement of residual debt

3 to 5 years.

Good behaviour phase

3 to 5 years.

Amount of income tax

To be calculated individually.

Obligations during good behaviour phase

You must fulfil your obligations according to the debt settlement plan, cooperate with the administrator and report regularly on your financial situation.

Advantages

There is the possibility to apply an abbreviated settlement of the residual debt. In addition, there are flexible provisions for the good behaviour phase and it offers a lower cost of living compared to other EU countries, as well as greater cultural diversity and a fascinating historical heritage.

Disadvantages

You may have to overcome the language barrier, and having to adapt to the local culture and way of life may be a problem for some.

Lithuania

Period until settlement of residual debt

2 to 7 years.

Good behaviour phase

2 to 7 years.

Amount of income tax

To be calculated individually.

Obligations during good behaviour phase

You must fulfil your obligations according to the debt settlement plan, cooperate with the administrator and report regularly on the financial situation.

Advantages

There is the possibility to apply an abbreviated settlement of the residual debt. In addition, there are flexible provisions for the good behaviour phase and it offers a lower cost of living compared to other EU countries, as well as beautiful scenery and historical cities of great cultural value.

Disadvantages

You may have to overcome the language barrier, and having to adapt to the local culture and way of life can be a problem for some.

Germany (and Austria)

Time limit until the residual debt is paid off

36 months.

Good conduct phase

36 months.

Amount of income tax

It is calculated individually. The exempt amount is €1339.99.

Obligations in the phase of good conduct

You are obliged to work, you may not commit insolvency offences or aid fraud, you are obliged to provide information and always cooperate, you may not incur unjustified liabilities or squander your assets, you must answer equally to your creditors and you are obliged both to hand over assets and to remunerate your administrator.

Advantages

None.

Disadvantages

Unlawful claims, such as criminal debts, are excluded from the residual debt discharge. In addition, the process is extremely lengthy and considerably restricts your privacy and freedom.

Summary of the comparison

If we now compare the different countries with each other, the first thing we notice is that Germany ranks as the country with the longest personal insolvency proceedings, with no less than 36 months. Moreover, the obligations are quite strict compared to the other countries. At first glance, Spain seems to be a good choice, as it allows for a discharge of residual debt in only one year. Moreover, Spain does not have a German-style period of good conduct. However, the disadvantages outweigh the advantages in this case as well: the fact that the debtor can neither incur nor accumulate new debts within 5 years after the opening of the procedure automatically excludes you from modern economic life. Therefore, we could not really say that Spain is a good solution.

Ireland and Latvia may also appear attractive destinations with their short periods to effective discharge of residual debt. In Latvia it is even possible to get it immediately! However, this is far from the norm. Moreover, the conditions for transferring personal insolvency to Latvia are not particularly tempting for Perpetual Travellers, because it is necessary to establish the centre of vital interests in Latvia and to pay taxes there. However, Latvia has a 0% tax on dividends from EU holdings, making it a fairly unknown tax haven that can be very attractive if you structure yourself properly. Local companies are taxed at a deferred rate of 20% when profits are distributed, which is familiar from neighbouring Estonia. In the end, Latvia does not come out too favourably when one considers all its features, such as its creditor-friendly guidelines: exemption for debts and tax offences is as ruled out as that for alimony and direct liability, the good behaviour phase is even stricter than in Germany and the judge can stop insolvency proceedings at any time.

A disadvantage in Ireland is that a permit is required for self-employment. This is actually the case in almost all countries, as without it the ability to do business is often restricted, but one can take advantage of Ireland’s non-dom system and operate virtually tax-free if setting up a new life abroad. Moreover, if necessary, you could start from scratch with a new name: you could legally change your name in as little as 6 weeks through the Deed Poll, which is recognised throughout the EU. Therefore, our conclusion is that Ireland is the best option, provided that you are really willing to move your centre of vital interests there.

Ireland is also notable for its high requirements for creditors to assert their claims, as a face-to-face appointment with a local lawyer is mandatory. While German-speaking Europe is very creditor-friendly, Ireland is considered the most debtor-friendly country in Europe. Mortgage, life insurance and pension debts are as unseizable as local bank accounts. Tax debts, claims for damages and direct liability are covered by the Irish residual debt discharge, from which only child support debts are excluded. Moreover, the procedure is very cheap, with court costs as low as €200. That is life in Ireland when you leave its capital, Dublin: few other destinations in Western Europe are cheaper to live in than Ireland. Even if personal insolvency is not your cup of tea, we recommend that you consider the excellent solution of the Irish Limited by Guarantee company.

In the end, it is up to everyone to decide for themselves which country they consider to be their personal best option. We believe it is a mistake to run away from debts for which you are responsible, but often the reality is not as clear and simple as it appears from the outside. We have advised many retired business people who, having earned millions in their lifetime, find themselves penniless at the end of their working lives: a combination of misguided investments, divorce and risky projects often leads to ruin. It is best to prevent this from happening in the first place by having a sensible asset protection structure into which you can transfer your assets at least a year before the catastrophe that could ruin you. With regard to structures, you have to be careful and work on them while you are in a good position, and not when you are already threatened by debts… But even then, all is not lost: you can always take advantage of the possibilities that the 25 EU countries offer you in relation to personal insolvency.