Consumer insolvency proceedings are designed to give people in financial difficulties a fresh start by discharging their residual debt. It can be initiated in the event of the debtor's insolvency or threatened insolvency and leads to a discharge of residual debt under certain conditions. Any natural person has access to the procedure, provided that he or she is not engaged in self-employed economic activity. If this was the case in the past, the consumer insolvency proceedings only apply if the financial circumstances are manageable (fewer than 20 creditors) and there are no claims against the debtor from employment relationships.
The consumer insolvency proceedings are divided into several procedural stages: out-of-court debt settlement, court proceedings on the debt settlement plan, and consumer insolvency proceedings with residual debt discharge after a three-year period of good conduct (for opening petitions filed since October 1, 2020). The latter two stages of the proceedings are only carried out if one of the previous stages has not already been successful.
Out-of-court debt settlement
Before filing an insolvency petition, the debtor must attempt an out-of-court debt settlement with his creditors. He must draw up a plan in which he sets out his income and asset situation and submits a concrete proposal for debt settlement.
Even when drawing up the plan, the debtor will usefully enlist the help of a person or office suitable for debt counseling. Suitable persons are by profession in particular attorneys/inside, notaries/inside and tax counsels/inside. In Bavaria, suitable agencies are debtor counseling agencies that have been recognized as such by the governments. Information may be obtained from the governments and the insolvency courts (local courts).
Court proceedings on the debt settlement plan
If the out-of-court debt settlement proceedings do not lead to an agreement, the debtor may apply to the court to open insolvency proceedings. The application must be accompanied by further documents and declarations, in particular a debt settlement plan. It contains the debtor's proposal for the implementation of the court debt settlement. If no creditor objects to the debt settlement plan, it is deemed accepted. It then has the effect of a court settlement, i.e. the debtor no longer has to meet the creditors' original claims, but only the liabilities listed in the debt settlement plan. The court can replace the consent of individual creditors who have expressly not agreed to the plan under certain conditions at the request of a creditor or the debtor.
Consumer insolvency proceedings with discharge of residual debt after a three-year period of good conduct.
If the court settlement attempt also fails, the court decides on the application to open insolvency proceedings. If the necessary conditions are met, the court opens the proceedings. The court appoints an insolvency administrator who realizes the insolvency estate, i.e. the debtor's attachable assets. When the insolvency proceedings are opened, the insolvency court also makes a decision on the admissibility of the debtor's application for residual debt discharge. The application for discharge of residual debt may be inadmissible, among other things, if the debtor has already been granted discharge of residual debt in the past eleven years or has been refused discharge of residual debt in the past five years on account of an insolvency offense, or if the debtor has breached duties of disclosure or cooperation before or after the application for commencement of insolvency proceedings. Residual debt discharge was previously granted by the court after a good conduct period of six years. Due to the new legal situation applicable from October 1, 2020, the term of the residual debt discharge proceedings will now be a uniform three years. Thus, in all insolvency proceedings filed from October 1, 2020, residual debt discharge will already be granted after three years from the opening of the insolvency proceedings if there is no reason for refusal. For insolvency applications filed between December 17, 2019 and October 1, 2020, the previously regular period of six years will be gradually reduced.
During the period of good conduct, the debtor must transfer the attachable portion of his earned income or a substitute benefit granted for it (e.g., unemployment benefit) to a trustee appointed by the court. The debtor is obliged, among other things, to engage in appropriate gainful employment or to seek such employment. The debtor's obligation to work even begins with the opening of proceedings. The discharge of residual debt is to be refused if this has been applied for by an insolvency creditor who has filed his claim and the debtor has intentionally or negligently breached his obligation to work or his other obligations up to the end of the period of good conduct and has thereby impaired the satisfaction of the insolvency creditors. With the discharge of residual debt, the debtor is discharged of all debts existing at the time of commencement of the insolvency proceedings. However, liabilities arising from a deliberately committed tort, from fines, penalties and administrative fines, from arrears of statutory maintenance which the debtor has deliberately failed to provide in breach of his duties, from a tax debt relationship if the debtor has been convicted by final judgment of a tax offence in connection therewith, and from interest-free loans granted to the debtor to settle the costs of the insolvency proceedings are excluded from the discharge of residual debt. The three-year residual debt discharge procedure can only be applied once for each debtor. If a debtor has to file for insolvency again after being granted residual debt discharge in the three-year procedure, he can only obtain residual debt discharge in the second procedure after five years. A second insolvency petition is also only possible after eleven years.