Further changes to personal insolvencies on the horizon

Less than two years since the big “debt relief” bill entered into force on 1 June 2019, the Czech Ministry of Justice has sent to the Parliament a bill amending the personal debt relief procedure again. We recommend that all creditors and NPL businesses closely follow the changes as they may impact their business in the future.

It appears that the big expectations for the 2019 bill have not been fulfilled. Although it removed the entry barrier requiring an individual to demonstrate their ability to repay at least 30% of their debt, data show that after a short wave of new insolvencies in 2019, the figures for 2020 went back to pre-2019 levels. Preliminary figures indicate that from approx. 500,000 individuals with multiple enforcement orders encumbering their daily lives, fewer than 20,000 decided to resolve their situation through a debt relief procedure in 2020. This is even more surprising when we realise that since April 2020, the system has allowed individuals who are entrepreneurs to file for debt relied proceedings without any further constraints, and that the Government has repeatedly increased the non-deductible amount that may remain in a debtor’s pocket each month.

The Ministry is trying to change the situation by motivating further individuals, many of them currently operating in shadow economy, to enter into a debt relief procedure and return to a more orthodox life.

Therefore, the most notable change in the new bill will be the complete replacement of the mandatory five-year instalment plan with a three-year plan for each individual debtor. This is also required by EU Directive 2019/1023 for individuals who are entrepreneurs; however, to level the playing field, the bill broadens this principle to all individuals, including consumers. By shortening the instalment period to three years, creditors will lose income for two years being 40% of the typical current instalment plan. Once adopted, the shortening of the instalment plans should apply to the newly approved debt reliefs and not the current ones, so NPL companies should not need to worry about their current portfolios. It would need to be calculated into any potential sale or purchase strategy in new NPL portfolios, however.

Other changes are of a more technical nature and should not have a material effect on the recoverability of claims for creditors. It is, however, advisable to follow the approval process in the Parliament as many MPs may wish to propose further changes, as we have seen in previous years. If approved, the new bill should enter into force on 1 July 2021.