Fact Sheet on Consumer Bankruptcy Proceedings Up to the Order of Commencement

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Insolvency proceedings serve to liquidate a debtor’s available assets in the event of insolvency and to distribute the proceeds equally among the creditors. In addition, honest debtors are given the opportunity to be released from their remaining obligations. The Insolvency Code (InsO) provides special rules for insolvent consumers and former self-employed individuals who meet certain criteria. First, serious efforts must be made to reach an out-of-court settlement with the creditors. After the application is filed, the court reviews once again whether an agreement on a debt settlement plan has a reasonable chance of success. If, in the court’s independent judgment, a successful conclusion of the debt settlement plan is not possible, the court decides to open insolvency proceedings. 1. Scope of Application Consumer insolvency proceedings apply to all natural persons who: · do not engage in or have not engaged in self-employed economic activity, · have engaged in self-employed economic activity in the past, but whose financial circumstances are manageable and against whom no claims arising from employment relationships exist. · Financial circumstances are considered manageable only if the debtor has fewer than 20 creditors at the time the petition for the opening of insolvency proceedings is filed (Section 304 InsO). · Claims arising from employment relationships include, in particular, claims by the tax authorities for income tax and claims by social security agencies for contributions from the debtor’s former employees. To determine the correct type of proceeding, the debtor is asked to substantiate the aforementioned claims with appropriate documentation (e.g., a current plain-text bank statement from the tax office, a certificate from the social security agency regarding the nature of the arrears). For all other natural persons, the so-called corporate insolvency proceeding is the correct type of proceeding. There, too, the possibility of residual debt discharge exists. A prerequisite for initiating consumer insolvency proceedings is the existence of a cause for insolvency in the form of actual or impending inability to pay. A situation must have arisen in which the debtor is currently or will be in the foreseeable future unable to meet their due payment obligations on time and in full (Sections 17, 18 InsO) . 2. Out-of-court settlement attempt Insolvent consumers may only apply for the opening of insolvency proceedings concerning their assets if they have previously made a serious attempt to reach an out-of-court agreement with their creditors regarding debt settlement. This is a mandatory prerequisite for the court proceedings and must be demonstrated when filing the application (Section 305(1)(1) InsO). The attempt at settlement must be based on a structured plan. It is not sufficient to merely ask creditors in general terms whether they are willing to reach an amicable agreement. The debtor must submit a proposal to them for the appropriate settlement of the debts. As a rule, this will be a payment plan specifying fixed installments and exact payment dates that are to replace the originally owed payments and the applicable deadlines. A serious attempt at reaching an agreement also requires that the debtor disclose their income and financial circumstances. Creditors must be able to assess, based on this information, whether the proposed modification of the payment obligations is necessary and whether it corresponds to the debtor’s financial capabilities. 3. Petition for Opening If the out-of-court settlement fails despite serious efforts, the debtor may petition the insolvency court to open insolvency proceedings (Section 305 InsO). The plan is deemed to have failed if a creditor pursues enforcement proceedings after negotiations regarding the out-of-court settlement have commenced (Section 305a InsO). 3.1 Certificate of the attempt at an out-of-court settlement The written application must be accompanied by a certificate from a suitable person or authority which confirms that, based on personal counseling and a thorough examination of the debtor’s income and assets, an unsuccessful attempt was made to reach an out-of-court settlement with the creditors regarding debt settlement based on a plan within the six months preceding the petition for commencement of proceedings (Section 305(1)(1) InsO). In addition, the reasons for the failure of the out-of-court settlement must be explained and the plan must be attached. If the out-of-court plan failed because a creditor pursued enforcement proceedings after negotiations on the out-of-court settlement had begun, the certificate must specify which creditor is involved and what enforcement measures were taken. Persons qualified to issue a certificate regarding the attempt at an out-of-court settlement include members of the legal professions (attorneys, notaries) as well as tax advisors. In case of doubt, the insolvency court shall decide on a person’s qualification. An authorized agency must have been formally recognized by the Düsseldorf District Government (following an official review process) (Act on the Implementation of the Insolvency Code of June 23, 1998 - GV. NW. 1998, 435). Therefore, debtors who hope to receive assistance from an agency providing debtor/insolvency counseling should ensure at an early stage that the agency has been recognized by the Düsseldorf District Government as a “suitable agency.” 3.2 Debt Settlement Plan A debt settlement plan must be submitted together with the petition for commencement of proceedings (Section 305(1)(4) InsO). This plan must outline how the debtor envisions reaching an agreement with the creditors regarding the final settlement of the debts. In doing so, the debtor’s financial, income, and family circumstances must be taken into account, as well as the interests of the creditors and the reasons that led to the failure of the out-of-court settlement. The debt settlement plan must have enforceable content (see § 308(1), sentence 2 InsO). It should therefore, in particular, specify exactly which payments the debtor must make to which creditor and at what time. Other provisions of the plan must also be sufficiently specific. The starting point for the commencement of payment periods should be the date on which the insolvency court confirms the acceptance of the debt settlement plan (Section 308(1), sentence 1, InsO). The debt settlement plan must specify whether and to what extent guarantees, liens, and other security interests of the creditors are to be affected by it (Section 305(1)(4) InsO). 3.3 Lists containing information on the debtor’s financial situation In addition, when filing the petition, the debtor must submit four lists containing information on their income and financial situation: 1. a list of existing assets and income (asset list), 2. a summary of the essential contents of the above list (asset overview), 3. a list of creditors (with exact and complete names and addresses (no P.O. box addresses)), 4. a list of claims against the debtor (Section 305(1)(3) InsO). All lists must be accompanied by a declaration that the information contained therein is accurate and complete. If the information in a list is incomplete due to intent or gross negligence, this may result in the denial of residual debt discharge at a later date (Section 290(1)(6) InsO). Incompleteness may have another serious consequence: Payment relief provided for in an approved debt settlement plan does not apply to creditors who are intentionally or unintentionally omitted from the lists, such that the debt settlement plan could not be served upon them. These creditors may continue to assert their full claims (Section 308(3), first sentence, InsO)

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