On 22 May 2024, an amendment to the Insolvency Act was successfully passed by the Chamber of Deputies. The bill is now in the Senate. The amendment will, among other things, reduce the length of debt relief for all debtors to three years across the board. The shortening is based on European legislation and represents a current social trend to bring debtors back to economic life as quickly as possible. But how will this change affect creditors?

Prudence first and foremost

The amendment is certainly not good news for creditors. This shifts the imbalance in the creditor-debtor relationship even further towards the debtor. It will again reduce the enforceability of debts in the Czech Republic. Therefore, if the current legislative situation forces creditors to be cautious when establishing business relations, the situation will be even worse after the amendment. Creditors will be forced to scrutinise their debtors more, because possible debt relief of the debtor will essentially mean an absolute write-off of the receivable for an unsecured creditor.

Collateral, collateral, collateral

How, then, should creditors react adequately to the amendment to the Insolvency Act? In addition to honestly investigating the personal and financial circumstances of the debtor, they should try to secure the claim as much as possible. So that in the event of the debtor’s bankruptcy, they would have the status of a secured creditor and would be satisfied primarily from the realisation of the collateral.

However, not all security instruments are considered collateral by the Insolvency Act. With a promissory note, for example, you do not get secured creditor status.

Creditors can also use assets of persons other than the debtor as collateral – for example, family friends or friends of the debtor. It is important that the creditor has an alternative source of satisfaction in case of financial difficulties of the debtor.

Who is most at risk now?

All creditors will be affected by the easing of the conditions for debt relief, but the amendment is viewed with concern, especially by unit owners’ associations and housing cooperatives. The inhabitants of apartment buildings (members of unit owner’s associations or cooperatives), where the debtor lives will suffer the consequences of the lower recoverability of debts the most. They will realistically have to pay the debts out of their own pocket.

Recapitulation

The amendment to the Insolvency Act will mean a further practical worsening of the position of all unsecured creditors after its entry into force. In case of debt relief, they will receive even less for their debtor’s debt than in the past.

If creditors wish to avoid this situation, they should make increased efforts to investigate the personal and financial circumstances of the debtor before entering into any business relationship with him. It can also be clearly recommended that the claim be secured as much as possible so that the creditor has the status of a secured creditor in the event of insolvency proceedings or that the creditor has another, alternative source of satisfaction.