The consumer insolvency proceeding is intended to enable individuals facing financial difficulties to make a fresh start through a discharge of residual debt. It can be initiated in the event of the debtor’s insolvency or imminent insolvency and, under certain conditions, leads to a discharge of remaining debts. Any natural person is eligible for the proceedings, provided they are not engaged in self-employment. If this was the case in the past, the consumer insolvency proceedings apply only if the debtor’s financial circumstances are manageable (fewer than 20 creditors) and there are no claims against the debtor arising from employment relationships.

The consumer insolvency proceedings are divided into several stages: out-of-court debt settlement, the court proceedings regarding the debt settlement plan, and the consumer insolvency proceedings with discharge of residual debt following a three-year good-conduct period (for petitions filed on or after October 1, 2020). The latter two stages of the proceedings are carried out only if one of the preceding stages has not already been successful.

Out-of-Court Debt Settlement

Before filing for insolvency, the debtor must attempt out-of-court debt settlement with their creditors. They must draw up a plan in which they outline their income and financial circumstances and submit a concrete proposal for debt settlement.

It is advisable for the debtor to seek the assistance of a person or agency qualified to provide debtor counseling when drafting the plan. Suitable professionals include, in particular, attorneys, notaries, and tax advisors. In Bavaria, suitable agencies are those debt counseling centers recognized as such by the district governments. Information can be obtained, if necessary, from the district governments and the insolvency courts (local courts).

Court Proceedings Regarding the Debt Settlement Plan

If the out-of-court debt settlement proceedings do not result in an agreement, the debtor may file a petition with the court to open insolvency proceedings. Along with the petition, additional documents and statements—in particular, a debt settlement plan—must be submitted to the court. This plan contains the debtor’s proposal for implementing the judicial debt settlement. If no creditor objects to the debt settlement plan, it is deemed accepted. It then has the effect of a court-approved settlement, meaning the debtor is no longer required to satisfy the creditors’ original claims but only the obligations listed in the debt settlement plan. Under certain conditions, the court may, upon the request of a creditor or the debtor, override the consent of individual creditors who have expressly stated that they do not agree with the plan.
 

Consumer Insolvency Proceedings with Discharge of Remaining Debts After a Three-Year Good Conduct Period

If the court’s attempt to reach a settlement also fails, the court decides on the petition to open insolvency proceedings. If the necessary requirements are met, the court opens the proceedings. The court appoints an insolvency administrator to liquidate the insolvency estate, i.e., the debtor’s attachable assets. Upon opening the insolvency proceedings, the insolvency court also rules on the admissibility of the debtor’s application for discharge of remaining debt. The application for discharge of remaining debt may, among other things, be inadmissible if the debtor has already been granted discharge of residual debt within the past eleven years, or if it has been denied within the past five years due to an insolvency-related criminal offense, or if the debtor has violated obligations to provide information or cooperate before or after filing the petition to open insolvency proceedings. Until now, discharge of remaining debts has been granted by the court following a six-year good-conduct period. Due to the new legal provisions effective as of October 1, 2020, the duration of the discharge proceedings is now uniformly set at three years. Thus, in all insolvency proceedings filed on or after October 1, 2020, discharge of remaining debts will be granted three years after the commencement of the insolvency proceedings, provided there are no grounds for denial. For insolvency petitions filed between December 17, 2019, and October 1, 2020, the previously standard six-year duration will be gradually reduced.

During the good-conduct period, the debtor must remit the attachable portion of their earned income or any substitute benefit granted in lieu thereof (e.g., unemployment benefits) to a trustee appointed by the court. Among other things, the debtor is obligated to engage in appropriate gainful employment or to make efforts to do so. The debtor’s obligation to earn a living begins as soon as the proceedings are opened. Discharge of residual debt must be denied if this has been requested by an insolvency creditor who has filed a claim, and the debtor has, by the end of the good-conduct period, intentionally or negligently violated his or her obligation to earn a living or other obligations, thereby impairing the satisfaction of the insolvency creditors. With the discharge of remaining debts, the debtor is released from all debts existing at the time of the opening of the insolvency proceedings. Excluded from the discharge of residual debt, however, are liabilities arising from an intentional tort, from criminal fines, administrative fines, coercive fines, and penalty fees, from overdue statutory maintenance that the debtor intentionally failed to provide in breach of duty, from a tax liability, provided the debtor has been finally convicted of a tax offense in connection therewith, as well as from interest-free loans granted to the debtor to cover the costs of the insolvency proceedings. The three-year residual debt discharge proceeding may be applied only once for each debtor. If a debtor must file for insolvency again after being granted residual debt discharge in the three-year proceeding, the debtor may not obtain residual debt discharge in the second proceeding until five years have elapsed. Furthermore, a second petition for insolvency is only possible after eleven years.