The purpose of the Personal Bankruptcy Institute is to help a natural person get out of a difficult financial situation and help him return to life by restoring the person’s economic capacity. In Lithuania, the bankruptcy institute of a natural person has been applied since 2013 March 1st, when the Law on Bankruptcy of Natural Persons of the Republic of Lithuania (hereinafter – LBNP) regulating its activities came into force. This law creates conditions for restoring the solvency of an honest natural person and ensuring the satisfaction of creditors’ claims to achieve a fair balance between the interests of the debtor and his creditors.
The LBNP provides a “second chance”, but in order to prevent this process from being abused, the law also provides safeguards to protect the interests of creditors. The purpose of the law provides that it is applied and a “second chance” is given only to honest persons. Therefore, the honesty of a natural person seeking bankruptcy is a necessary condition both for the initiation of the insolvency process and during the entire process.
The bankruptcy process of a natural person can only be initiated for an insolvent person. According to the LNBP, a person is recognized as insolvent under the following two conditions: (1) the person’s debts with expired payment terms must exceed 25 minimum monthly wages (MMW) approved by the Government of the Republic of Lithuania. From 2022 January 1st, the MMW amount is set at EUR 730, so currently only persons whose overdue debts exceed the amount of EUR 18,250 could file for bankruptcy; (2) it must be established that the insolvency is substantiated, i. e., a person’s inability to fulfill overdue obligations of creditors, when the available assets and income are insufficient to repay the debts, must be established
The efforts of a person are extremely important for the recognition of insolvency
After the insolvency of a natural person has been established, it is further assessed whether there are conditions established by the LBNP, in the presence of which bankruptcy initiation is refused. One of them is the dishonesty of the person seeking bankruptcy. Thus, to file a bankruptcy case for an individual, it is necessary to determine whether the individual became insolvent through honest conduct. A person’s honesty is an essential and, at the same time, probably the most debated requirement in judicial practice. The Supreme Court of Lithuania has clarified that, when deciding on the initiation of a bankruptcy case for a natural person, the person’s integrity must be evaluated on two aspects: firstly, whether the debtor honestly provided the whole information when applying for the initiation of the bankruptcy case, and secondly, whether he became insolvent by acting honestly.
The first aspect draws attention to the information submitted to the court by the person seeking bankruptcy, its completeness, and correctness. When applying to the court for the initiation of a bankruptcy case, a person must disclose all data about his possessions and the assets he has had over the past three years, creditors, and debtors, as well as indicate all income. Otherwise, if any undisclosed (concealed) information comes to light later, it would be a sufficient basis to consider the behavior of such a person as dishonest.
As for the second aspect, a person can be recognized as dishonest if the data on the basis of the appearance of debts, and/or his or her behavior with his or her finances, lead to the conclusion that the person allowed the debts to arise deliberately (directly), hoping that the unsatisfied demands of creditors will be written off, or behaved in other ways with extreme carelessness, judging his behavior in the specific circumstances according to the principles of reasonableness and justice.
Deliberate actions of a person are considered to be such intentional actions, when a person, assuming debt obligations or concluding other transactions, provided incorrect information to creditors about the financial condition in order to avoid settlement with them, for example, taking on debts without intending to fulfill them, deliberately increasing debts, misleading creditors, transfer of property, concealment of income and other similar situations that would lead to the conclusion of a person’s desire to avoid the fulfillment of obligations to creditors.
According to Article 5, Paragraph 8, Clause 2 of the LBNP, a person’s dishonesty can be recognized both for the above-mentioned specific actions of a person and for inaction. Inaction is understood as a deliberate absence of effort to settle with creditors and purposeful further worsening of one’s financial situation. Persons, seeking to use the bankruptcy procedure of a natural person, must honestly make maximum efforts to obtain the highest possible income, making it possible to satisfy the demands of creditors.
Putting effort to earn money is essential
A person’s dishonesty can be established when a person, based on his age, state of health, and qualifications, can receive a higher salary but does not seek it. For instance, if a person received an extremely low income – unemployment benefits lower than the minimum wage, although he could have received a higher income based on his experience and qualifications. In court practice, one of the criteria of dishonesty is the fact that the person did not make sufficient efforts to pay the debts owed to creditors. In such a case, it is important to state that the person is aware of the consequences of his inaction and consciously seeks to worsen, rather than improve his situation.
In a general sense, a person who, both by his own conscious actions and by his conscious inaction, strained the situation of the creditors, leading to the said person reaching a state of insolvency, should be considered dishonest. In any case, the established dishonesty of a person can be the basis for refusing to open a bankruptcy case only if it had a significant influence on the insolvency of the person, i. e. a causal connection between dishonesty and insolvency must be established. This means that insignificant transactions and/or behavior of a person that did not have a significant impact on a person’s solvency should not, in principle, prevent an insolvent person from going bankrupt. Likewise, the mere careless behavior of a person or improper assessment of consumption possibilities that led to a person’s insolvency does not in itself signify the person’s dishonesty.
The criteria defining dishonesty that are mentioned above were formed gradually in court practice, with increasing attention being paid to the fact that unscrupulous persons do not use the bankruptcy process as a tool to write off their debts to creditors.
Following the ruling of the Supreme Court of Lithuania, going bankrupt is even more difficult for dishonest people
The fact that it is becoming more and more difficult for a dishonest natural person to go bankrupt is also confirmed by the 2022 July 5th ruling of the extended panel of judges of the Civil Cases Division of the Supreme Court of Lithuania passed in civil case no. e3K-7-155-823/2022. The adoption of this ruling was conditioned by the fact that the courts interpreted the three-year period provided for in Article 5, Paragraph 8, Clause 2 of the LBNP as prohibiting the assessment of a person’s actions performed earlier than three years before the filing of a bankruptcy case from the point of view of honesty.
Thus, actions that did not fall within the period of three years before the filing of the bankruptcy case, were not considered by the courts as causing the person’s dishonesty. In this case, there were cases where dishonest persons who created the state of declared insolvency by their own deliberate or extremely reckless actions sought to go bankrupt (for example, the managers who led companies to bankruptcy and thus should be held responsible for it against creditors, persons who provided incorrect (false) information to creditors about financial status, etc.). Such a person seeking bankruptcy could “adjust” the honesty period himself, as the courts only assessed the person’s actions of the last three years in terms of (dis)honesty, although it is obvious that such a situation did not correspond to the purpose and goals of the bankruptcy institute for a natural person – to restore the solvency of an honest person.
Due to the above-mentioned reason, the above-mentioned ruling of the court of cassation established an interpretation of the LBNP that according to Article 5, Part 8, Point 2 of the Law on Bankruptcy of Natural Persons, the court refuses to open a bankruptcy case for a natural person, if it determines that: 1) the applicant became insolvent within three years prior to the acceptance of the application for bankruptcy proceedings and 2) the reason for the applicant’s insolvency is the dishonest actions specified in Article 5, Part 8, Clause 2 of the LBNP.
When a natural person became insolvent due to dishonest actions referred to in Article 5, Part 8, Point 2 of the FABI, and the time of their execution does not coincide with the time when the natural person became insolvent, then the time when the dishonest actions were committed (whether it happened within the last 3 years prior to the acceptance of the application to open a bankruptcy case or earlier), is not a legally significant legal fact for the application of Article 5, Part 8, Clause 2 of the LBNP, however, such actions must be the essential cause of the person becoming insolvent. This rule formed by the court of cassation is extremely important because the assessment of a person’s integrity and the proper assurance of such an assessment is the main issue in deciding whether to initiate a bankruptcy case for a natural person and enable the write-off of creditors’ debts.
The success of the process depends on honesty
The success of the bankruptcy process itself depends on the honest actions of the person. In practice, there are cases when a bankrupt person behaves passively in the bankruptcy process – he or she does not make efforts to obtain higher income, avoids settlement with creditors, does not cooperate with the bankruptcy administrator, does not provide data on monetary funds (cash). There are also such active actions of a person going bankrupt when the aim is to delay the examination of certain issues. For example, attempts to delay the approval of creditor claims or the approval of a solvency restoration plan. In addition, groundless legal disputes are initiated, which is also incompatible with a fair bankruptcy process.
One of the main documents in the bankruptcy process of a natural person is the solvency recovery plan, as it indicates the measures that the natural person will implement in order to maximally reduce the resulting debts to creditors. In such a case, the success of the implementation of the solvency restoration plan, as well as the realization of the goals of the bankruptcy of a natural person, depends precisely on the honest efforts of the person who has filed for bankruptcy. A natural person must also be active at this stage of the bankruptcy process, honestly use the rights granted to him by law, and honestly fulfill the prescribed duties.
When implementing a solvency recovery plan, a person must make maximum efforts to satisfy as many claims of the creditors as possible, so that the largest possible amount of debts would be returned to creditors. Performing actions contrary to those specified – submission of incorrect information about assets, income, liabilities, reasons for insolvency, and others that would hinder the implementation of the measures set out in the solvency recovery plan – would lead to the actions of the bankrupt person being recognized as dishonest, which would be the basis for the termination of the bankruptcy case of a natural person.
In summary, it can be concluded that the abuse of the bankruptcy institute of a natural person is limited by the assessment of honesty, as only a person who goes bankrupt via honest conduct can expect from the bankruptcy process not only a write-off of debts but the opportunity to restore his solvency while ensuring the maximum satisfaction of creditors’ claims. The integrity of a natural person is an important condition for both filing a bankruptcy case, implementing a solvency recovery plan, and ending the process. A “second chance” is given only to an honest person, especially since illegal actions cannot give rise to legitimate expectations that there will no longer be a need to repay the debt or compensate for the damages. Moreover, one should be guided by the wisdom of life that one should treat others as one would like others to treat oneself.