Last week President Valdis Zatlers ratified a new Latvian insolvency law. While quite a number of aspects have been changed from the old insolvency act, of particular note is that the new law delves into previously undeveloped territory in Latvian law 's that of personal bankruptcy.
What does this mean to shaky debtors? As long as they meet their payment obligations on debt, probably not very much. But with the increasing recent pressures on mortgage interest rates at a time when housing prices seem to, at least in some cases, be dropping somewhat, there may be ramifications, for example, for such unfortunate debtors who cannot meet mortgage payments and have their property subject to a power of sale.
As a result of the very liberal mortgage lending practices that not long ago preceded the current conservatism in mortgage lending, in some such cases there may not only be zero equity of redemption, but in fact a shortfall for the coverage of debt and interest owed to the creditors in a forced sale situation. If the debtor cannot cover the shortfall, and if that shortfall must be paid by the individual, that may mean that under certain circumstances he or she is a good candidate for personal bankruptcy.
Of course, in addition to possible non-performing mortgage loan scenarios, there are a multitude of other possible reasons, as there always have been, as to why a person might be having financial trouble. Only now it may mean that they will also qualify for personal bankruptcy under the new legislation.
What are the criteria for personal bankruptcy under the law? Section 151 basically sets them out:
* A debtor may be subject to the insolvency process where the debtor ceases to meet its liabilities as they become due where such liabilities exceed 50 minimum monthly wages;
* Or, it is established that the debtor shall not be able to meet its liabilities, as they become due within a year, where the total of such liabilities exceeds 100 minimum monthly wages. For the purposes of making the applicable calculations to the formulas set out above, the minimal wage shall be 160 lats per month as of Jan. 1, 2008, the date on which the law shall take effect.
An individual undergoing insolvency proceedings will not be permitted for a period of time to sell, pledge, gift or otherwise encumber his property, or enter into any contracts or perform any actions which could detrimentally affect the position of his assets or that of his creditors. There are a host of other obligations upon an individual undergoing insolvency that are too numerous to set out in this column. As would be expected, under certain circumstances the law allows the forced sale of personal property of the bankrupt individual, subject to limitations set out in the Civil Process Law concerning certain property exempt from seizure and sale.
If a court rules to proceed with the personal insolvency, there are some ramifications for creditors as well. For example, execution orders for seizure of personal assets may be frozen, and secured creditors may also find that they are barred from realizing on the security of the debtor pending a resolution to the debtor's insolvency.
The news is not all bad to insolvent debtors. For example, if they are undergoing the insolvency process, then interest and contractual penalty accruals are frozen, as are certain tax penalty accruals ordinarily calculated on a percentage basis.
Time will tell how well the new legislation operates in practice. But to creditors, it is a new and perhaps welcome addition to the tools already available in the creditor's toolbox for dealing with bad debtors. For insolvent individuals, it may amount to a process under which they can eventually get relief from the burden of unmanageable debt, and perhaps start anew in the right direction.
Valters Kronbergs is managing partner at Kronbergs & Cukste, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Teder, Glikman & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.