Insolvency and Suspension of Payments

Insolvency

There are two (2) kinds of insolvency: voluntary and involuntary. Insolvency is voluntary when a person's liabilities are more than his assets and he goes to court to have himself declared insolvent while having his remaining assets equitably distributed among his creditors. A damage suit will be suspended if a debtor applies for voluntary insolvency (but the court where the damage suit is filed can still set the amount of the damages.) Foreclosure proceedings for real estate mortgage, however, are not suspended when the debtor applies for voluntary insolvency.

An employer can't use this law to skip payments of salaries to his employees (because they're employees, not creditors.) If employees sue their employer for unpaid salaries, the employer can't invoke insolvency against them.

Insolvency becomes involuntary when three (3) or more creditors of the same debtor go to court to have that debtor declared insolvent if he either:

1.) Is trying to leave the country

2.) Is always absent

3.) Hides himself from court processes

4.) Hides or removes his properties

5.) Let his properties get attached (confiscated in another court case)

6.) Confessed or allowed himself to lose a case (the legal wording is "allowed judgment to be taken against him.") This is not the same as #7.

7.) Allowed himself to lose a case by default (didn't show up in court on purpose.)

8.) Let his property be taken by other legal proceedings to give preference to other creditors

9.) Assigned, sold his property or gave it as a gift to another person

10.) Gave or sold the property to another person so he could be declared insolvent and cheat his creditors (not the same as # 9.)

11.) Defaulted in paying his bills for thirty (30) days

12.) Failed to surrender money entrusted to him

13.) If the debtor's property isn't enough to satisfy payments ordered in a court decision

Even if you're declared insolvent, you're only released from debts you had before you were declared insolvent. A person in an insolvency case is insolvent only if the court declares him insolvent. The good news is that future earnings of an insolvent person can't be attacked by his old creditors. There are, however, obligations that a person declared insolvent can't run away from:

1.) Government assessments

2.) Alimonies

3.) Corporate debts

4.) Debts caused by the debtor's fraud, embezzlement or defalcation (misappropriating money entrusted to him.)

5.) Solidary debts with another debtor (a complex type of debt where there are several debtors and the creditor can ask for a part or the whole debt from any or all of them.)

6.) Debts not mentioned in the schedule (list) the debtor submitted to the court

Suspension of Payment

If a debtor has enough to pay all his debts but can't pay all of them when their due dates arrive, he can go to court to ask for a suspension of payments. He must submit the following to the court:

1.) His schedule of debts and property

2.) His statement of assets and liabilities

3.) The proposed agreement

The court will order suspension of payments if at least two-thirds (2/3) of the creditors approve as well as three-fifths (3/5) of liabilities. Once approved, the creditors can't object if the debtor continues to do business and pays his legitimate expenses. Suspension of payment was made to help a debtor pull himself back together so he can pay his creditors when the time comes.

Regarding suspension of payments, remember the following:

1.) Persons foreclosing legal or contractual mortgages can either join the other creditors for suspension of payments or foreclose them independently.

2.) An unsecured creditor's case against a debtor asking for suspension is suspended because secured creditors (like those foreclosing mortgages) are must be given priority -that's the rule.

This has now been repealed by the FRIA.