The Ministry of Justice has published a draft Personal Insolvency Law (“PIL”) on the public consultation portal for the third time. Such draft law has already been subject to two public consultations in recent years, but has not yet been adopted by the National Assembly. The aim of PIL is to align the requirements in the field of insolvency arising from European legislation with the national law.

Bulgaria is one of the few countries in the EU that do not have a legal framework envisaging the possibility to open insolvency proceedings for natural persons, who are not traders or entrepreneurs. Respectively, there is currently no legal possibility for natural persons who are financially unsustainable to be declared insolvent.

Firstly, the procedure for commencing insolvency proceedings is not mandatory and is initiated upon request of the debtor lodged with the regional court as per his permanent address. This means that the initiative to open such proceedings lies solely with the debtor and cannot be initiated at the request of third parties - for example, his creditors.

According to the draft law, a debtor is deemed to be “of good faith” if he incurs debts in accordance with his assets and income and does not intentionally or negligently harm the interests of his creditors. PIL introduces hypotheses (presumptions) when the debtor is a priori considered to be “not of good faith” - for instance, if he has been convicted for certain types of crimes; if he is capable to work but has not exercised any employment or other activity in the last year prior to the filing of the application for the opening of the proceedings; if he has violated the obligation to declare income or assets in the last three years; if he has made disposals of assets of significant value, etc.

The debtor's request must contain data concerning his employment, financial unsustainability, good faith (under the meaning of PIL), assets owned, a list of known creditors, etc. The debtor shall also enclose to the request a repayment plan. The court shall examine the request within 14 days, collecting the necessary evidence and assessing whether the debtor meets the requirements of PIL for commencement of insolvency proceedings. 

As “financially unsustainable natural person” the draft law deems any debtor who has been unable to meet one or more monetary obligations totalling more than ten minimum wages for more than six months. From 1 January 2025 the minimum wage will become BGN 1 077 (approx. EUR 540), which means that financial unsustainability shall occur in event of outstanding debts in the amount of at least BGN 10 700 (EUR 5,350). If the debtor has ceased the payments to its creditors (even partially), the financial unsustainability is presumed, similar to the insolvency of commercial companies.

In its ruling declaring the insolvency proceedings, the court also determines an initial maintenance of the debtor and his family members, which shall serve to meet their living needs, as well as a bank account of the debtor, into which payments shall be made in favour of the latter and from which the debtor may make payments. Similarly to commercial insolvency, the ruling declaring the insolvency proceedings imposes general restraint and foreclosure (or other security measures) on the debtor's assets which the debtor can no longer dispose of. The person may only carry out actions to meet current obligations in view of his family's living needs.

With the opening of the insolvency, all court and arbitration proceedings against the debtor, initiated as a result of monetary claims of its creditors, are suspended. If the claim in respect of which the court or arbitration proceedings have been opened is satisfied in the insolvency proceedings, the relevant proceedings shall be terminated.

Similar is the regulation for any enforcement proceedings initiated against the debtor prior to the opening of the insolvency proceedings.

All creditors of the debtor are entitled to participate in the insolvency proceedings. Their claims shall be submitted before the court, whereas the appointed insolvency administrator prepares a list of the approved claims.

In the proceedings, the court, upon the proposal of the meeting of creditors, appoints insolvency administrator to represent the debtor and exercise control over his current deeds. The insolvency administrator draws up the list of creditors and verifies the existence and maturity of their claims, takes an inventory of the debtor's assets (the mass of insolvency), proposes a repayment plan and performs other actions specified in the law or assigned by the court. If the debtor disagrees with the validity of a certain claim, he has the procedural possibility to file a claim for the existence of that claim.

The main objective of the proceedings is to achieve voluntary performance of obligations and satisfaction of creditors to the extent possible. For that reason, it is provided that the debtor shall submit a repayment plan together with the lodging of the application for the opening of the proceedings. The insolvency administrator and some of the creditors holding at least one third of the total claims are also entitled to propose a repayment plan.

The plan may envisage 1) deferral or rescheduling of payments; 2) partial or total forgiveness of debts; 3) transactions with the debtor's assets aimed at satisfying creditors and other similar measures. If the plan meets all the requirements, it is subject to voting and approval by the creditors' meeting. In case of positive voting, the court confirms the adopted plan and it becomes binding on the debtor and the creditors.

The draft law also provides for other measures for repayment of debts - termination by the insolvency administrator of unfavourable contracts to which the debtor is a party (if possible), debts’ set-off, sealing of premises to avoid the physical dissipation of assets of the debtor, etc.

The insolvency proceedings are concluded by a ruling by virtue of which the debtor is declared insolvent and the redemption (cashing) of its property begins. The creditors are satisfied in a special order. First-ranked creditors are those with claims that are secured by a mortgage or pledge under the Special Pledges Law - from the amount received after the sale of the secured asset. For any creditor's claims disputed in court, the insolvency administrator shall allocate funds to the distribution account which are subsequently transferred in favour of the respective creditor, in case his claim is recognised as validly existing and justified by the court.

The debtor's obligations are extinguished upon the expiry of a three-year period from the entry into force of the court's ruling confirming the repayment plan, unless it is established that the mass of insolvency is not exhausted.

In the absence of assets of the debtor, his obligations are extinguished upon the expiry of five years from the entry into force of the ruling opening the insolvency proceedings, unless it is established that the debtor is “of bad faith” (according to the criteria for “bad faith” quoted above) or that there were sequestrable assets that were not used to satisfy the creditors.

As an exception to the above general rule, PIL stipulates that certain claims are not extinguished in this manner, namely - claims secured by a mortgage; fines; tort claims; maintenance and claims that have occurred after the opening of insolvency proceedings.

Providing for an independent insolvency procedure for natural persons in Bulgaria is an important additional step, on the one hand, towards overcoming the figure of the “eternal debtor” and on the other - for harmonising Bulgarian law with EU standards. The new law is also likely to provide a solution to some practical issues. For instance, it is likely to allow for easier recognition and enforcement by Bulgarian authorities of judgments of foreign courts, by means of which a debtor natural person (residing in the territory of a foreign state) is declared insolvent and owns assets in Bulgaria, which may serve to satisfy his creditors.