How can I stop payments to suppliers and creditors?
An option for individuals with more debts than income is civil and business bankruptcy. The civil bankruptcy is intended to settle debts, but the debtor can keep some assets. The business bankruptcy aims to preserve business and companies, so it does not simply pursue to settle debts.
Currently, due to the COVID-19 pandemic, many citizens and companies from various countries are suffering economic damages, due to the necessary measures to prevent the spread of the virus, such as the total or partial closure of Business activities listed by the government as non-essential.
These measures, despite being fundamental to ensure people’s health, can cause monetary losses to both individuals and large, medium and small companies, which at some point could have several debts on behalf different creditors. For such problems, there are judicial procedures that allow to solve non-payment of debts to all creditors, thus saving a lot of time and money that would derive from various lawsuits.
The judicial procedure that we are talking about is called Bankruptcy and it exists in business and civil matters, both have the purpose of having the debtor settle its debts to the creditors in a non-conflictive way, but they also have their differences, therefore we will explain both proceedings.
What is the civil bankruptcy proceeding?
The civil bankruptcy proceeding is a trial that allows to solve in a single procedure all the matters referred to the liquidation of the assets of a non-business debtor, to face the civil debts that he has with his creditors.
Civil bankruptcy is a judicial process in which the debtor who is in a state of default is granted the possibility of reaching an agreement with his creditors; the debtor will respond with all his assets to pay the debts he has with his creditors, with the exception of those that are unattachable.
Civil bankruptcy will only proceed when the debtor suspends the payment of his civil, liquid and payable debts. The declaration of bankruptcy will be made by the competent judge, in accordance with the Code of Civil Procedures.
The declaration of insolvency incapacitates the debtor to continue managing his assets, and makes the term of all his debts expire. This declaration also produces the effect that the default interest produced by the debts cease to run and accumulate, except for mortgage and pledge loans, which will continue to accrue the corresponding interests, up to the value of the assets that guarantee them.
Creditors will only be paid the capital owed in the order established by the corresponding legislation, and if after such payments, there are still funds belonging to the bankruptcy, the interest will be paid, in the same order in which the capital was paid, but at its legal rate, unless a lower rate has been agreed. In the event that the debtor’s assets are sufficient for all creditors to be paid in full, the interest will be covered at the agreed rate even if it´s higher than the legal one.
In this procedure, the debtor has the capacity to enter into agreements with his creditors, but these agreements will be made precisely at a duly constituted meeting of creditors.
Within eight days after the meeting in which the agreement is approved, dissident creditors and those who have not attended the meeting may oppose its approval. When the debtor complies with the agreement, his obligations are extinguished, but if he does not fulfill it in whole or in part, the right of the creditors will be reborn for the amounts they did not receive from their primitive credit, and any of them may request the declaration or continuation of the bankruptcy.
The civil bankruptcy turns out to be a way that the law marks as an alternative and offers the following benefits:
- The civil bankruptcy is a trial that allows to resolve in a single procedure all the matters related to the liquidation of the assets of a non-commercial debtor, to face the civil debts that he has with his creditors.
- The debtor has the opportunity to undergo the bankruptcy procedure with the intention of disposing of his assets, in order to pay his creditors the existing debts on a voluntary basis.
- It allows to order the debts of the insolvent person to prevent their debts from increasing.
- The procedure can be preventive looking for an amicable solution because there is the possibility of signing agreements in favor of the creditors, without having to wait for a judicial resolution, which guarantees conciliation and speed in the negotiation.
- Have the support of a person (“sindico”) who at all times will look after the interests of the debtor in order to satisfy the best benefit for him, trying to fulfill the greater number of unpaid debts in favor of creditors.
- The opportunity to restructure the debts with the Judge´s approval.
- Jointly resolve all procedures instituted against the same debtor. That is, all creditors will have the possibility of demanding compliance with the obligations within the same lawsuit and thereby solve to the greatest extent what is owed by the bankrupt /debtor.
- A debtor has legal alternatives to oppose a bankruptcy procedure initiated against him.
- The interests generated by the breach of obligations ceases when the procedure begins, except for mortgage and pledge loans, which will continue to accrue the corresponding interests, up to the value of the assets that guarantee them.
- Debtors can protect the assets that the law marks as non-seizable.
- Creditors will be paid the capital owed in the order established by the applicable legislation; that is, priority will be given to those who have attended the procedure primarily, seeking at all times equity.
- The interest request can be made and they will be paid in the same order as the capital of the debts if the debtor’s assets allow it.
- Having the necessary assets to fulfill the obligations, they are extinguished.
As you can see the effect of bankruptcy procedures is to comply with existing debts in favor of creditors by means of assets owned by a debtor. These means his assets will be the essential element to be able to settle his obligations. Thus, assets play an important role in a bankruptcy procedure; However, there are assets that the law does not allow to seize and which the debtor can protect, even if he is going through bankruptcy proceedings.
What property can the debtor keep?
In this regard, the assets that are not subject to seizure and which have legal protection in favor of the bankrupt / debtor are indicated below:
- The assets that constitute the family heritage, since its registration in the Public Registry of Property.
- The daily bed, the clothes and the furniture of ordinary use of the debtor, his spouse or his children, not being luxurious, in the judge’s opinion.
- The instruments, devices and supplies necessary for the debtor’s work;
- The machinery, instruments and animals for agricultural cultivation, if they are necessary for the service of the farm to which they are destined, in the judgment of the judge, for which purpose he will hear the report of an expert appointed by him;
- The books, devices, instruments and supplies of people who exercise or dedicate themselves to the study of liberal professions;
- The weapons and horses that the military in active service use, indispensable for it in accordance with the relative laws;
- The machinery and instruments proper for the operation of commercial or industrial enterprises, insofar as they are necessary for their service and movement, in the judgment of the judge, for which purpose he will hear the opinion of an expert appointed by him;
- Harvest before harvesting, but not planting rights;
- The right of usufruct, but not the fruits of it;
- Use and room rights;
- The easements, unless the estate in whose favor they are constituted is seized, except for the waters, which are independently seizable;
- Life annuity;
- The wages and salaries of workers in the terms established by the Federal Labor Law, as long as they are not food debt or crime-related liability;
- The allowances of the pensioners of the Treasury;
- The ejidos of the towns and the individual parcel that in its subdivision has corresponded to each ejidatario.
To know more in detail about which are the assets that are not subject to seizure, you can consult our article: What assets are Non-attachable assets.
If you are in a situation such as the described in this article, we inform you that there are voluntary options if you want to anticipate an eventual procedure against you due to civil debts. In case you are already sued in a civil bankruptcy lawsuit, or if you are a creditor that requires a debtor to fulfill an obligation, our law firm can provide you with the necessary advice in order to give you the best alternative solution to your conflict, since we are trained to assist you in the legal procedure.
What is business bankrupcity?
In Mexico, suspension of payments was regulated in the Bankruptcy and Suspension of Payments Law, a law that was repealed by means of the second transitory article of the Bankruptcy Law, published in the Federation Official Gazette on May 12, 2000. Due to the foregoing, the Bankruptcy and Suspension of Payments Law only applies to bankruptcy proceedings initiated prior to the effective date of the Bankruptcy Law.
The Bankruptcy Law regulates the judicial procedure to which merchants in insolvency are subjected to reach an agreement with their creditors or if it is not possible, to liquidate the merchant’s assets, distributing the entire amount among the creditors up to where scope. The main objective of the Bankruptcy Law is to preserve the Company and carry out the liquidation procedure, granting equal treatment to the merchant and its creditors.
Business bankruptcy is then a collective business procedure that can be initiated before a federal judge, by the insolvent merchant or by his creditors. It initiates when the merchant defaults on his payment obligations and does not have enough assets to pay off all his credits.
Business bankruptcy is not intended to bankrupt the businesses of the merchants, but rather to preserve them. This is because bankruptcy would affect the State’s economic objectives such as the generation of new jobs and an increase in the Gross Domestic Product. So before the bankrupt of a merchant, an attempt is made to enter into an agreement between the debtor and his creditors that allows modifying the payment conditions of the debts to be able to cover them in a better way.
In the event that in the bankruptcy it is not possible to reach an agreement between the debtor and the creditors, the bankruptcy of the merchant is decreed, so that after the course of the procedure the sale or auction of the assets of the bankrupt company is carried out to satisfy the creditors, as far as possible, according to their preference order.
This procedure is carried out under federal jurisdiction since article 17 of the Business Bankruptcy Law establishes that the District Judge with jurisdiction in the place where the merchant has his domicile is competent to hear about bankruptcy procedures.
Differences and similarities
1.- Both procedures have as their main objective that the debtor who has failed to fulfill his payment obligations liquidates the credits to all his creditors in a single procedure.
2.- The Civil Bankruptcy regulates the non-business debtor who has stopped paying its civil debts and it is regulated in the different civil codes of the Mexican Republic states, for this reason the procedure begins before a Court of common jurisdiction.
3.- The Business Bankruptcy has the purpose that the individuals and legal entities that are merchants, liquidate their debts in a non-contentious manner and do not go bankrupt. It is regulated by the Bankruptcy Law and the procedure is initiated before a District Judge.
4.- Both procedures have similarity in their main procedural stages:
THE COMMON STAGE OF THE CREDITORS CONTEST.- It begins with the bankruptcy declaration and ends with the agreement compliance or with the liquidation phase.
THE STAGE OF AGREEMENT WITH THE CREDITORS.- It begins after the common phase. Its goal is to reach agreements with creditors. The Creditors Board meets and vote for the agreement. It ends with its compliance, or in the case of its default, the liquidation phase begins.
LIQUIDATION PHASE OF THE CREDITORS CONTEST.- It begins due to breach of agreement or by prior request due to the impossibility of reaching agreements. Its objective is the sale of the bankrupt assets to satisfy the debt with the creditors.
CREDITORS´ CLASSIFICATION PHASE.- It is opened at the same time as the liquidation phase.
These phases may vary in the civil procedure, since they are not the same procedures in all the Courts of the country and are according to what is established by the state judicial powers.
5.- To determine the estimated time that Bankruptcy proceedings take, it must be taken into account that the bankruptcy may be voluntary (urged by the debtor himself) or necessary (by creditors); abbreviated or ordinary; to negotiate payment terms and withdrawals with creditors or to settle. In addition, the workload of the Court must be considered; so it can last from 6 months to 4 years.
In general, we can summarize that for those individuals or companies who cannot face their debts becasue of the contingency caused by COVID-19, law establishes a trial to liquidate their credits even with the possibility of keeping their business or company and above all without generating too many legal expenses.
Our law firm can advise you in case you need it; together we can determine the best path for you, considering all possible legal scenarios you may face. Schedule a Free Call with Us.