What can I do if I can’t pay my creditors in Mexico due to COVID-19?
In addition to important public health considerations, the international pandemic of COVID-19 will affect many people economically. There will be people and companies that will not be able to pay creditors.In Mexico there are judicial procedures that resolve the inability to pay back creditors, thus saving a lot of time and money when compared to individual lawsuits.
The judicial procedure that we are talking about is called, of course, bankruptcy, and bankruptcy can be declared in both commercial and civil matters. Both civil and commercial bankruptcy allow the debtor to settle debts in a non-conflictive way, but they also have major differences. We explain the similarities and differences in the following sections.
What is a civil bankruptcy proceeding?
A civil bankruptcy proceeding is a trial that liquidates, in one procedure, the assets of a non-commercial debtor in order to terminate civil debts with creditors.
Civil bankruptcy is a judicial process in which the debtor, in a state of default, is granted the possibility of reaching an agreement with creditors; the debtor will respond with all his or her assets to pay the debts with creditors, with the exception of those that are protected by state law (such as the family´s house trust).
Civil bankruptcy will only proceed when the debtor suspends payment of civil, liquid and payable debts. The declaration of bankruptcy will be made by a civil judge in Mexico, in accordance with the Code of Civil Procedures.
The declaration of bankruptcy declares the debtor unable to continue managing their assets and makes the term on all their debts expire. This declaration also means that the default interest produced by the debts cease to accumulate, except for mortgage and pledge loans, which will continue to accrue the corresponding interest, up to the value of the assets that guarantee them.
Creditors will be paid the capital owed to them in the order established by the corresponding legislation. If, after such payments, there are still funds remaining, 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 rate.
In this procedure, the debtor has the ability to enter into agreements with creditors, but these agreements will be madeat a duly convened meeting of the creditors.
Within eight days of the meeting at which the agreement is approved, dissident creditors and those who did not attend the meeting may oppose the approval of the agreement. After eight days the agreement is considered final.
If the debtor complies with the agreement, his or her obligations are extinguished. However, if the debtor does not fulfill the agreement in whole or in part, the rights of the creditors to the original amount they did not receive will re-emerge, and any of them may that the bankruptcy be continued or re-declared.
What is a commercial bankruptcy proceeding?
A commercial bankruptcy proceeding applies to incorporated commercial firms in Mexico and Mexican merchants. Its objective is to preserve the company in debt and to carry out the liquidation procedure, granting equal treatment to the company and its creditors. The Bankruptcy Law regulates this federal judicial procedure. Commercial bankruptcy is not intended to bankrupt the businesses, but rather to preserve it. If preserving the business is impossible, only then can the merchant’s assets be distributed among creditors.
Bankruptcy law in Mexico is designed to preserve businesses in order to uphold broader economic objectives such as jobs and GDP.
Commercial bankruptcy is a collective commercial procedure that can be initiated before a federal judge by the insolvent company or by its creditors. It may begin when the company defaults on its payment obligations and does not have enough assets to pay off all its credits.
This procedure is carried out by the District Judge with jurisdiction in the place where the company has its domicile.
Civil and Commercial Bankruptcy: Differences and similarities
1.- Civil bankruptcy regulates the non-commercial debtor that has stopped paying its civil debts.Civil bankruptcy is regulated by different civil codes of the Mexican states, so the procedure must be initiated before a regional Court Judge.
2.- Commercial Bankruptcy has the purpose to keep the business afloat whenever possible. Commercial bankruptcy is initiated before a Federal District Judge.
3.- In both procedures, all debts are solved in one single procedure.
4.- Both procedures have the following stages:
BANKRUPTCY DECLARATION – All creditors anddebts will be subject to the bankruptcy procedure.
AGREEMENT WITH CREDITORS – Creditors meet, discuss and vote on the agreement. If an agreement cannot be reached due to insufficient assets or otherwise, the liquidation phase begins.
LIQUIDATION PHASE Sale of the bankrupt assets to pay creditors (if no agreement reached, or agreement is breached).
CREDITORS´ CLASSIFICATION PHASE – Debts are ranked in order of payment.
These phases may vary somewhat in the civil procedure, since the civil procedure is managed in regional courts.
Bankruptcy proceedings may last from six months to four years depending on the following factors:
- Whether the bankruptcy is voluntary (initiated by the debtor himself) or involuntary/necessary (initiated by creditors). Voluntary bankruptcy tends to proceed more quickly;
- Whether the bankruptcy procedures are executive or ordinary;
- Whether the agreement is negotiated smoothly with creditors, or there is a combat among creditors and debtor.
In addition, the workload of the specific court must be considered.
In general, we can summarize that for those individuals or companies who cannot face their debts due to circumstances created by COVID-19, filing for bankruptcy in Mexico may be a viable option.
Need advice? Litigation Lawyers.Mx can help. Together we can determine the best path forward, considering all possible legal scenarios. Contact Us.
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Generally speaking, yes! Civil legislation in Mexico considers this type of circumstance “Force Majeure”. Force Majeure may also prevent defaults from being considered an "intentionally wrongful act".