Discharge of remaining debts: a second chance to start afresh.

The discharge of remaining debts (exoneração do passivo restante) is one of the most significant mechanisms provided for in the Insolvency and Corporate Recovery Code (Código da Insolvência e da Recuperação de Empresas, CIRE). It allows an individual who meets certain legal requirements to be released from the debts that remain unpaid once the insolvency proceedings have run their course.

The regime rests on the principle commonly known as the second chance, or fresh start. It seeks to balance two equally important interests: on the one hand, ensuring that creditors receive everything that can be recovered; on the other, ensuring that a debtor acting in good faith is not bound for life to debts that he or she will never be able to pay.

A frequent misconception should, however, be dispelled. The discharge of remaining debts is neither an immediate forgiveness of debts nor the elimination of all existing obligations. It is a benefit subject to the assessment of the court and to the strict compliance by the debtor with the duties imposed during the assignment period of disposable income.

#Who can benefit?

The discharge of remaining debts is available exclusively to natural persons, irrespective of their profession or employment status.

The regime may benefit employees, self-employed workers, sole traders, former business owners, partners or managers of commercial companies and any other individual who is insolvent.

Commercial companies, associations and other legal persons cannot benefit from this mechanism.

#How is the application made?

The application for discharge of remaining debts is made in the initial petition by which the debtor files for insolvency. It should be submitted by a lawyer duly instructed for that purpose, so as to ensure that the application is properly substantiated and that all legal requirements for obtaining the discharge are met.

Once the application has been filed, the court examines whether the legal conditions for its admission are satisfied. If there are no grounds for summary dismissal, the court issues an initial order admitting the debtor to the discharge regime.

Admission does not, however, mean that the discharge has been granted. It merely allows the debtor to begin the period during which he or she must demonstrate that the benefit is deserved.

#The assignment period of disposable income

The assignment period currently lasts, as a rule, three years, calculated in accordance with the CIRE.

During that period, the debtor is required to hand over to the trustee appointed by the court the portion of his or her income that exceeds the amount deemed indispensable to ensure a minimally dignified standard of living for the debtor and his or her household.

The amount left at the disposal of the debtor is set by the court in each case, having regard to the specific circumstances of each household. There is no single figure applicable to all situations.

Throughout these three years, the debtor must also comply with various legal duties, namely to cooperate with the trustee, to report changes in his or her financial situation, to engage in professional activity whenever possible and not to conceal assets or income.

#Which debts are covered?

As a rule, the discharge covers claims against the insolvent estate that remain unsatisfied after the liquidation of the debtor's assets and the expiry of the assignment period.

These may include, among others, bank debts, personal loans, credit cards, bank overdrafts, supplier claims, private loans and other ordinary financial obligations.

#Are there debts that are never discharged?

Yes. The law expressly excludes certain claims from the benefit of discharge. These remain enforceable against the debtor even after the final discharge order has been issued.

They include:

• maintenance claims;
• compensation arising from intentional unlawful acts committed by the debtor;
• criminal fines, administrative fines and other pecuniary penalties;
• tax claims, including debts to the Tax and Customs Authority (Autoridade Tributária);
• debts to Social Security (Segurança Social).

During the assignment period, however, specific rules govern the exercise of the rights of these creditors, depending on the legal framework applicable to each case.

#When can the application be refused?

The discharge of remaining debts is not an automatic right.

The court may dismiss the application at the outset or, at a later stage, refuse the discharge if it concludes that the debtor has not acted in good faith or has breached the duties incumbent upon him or her.

Among other situations provided for by law, relevant grounds include making false statements, concealing assets or income, breaching the duty to cooperate with the court or the trustee, obtaining credit fraudulently and engaging in conduct detrimental to creditors.

#What happens at the end of the three years?

Once the assignment period has ended, the court assesses the conduct of the debtor throughout the proceedings.

If it finds that all obligations have been fulfilled and that there are no legal grounds for refusing the benefit, the court issues the final discharge order.

That decision extinguishes the claims covered by the regime, allowing the debtor to rebuild his or her financial life free from the burden of the debts that remained unpaid.

This is a technical note published for information purposes. It does not constitute legal advice on any specific case. For such advice, please contact the firm.