Court of Appeal grants the debt discharge a judge had refused

A judge refused a woman a second chance because of “reckless” debts, but the Zaragoza Court of Appeal granted it. Having taken out a string of consumer loans totalling €28,000 that she could not repay, she was freed from them after appealing, thanks to the two courts’ differing approaches.

The Provincial Court of Zaragoza ruled in her favour and granted the discharge of debts from several consumer loans that a commercial court in the city had refused. She had been denied the so-called second chance because the judge found that she had borrowed “recklessly”, seeing no justification for taking out so many loans. She appealed and has now obtained the discharge of outstanding liabilities, which frees her from having to repay the money.

The consumer had applied for personal insolvency because she could not pay the roughly €28,000 she had built up across more than half a dozen loans. The proceedings were admitted as a “no-asset” insolvency, as she had no property with which to pay. The next step was to apply for the second chance.

She explained that she had taken out the loans to cover her own living costs and those of her daughter and her elderly mother, whom she cared for. She then had to borrow more to pay the instalments on the earlier loans while she looked for work, which she did not find. That led to her over-indebtedness.

“A lack of control over spending”

Commercial Court No. 1, in judgment 161/2023 of 13 November, had acknowledged that the purpose of the second chance is that an individual, “despite business or personal financial failure, can get their life back on track and even take on new ventures, without indefinitely carrying a burden of debt they will never be able to pay”.

However, it held that the second chance “must be limited to cases in which borrowing has been responsible and in line with the debtor’s circumstances”, and that the inability to pay must result from “unexpected and unforeseeable” events, such as a “significant and unforeseen loss or reduction of income” or “exceptional spending needs that cannot be met from existing income”.

In this case the judge considered there had been “reckless borrowing”, one of the grounds for refusing a discharge. He found no “exceptional circumstance” preventing the debts from being paid, a “complete lack of control over spending and its documentation”, and information he regarded as “incomplete and insufficient”, noting borrowing of about €28,000 against an annual income of around €14,000.

Despite the creditors’ silence

The debtor appealed and obtained a favourable ruling from Section 5 of the Court of Appeal in judgment 31/2024 of 12 January, highlighting the different approaches of the first-instance judge and the appellate court.

Her lawyer argued that the commercial judge had gone too far in examining, on his own initiative, whether the borrowing had been reckless, since no creditor had objected. The judge had replied that the reformed Insolvency Act (article 502) allows him to verify that the requirements for the discharge are met, and that creditors’ silence does not relieve the court of that duty.

The Court of Appeal agreed that the judge must assess the debtor’s past conduct, but added that proving reckless or negligent borrowing is ordinarily the responsibility of whoever opposes the discharge, and pointed out that lenders are already legally required to assess a customer’s ability to repay before granting credit.

Starting from a presumption of good faith, the court held that it had not been rebutted and that the loans were consumer credit for private needs not shown to have been obtained negligently or recklessly. It therefore discharged almost €28,000 of debt, except for €1,000 owed in local taxes to Zaragoza City Council, which the law does not allow to be discharged.

In a similar situation?

If your debts seem insurmountable, you are not alone. At Rodian Abogados, Second Chance Law lawyers in Valencia, we help you explore your legal options and find a solution that lets you start again. We will be honest and transparent with you, give your case the time it needs and, above all, we will not try to sell you anything.