Anyone who has such overwhelming debts that he can not repay them in his life has the option of a private bankruptcy procedure. If everything goes well, the debt relief is at the end of the insolvency proceedings: From this point, all debts are done.

What is a residual debt exemption?

The discharge of residual debt was introduced in 1999 as part of the bankruptcy law reform and offers natural persons the opportunity to be exempted from all previously unfulfilled liabilities . This happens either in the context of a bankruptcy plan or – without such – after six years of good behavior. Thus, for example, former self-employed, who had to adhere personally with their entire fortune for their activity and are then highly indebted, hope for a debt-free restart. Reason for the introduction of the residual debt exemption was the equal treatment: While a corporation was dissolved after bankruptcy and the creditors were no longer got money, this option was previously denied to other debtors. They had to pay life-long to the creditors.

Conditions for the discharge of residual debt

One of the essential prerequisites for the discharge of residual debt is that part of the debt is paid . If a petition for bankruptcy is filed, a debt settlement plan will also be drawn up. In this is recorded how much money in the bankruptcy phase is handed over to the trustee. From this, the creditors get their money, so that the debts gradually become less. However, the release of residual debt is open only to so-called honest debtors, dishonest it is denied.

When can an exemption be requested?

According to section 287 (1) of the Insolvency Law, the debtor himself must file an application for the opening of insolvency if he wishes to benefit from the remainder of the exemption. If, on the other hand, the creditors file a so-called third-party application for bankruptcy, the debtor can not count on a debt waiver. In order for the debtor nevertheless to have the opportunity to waive the residual debt, Section 20 (2) InsO stipulates that in the case of a justified third-party application, the court points out that the waiver of residual debt pursuant to Sections 286 to 303 InsO is possible.

Who gets a residual debt exemption?

In principle, anyone who opens insolvency proceedings can also receive a residual debt exemption. However, only if the application for this has already been made with the opening of the insolvency proceedings . Basically, there are no rules regarding the level of debt, the age of the debtor or his or her professional situation. Anyone who is guilty of any breach of the rules during the entire period of good conduct will be granted the exemption by order of the court. From this moment, the claims of creditors may no longer be enforced and the debtor is free from recourse claims.

The expiry of the residual debt exemption

• First, the insolvency proceedings must be opened. Thus, as in the period of good behavior, creditors are prohibited from individual foreclosure.
• The insolvency court appoints a trustee.
• It manages, utilizes and distributes the assets of the debtor, primarily paying the costs of the proceedings and subordinated all claims of the creditors.
• Once the assets have been utilized and distributed, the actual insolvency proceedings have ended.
• Then begins the so-called period of good behavior, at the end of the residual debt exemption is possible.

Formalities of residual debt exemption

How is the debt waiver requested?

At the competent court, the debtor has to file an application for the waiver of residual debt at the same time as filing for insolvency. Once the insolvency proceedings have ended, the residual debt clearance procedure begins. During this time , the debtor must behave accordingly well . It is only at the final sitting of the proceedings that the court decides whether the debtor is exempt from the remainder of the debt – or whether it is denied.

Immediate release of residual debt

If no creditor has lodged a claim with the court or if both the court costs and all claims of the creditors are satisfied after conclusion of the insolvency proceedings, the court can grant the immediate discharge of the debt as of 1 July 2014, if requested by the debtor. (Section 300 (1) sentence 2 no. 1 InsO)

Residual debt exemption after five years
If the debtor has paid all the costs of the proceedings, the debt waiver may be granted by the court upon request, five years after the beginning of the insolvency proceedings. (§ 300 Abs. 1 Nr. 3 InsO)

Early termination of proceedings and discharge of residual debt

If all creditors have declared their consent in writing in court , the insolvency proceedings under § 213 InsO may be terminated prematurely . It does not have to be proven that their claims have been satisfied. However, the insolvency administrator must correct the mass claims and the procedural costs and, in accordance with section 214 (3) InsO, must provide appropriate security for the mass claims. 

 If all creditors have declared their consent in writing in court, the insolvency proceedings under § 213 InsO may be terminated prematurely.

Duties and grounds for refusal of residual debt

In order for the court to grant the debtor exemption, it must prove its worth during the period of good conduct. Except for the non-attachable part of the income, he has to hand over all income to the trustee so that he can satisfy the claims of the creditors. If the debtor acts independently during this period, the actual profit will not be taken as the basis for calculation, but the earnings he would receive in a regular employment relationship, depending on his education. During the six-year beneficial period , the debtor must try to pay at least part of the debt.

Obligations of the debtor:

• He must seek or carry out appropriate employment. Anyone pursuing employment must not simply quit. Even if you are self-employed, you have to keep working.
• He must inform the bankruptcy court and the trustee if he is seeking new employment and if he changes his place of residence.
• He must notify both the bankruptcy court and the trustee if he or she has money due to special circumstances or less money than before.
• Only the trustee may send money to the creditors.
• If the debtor inherits during this time, he must hand over half of the inheritance to the trustee.

The failure reasons for a residual debt exemption

According to § 290 InsO, the debtor does not receive any residual debt exemption if:

• he was finally convicted of a bankruptcy offense.
• he has illegally seized public subsidies, public funds or credit.
• he wasted his money.
• he has given false information and thus violated his obligations to cooperate and provide information.
• He has already obtained a residual debt exemption in the past ten years.
• he was denied the granting of a residual debt exemption in the past ten years under § 296 or § 297 InsO.

tip Most often, the discharge of residual debt is refused if the insolvency petition has not been filled out correctly (§ 290 (1) no. 6 InsO). All information about the personal assets, the income earned, the list of all creditors and their claims must be filled out correctly. The same applies to the application for insolvency and the application for the discharge of residual debt. Should an error nevertheless happen, this may neither be grossly negligent nor intentional. Therefore, both the application for bankruptcy and the application for exemption from residual debt should only be made with the assistance of a debt counselor or lawyer.

The residual debt exemption and tax debts

If the debtor has debts to the tax office because he was unable to pay the taxes, they will be treated like all other debts. The exemption from residual debt thus also applies to tax debts . This applies to all types of taxes, such as wage and income taxes, but also unpaid sales taxes. If the debtor has been convicted for a tax offense, for example because of tax evasion, that is no obstacle to a discharge of residual debt. Although the penalty due for it has to be paid, this does not apply to unpaid taxes.

Also in the insolvency procedure and in the period of good behavior the due tax declarations must be prepared and submitted to the tax office. If there are reimbursements during this period, the insolvency administrator will retain them during the insolvency proceedings. During the period of good conduct, she receives the debtor but should notify the liquidator of this. If debts are still open at the tax office, this may withhold any reimbursements in the period of good conduct and settle them with the debts.

Danger In the case of self-employed persons, traders, farmers and foresters, the exemption from residual debt can lead to taxable profits – and in turn taxes must be paid.

No residual debt exemption possible?

If the residual debt relief is denied, the debts are maintained and must be paid off slowly. Since the interest rates on loans are favorable, a small loan could help over the first time: this can be used to replace outstanding debts. As both personal bankruptcy and the discharge of residual debt are stored at the Credit Scorer, a new loan is only possible if the note is deleted three years after the remainder of the debt has been cleared. Those who can still avoid personal bankruptcy should consider different ways of debt repayment. A foreclosure can be avoided in many cases.