Residual debt discharge: tips for debt relief after private insolvency

Those who have such overwhelming debts that they will not be able to repay them in their lifetime have the option of private insolvency proceedings. If everything goes well, there is a discharge of residual debt at the end of the insolvency proceedings: from this point on, all debts are settled.

What is a discharge of residual debt?

The discharge of residual debt was introduced in 1999 as part of the reform of insolvency law and offers natural persons the opportunity to be discharged from all liabilities that had not been fulfilled by that time. This takes place either within the framework of an insolvency plan or – without such a plan – after six years of good conduct. This means, for example, that former self-employed persons who were personally liable for their activities with all their assets and subsequently became heavily indebted can hope for a debt-free fresh start. The reason for the introduction of the residual debt discharge was the equal treatment: While a corporation was dissolved after the insolvency and the creditors did not get any more money, this possibility was denied to other debtors until then. You had to pay to creditors for life.

Requirements for the discharge of residual debt

One of the essential requirements for the discharge of residual debt is that part of the debt is paid off. If an insolvency petition is filed, a debt settlement plan is also drawn up. This specifies how much money is transferred to the trustee during the insolvency phase. From this, the creditors get their money, so that the debts become less little by little. However, the discharge of residual debt is only open to so-called honest debtors, dishonest ones are denied it.

From when can a discharge of residual debt be applied for?

According to § 287 para. 1 InsO, the debtor himself must apply for the opening of insolvency proceedings if he wishes to benefit from the discharge of residual debt. If, on the other hand, the creditors file a so-called third-party petition for insolvency, the debtor cannot count on a discharge of residual debts. To ensure that the debtor nevertheless has the opportunity to obtain residual debt discharge, section 20 para. 2 InsO, that the court in the case of a justified third-party application points out that the residual debt discharge is possible under § § 286 to 303 InsO.

Who gets a discharge of residual debt?

In principle, anyone who opens insolvency proceedings can also receive residual debt discharge. However, only if the application for this was already filed when the insolvency proceedings were opened. In principle, there are no rules regarding the amount of the debt, the age of the debtor or his professional situation. If you are not guilty of any violation for the entire period of good conduct, the court grants you residual debt discharge by order. From this moment on, the claims of creditors may no longer be enforced and the debtor is free from recourse claims.

The process of residual debt discharge

• First the insolvency proceedings must be opened. This means that – just as in the period of good conduct – creditors are prohibited from individual foreclosures.
• The insolvency court appoints a trustee.
• The insolvency administrator administers, realizes and distributes the debtor's assets, pays the costs of the proceedings as a priority and all creditors' claims as a subordinate priority.
• Once the assets have been realized and distributed, the actual insolvency proceedings are over.
• The so-called period of good conduct then begins, at the end of which residual debt discharge is possible.

Formalities of residual debt discharge

How to apply for discharge of residual debt?

The debtor must file an application for residual debt discharge with the competent court at the same time as filing for insolvency. If the insolvency proceedings have ended, the residual debt discharge proceedings begin. During this period, the debtor must behave accordingly well. Only at the final hearing of these proceedings does the court decide whether residual debt discharge applies to the debtor – or whether it is denied.

Immediate discharge of residual debt

If no creditor has filed a claim with the court or if, at the end of the insolvency proceedings, both the costs of the proceedings and all creditors' claims have been satisfied, the court can, since 1. July 2014 grant immediate discharge of residual debt if requested by the debtor. (§ 300 para. 1 sentence 2 no. 1 InsO)

Residual debt discharge after five years
If the debtor has paid all the costs of the proceedings, five years after the commencement of the insolvency proceedings, discharge of residual debt may be granted by the court on application. (§ 300 para. 1 no. 3 InsO)

Early termination of proceedings and discharge of residual debt

If all creditors have declared their agreement in writing to the court, the insolvency proceedings can be terminated prematurely in accordance with section 213 of the German Insolvency Code (InsO). It is not necessary to prove that the debtor's claims have been satisfied. However, the insolvency administrator must adjust the mass claims and the costs of the proceedings and, in accordance with § 214 para. 3 InsO for the mass claims provide evidence of appropriate securities. According to the decision of the Federal Court of Justice of 29. September 2011 (Ref. IX ZB 219/10), residual debt discharge can also be granted in the event of early termination of the proceedings, if the debtor submits the appropriate application for this purpose.
(§ 213 InsO)

Duties and grounds for refusal of residual debt discharge

In order for the court to grant the debtor the discharge, the debtor must prove himself during the period of good conduct. With the exception of the non-attachable part of the income, the debtor must hand over all income to the trustee so that the trustee can satisfy the claims of the creditors. If the debtor is self-employed during this period, the basis for calculation is not the actual profit earned, but the earnings that he would receive in a regular employment relationship – depending on his training. During the period of good conduct, which lasts a maximum of six years, the debtor must try to pay at least part of the debts.

The debtor's obligations:

• He must seek or carry out appropriate gainful employment. The debtor may not simply give notice if he is in employment. Even if the debtor is self-employed, he must continue to work.
• The debtor must inform the insolvency court and the trustee if he/she takes up a new occupation and if he/she changes his/her place of residence.
• He must notify both the insolvency court and the trustee if, due to special circumstances, he comes into money or has less money than before.
• Only the trustee may pay money to the creditors.
• If the debtor inherits during this period, he must hand over half of the inheritance to the trustee.

The grounds for failure to grant residual debt discharge

According to § 290 InsO, the debtor does not get residual debt discharge if:

• he has been convicted by final judgment of an insolvency offense.
• he has illegally obtained public subsidies, public funds or loans.
• he has wasted his money.
• he has made false statements and thus violated his duties to cooperate and provide information.
• he has already obtained discharge of residual debt within the past ten years.
• the granting of residual debt discharge has been refused in the past ten years in accordance with § 296 or § 297 of the German Insolvency Code (InsO).

Most often, the residual debt discharge is denied if the insolvency petition was not filled out correctly (§ 290 para. 1 no. 6 InsO). All information about personal assets, the income earned, the list of all creditors and their claims must be filled in correctly. This applies equally to the insolvency application and the application for residual debt discharge. Should a mistake nevertheless occur, it must be neither grossly negligent nor intentional. For this reason, both the insolvency application and the application for residual debt discharge should only be made with the support of debtor counseling or a lawyer.

The residual debt discharge and the tax debts

If the debtor has debts with the tax office because he could not pay the taxes, these are treated like all other debts. The residual debt discharge applies thus also with tax debts. This applies to all types of taxes, for example wage and income taxes, but also unpaid sales taxes. If the debtor has been convicted of a tax offense, for example tax evasion, this is not an obstacle to residual debt discharge. Although the penalty due for this must be paid, this does not apply to the unpaid taxes.

The due tax returns must also be prepared and submitted to the tax office during the insolvency proceedings and the period of good conduct. If there are any refunds during this period, the insolvency administrator keeps them during the period of the insolvency proceedings. During the period of good conduct, the debtor receives it, but should inform the insolvency administrator about it. If debts are still outstanding with the tax office, the latter may withhold any refunds during the period of good conduct and offset them against the debts.

In the case of self-employed persons, tradesmen, farmers and foresters, the discharge of residual debt can lead to taxable profits – and taxes must in turn be paid on these.

No residual debt discharge possible?

If the discharge of residual debt is denied, the debts remain and must be paid off slowly. Since the interest rates for loans are favorable, a small loan could help over the first time: This can be used to pay off outstanding debts. Since both private insolvency and discharge of residual debt are stored at SCHUFA, a new loan is only possible if the note is deleted three years after the discharge of residual debt. Anyone who can still avoid private insolvency should consider various options for paying off debts. Compulsory execution can be avoided in many cases.