Key Aspects of Individual Bankruptcy in Ukraine

Personal Bankruptcy in Ukraine: Is Debt Relief Truly Possible for Ordinary Citizens?

Until recently, or more precisely until 2018, only legal entities could declare themselves bankrupt. However, with the adoption of the Code of Ukraine on Bankruptcy Procedures (hereinafter referred to as the Code) on October 18, 2018, individuals also gained the right to be declared bankrupt if they are unable to pay their obligations.

Does this mean one can take out a loan, then initiate bankruptcy, and not pay the obligation?

Definitely not. After all, first and foremost, Book 4 of the Code, which regulates this issue, is called "Restoration of Debtor's Solvency." This means that in the event of opening bankruptcy proceedings, all possible measures are initially taken to repay the individual's debts, and only when all possible measures have been exhausted can the person be declared bankrupt, which may have certain consequences in the future.
But let's go in order.

What the Code on Bankruptcy Procedures States

Part 2 of Article 115 of the Code defines an exhaustive list of grounds under which a debtor has the right to apply to the commercial court with a statement on the initiation of insolvency proceedings. These include:

1. The amount of the debtor's overdue obligations to the creditor (creditors) is not less than 30 times the minimum wage.
2. The debtor has ceased repayment of loans or other scheduled payments in an amount exceeding 50 percent of monthly payments for each of the credit and other obligations for two months.
3. A resolution has been adopted in enforcement proceedings regarding the absence of property belonging to the individual that can be subject to collection.
4. Other circumstances confirming that the debtor will not be able to fulfill monetary obligations or make ordinary current payments in the near future (threat of insolvency).

Which Debts Are Not Subject to Restructuring and Write-off

According to Article 125 of the Code, the following debts are not grounds for and are not subject to restructuring:

• debts for alimony payments
• compensation for harm caused by injury, other health damage, or death of an individual
• debts for payment of a single contribution to mandatory state social insurance
• debts for payment of other mandatory contributions to mandatory state social insurance.

Unlike international practice, Ukrainian legislation stipulates that only the debtor can initiate the process by submitting a corresponding application to the commercial court. The requirements for the application, as well as a considerable list of documents that must be attached to it, are established by Article 116 of the Code.

At first glance, it seems that our legislation is finally adapting to the needs of ordinary citizens who, due to various circumstances, lose the ability to pay mortgages, repay loans, etc.

However, it's not all so straightforward.

So why have a large number of debtors still not exercised their right to be freed from the burden of debt today?

The first obstacle for most who wish to file an application is the significant number of documents that must be attached to the application, as established by Article 116 of the Code.

Another significant "con" is the payment for the services of the arbitration manager. The Code stipulates that the debtor must attach to the application evidence of the debtor's advance payment to the court's deposit account for the remuneration of the restructuring manager for three months of performing duties, which amounts to five times the subsistence minimum for able-bodied persons for each month of the arbitration manager's performance of duties (paragraph 3 of part 2 of Article 30 of the Code). That is, an amount equal to fifteen times the subsistence minimum for able-bodied persons must be deposited into the court's deposit account, which as of the publication date of this article (October 2021) amounts to 35 685 UAH.

Also, the prospect of losing property during the execution of the debt restructuring plan or in the event of the introduction of a debt repayment procedure for an individual, as provided for in paragraph 1 of part 3 of Article 124, part 4 of Article 124, and Article 131 of the Code, does not seem very attractive.

The only exceptions that cannot be realized are property such as housing that is the sole place of residence for the debtor's family (an apartment with a total area of no more than 60 sq.m. or a living area of no more than 13.65 sq.m. per family member of the debtor, or a residential house with a total area of no more than 120 sq.m.) and is not subject to collateral, funds held in the debtor's accounts in pension funds and social insurance funds, and other property of the debtor that cannot be seized according to legislation.

Furthermore, the Code provides for certain "bonuses" that come with the status of a bankrupt for individuals recognized as such after undergoing the procedure.

What "Comes with" Bankruptcy

According to the provisions of Article 135 of the Code, the following restrictions are imposed on individuals declared bankrupt:

1. For five years after an individual is declared bankrupt, insolvency proceedings cannot be initiated based on their application, except in cases where the debtor has fully repaid all debts in the manner prescribed by this Code.
2. For five years after an individual is declared bankrupt, such person is obliged to notify the other parties to loan agreements, credit agreements, guarantee agreements, or pledge agreements in writing about their insolvency before entering into such agreements.
3. An individual cannot be considered to have an impeccable business reputation for three years after being declared bankrupt (an important point when holding positions that require an impeccable business reputation).

Therefore, although such an innovation in legislation as personal bankruptcy was primarily aimed at creating a legal and legitimate way to help an individual cope with financial difficulties and inability to pay their debts, particularly credit obligations, including foreign currency ones, in practice, the realization of this opportunity does not seem very simple or attractive.

For most credit-dependent individuals, it is simpler to pay exorbitant interest, deal with collectors, and seek other solutions to the problem than to spend a considerable amount on judicial settlement and risk their own property.

Olga Petrukhina's Law Office will provide a detailed legal consultation on debt issues, specifically by studying and evaluating your particular situation to help weigh all the "pros" and "cons" of initiating insolvency proceedings. And, if necessary, it will provide qualified assistance in drafting an application for the opening of insolvency proceedings.