Second chance law for hospitality entrepreneur with €780K debt

The Challenge

When the last of his three restaurants closed in March 2021, the entrepreneur had accumulated personal debt of 780,000 euros that was materially impossible to repay. The debt was not the product of negligence or poor decision-making: it was the direct result of eighteen months of mandated closures, capacity restrictions, and collapsed demand in the hospitality sector during the COVID-19 pandemic.

The liabilities were distributed across three groups of creditors with different legal natures and treatment. Secured debts — a mortgage over the main premises and a personal guarantee on an ICO-backed loan — totalled 310,000 euros and were backed by specific assets. Ordinary financial debts — credit lines, business credit cards, and a kitchen equipment lease — reached 290,000 euros. Public-sector debts owed to the Tax Agency (Agencia Tributaria) and Social Security, partially deferred during the pandemic under the exceptional relief mechanisms introduced at that time, amounted to 180,000 euros.

The situation was technically that of a good-faith debtor in a state of insolvency. But without specialist assistance, Spain’s Second Chance Law — formally the Insolvency Act as reformed by Royal Decree-Law 1/2015 and subsequently integrated into the Consolidated Insolvency Act (TRLC) via Act 16/2022 — presented a procedural complexity that had led many debtors to abandon the process halfway or to be excluded from discharge on technical grounds.

Our Approach

The BMC team, with the direct involvement of insolvency law specialist Raúl Herrera García, approached the case using the out-of-court payment mechanism (BEPI) as a precursor to the subsequent insolvency proceeding, which is the standard route for natural persons and small business owners whose liabilities fall below the threshold that would justify a full ordinary insolvency procedure.

Eligibility analysis and liability strategy. The first step was to verify that the client met all the conditions for access to the second chance mechanism: a good-faith debtor, no conviction for property or economic offences in the preceding ten years, no rejection of suitable employment during the process, and no prior use of the benefit within the last ten years. The clean criminal record and the well-documented good faith in the origin of the debt — contracts, invoices, annual accounts filed with the Mercantile Registry — formed the solid foundation of the case.

We then classified the liabilities by their treatment under the TRLC, distinguishing between dischargeable debts (ordinary and subordinated) and debts potentially non-dischargeable by virtue of their public-sector nature or real security. The Tax Agency and Social Security debt warranted specific attention: while the Court of Justice of the European Union had supported in its case law an interpretation favouring the discharge of public-sector debt in the framework of the Second Chance Directive, the position of the Spanish administration remained restrictive and required a precise legal argument.

Out-of-court negotiation with creditors. We convened three creditor meetings under the BEPI structure. The strategy for each group was tailored. With the financial creditors, we presented a realistic payment plan based on the debtor’s demonstrable economic capacity — income from employment after returning to the labour market as an employee — and a calculation of the expected recovery value in an insolvency scenario versus an out-of-court agreement. With the mortgage creditor, we negotiated a deed in lieu of foreclosure that eliminated the mortgage shortfall. With the public-sector creditors, we applied for deferral and instalment payment of the tax debt within the regulatory deadlines, which reduced the immediately enforceable amount and improved the viability of an overall agreement.

The three meetings concluded without unanimous agreement — the typical outcome of the BEPI mechanism when public-sector creditors are involved. This outcome, far from being a failure, is the anticipated procedural step that opens the gateway to the subsequent insolvency proceeding with an application for debt discharge.

Subsequent insolvency and discharge of unmet liabilities. Once the subsequent insolvency proceeding was opened before the competent Commercial Court, we submitted the application for discharge of unmet liabilities (EPI), documenting compliance with all good-faith requirements and the objective impossibility of meeting the remaining debt. The insolvency administrator’s report was favourable. The court granted a full discharge of all dischargeable unmet liabilities, including the public-sector debt, relying on the integrative interpretation of Art. 491 TRLC in line with Directive 2019/1023 of the European Parliament.

Results

Total debt discharged amounted to 780,000 euros. The process, from the initial consultation to the final discharge order, was completed in eight months.

The client resumed entrepreneurial activity in February 2025, this time as a minority partner in a hospitality establishment managed by his former business partner, with no requirement to contribute his own capital or guarantee financial transactions. The discharge obtained does not remain indefinitely on the Public Insolvency Register: once the statutory period has elapsed, his registered position will be clear.

This case illustrates the role that the Second Chance Law can play when correctly applied: not as a mechanism for evading obligations, but as an instrument of economic reintegration for good-faith debtors whose life circumstances — in this case, a global pandemic — have led them to a state of insolvency that does not reflect their conduct or their genuine capacity.