The [Second Chance Law](/en/legal/second-chance-law/) allows any individual in Spain to cancel debts they can no longer pay. You do not need to have run a business. You do not need to be an entrepreneur. This guide explains, without unnecessary technical jargon, how the mechanism works in 2026, who can use it, and what to expect at each stage of the process.
If you already know you are a salaried employee and want to see the procedure from that specific perspective, we have a dedicated guide on cancelling debts as an employee under the Second Chance Law. If you are self-employed, the Second Chance Law guide for the self-employed covers the specifics of that profile. This article covers the general framework for individuals who need a starting point.
Legal Framework 2026: Ley 16/2022 and the EPI Reform
The Second Chance Law in Spain was introduced by Ley 25/2015 of 28 July, which partially transposed the European restructuring and insolvency directive. For seven years, the mechanism was criticised for its rigidity: few people could access it, procedures were slow, and discharge of public debt was virtually impossible.
All of that changed with Ley 16/2022 of 5 September, which fundamentally reformed the Consolidated Insolvency Act (TRLC). The main changes were:
- Direct access to consecutive insolvency proceedings without having to exhaust the out-of-court procedure in all cases.
- Partial discharge of public debt for the first time, with specific thresholds for AEAT and Social Security.
- Enhanced protection for the main residence through a 3-to-5-year payment plan.
- Simplification of the good faith requirement, making the process more accessible to debtors in genuinely difficult situations.
- Reduction of the EPI revocation period from five to three years.
The consolidated text of Ley 16/2022 is available at the BOE. Statistics from the CGPJ on insolvency proceedings — which record the sustained increase in Second Chance Law applications since 2022 — are available from the General Council of the Judiciary’s statistical portal.
Who Can Apply: Requirements for Individuals
Article 487 TRLC sets out the good faith requirements, which are the gateway to the mechanism. There are four cumulative conditions:
1. Being an individual. The Second Chance Law is not available to commercial companies (S.L., S.A., etc.). Only natural persons may apply: employees, self-employed persons, pensioners, unemployed individuals, students, or any private individual.
2. Being in a state of insolvency. The debtor must demonstrate that they cannot regularly meet their payment obligations, or that they foresee they will be unable to do so within the next three months (imminent insolvency). It is not necessary to have already stopped paying; a well-founded forecast is sufficient.
3. Total debts below 5 million euros. This limit covers virtually all individual debtors. Only those with liabilities of an almost commercial scale fall outside it.
4. Acting in good faith. This is the requirement most extensively analysed in case law. The TRLC specifies it through several negative conditions: not having been convicted of offences against property, the economic order or the public treasury in the previous ten years; not having obtained second chance protection in the previous five years; not having concealed or destroyed assets; and not having breached the duty of cooperation with the insolvency administrator or the information and documentation obligations.
The Supreme Court has clarified in various rulings — including STS 381/2019 and subsequent decisions interpreting the 2022 reform — that good faith must be assessed holistically and not mechanically. An accounting error, a tax debt, or a delay in filing tax returns does not automatically prevent discharge if the debtor’s overall conduct is consistent with the honesty required.
Procedure Phases Step by Step
The Second Chance Law procedure has two main routes, both converging on the same outcome: the Discharge of Unsatisfied Liabilities (EPI, Exoneración del Pasivo Insatisfecho).
Phase 1: PAED Application Before a Notary
The Special Procedure for Individual Debtors (PAED, formerly known as the Out-of-Court Payment Agreement) is initiated with an application before a notary. The debtor must provide:
- Inventory of assets and rights with valuations.
- Complete list of creditors with amounts and due dates.
- Last three Personal Income Tax (IRPF) returns and current income documentation.
- Bank statements for the past twelve months.
The notary appoints an insolvency mediator from the Register of Mediators and Mediation Institutions. The mediator has two months (extendable by one further month) to draw up a payment plan and submit it to creditors.
Phase 2: Creditor Negotiations
The payment plan may include haircuts (reduction of principal), deferrals, and assignment of assets in payment of debts. For approval it requires the affirmative vote of creditors representing at least 60% of the liabilities (or 75% if it includes haircuts exceeding 25%).
If the plan is approved, the debtor fulfils it during the agreed period and, at the end, is released from the remaining debts included in the agreement.
Phase 3: Consecutive Insolvency Proceedings
If the plan is not approved or the debtor has insufficient assets to propose a viable plan, the notary notifies the commercial court of the failure and consecutive insolvency proceedings are opened. This is the formal judicial procedure.
In consecutive insolvency proceedings, if the debtor has no significant assets, the judge may declare insolvency and simultaneously grant the EPI immediately (known in practice as “express insolvency with EPI”). If there are assets to liquidate, the liquidation phase opens before discharge.
Phase 4: Discharge of Unsatisfied Liabilities (EPI)
The EPI is the judicial ruling that releases the debtor from unpaid debts. It can be:
- Definitive EPI: granted immediately if the debtor has no assets or income above the subsistence minimum. It is irrevocable except in cases of fraud.
- Provisional EPI with payment plan: discharge is granted but the debtor takes on a 3-to-5-year payment plan for debts that the law does not permit to be directly discharged (such as public debt above the thresholds).
Insolvency Mediation vs. Direct Court Route
The 2022 reform introduced an important option: in certain circumstances, the debtor can go directly to court without going through the notarial PAED process. This applies when the debtor has no assets or income to justify an out-of-court negotiation, or when the composition of the liabilities makes any agreement unviable.
The direct route is faster but also less certain: the outcome depends entirely on the judge’s assessment of good faith and willingness to grant the EPI. Prior mediation, though slower, creates a negotiating track record that judges view positively when assessing the debtor’s good faith.
In practice, lawyers specialising in insolvency law assess on a case-by-case basis which route is most appropriate, taking into account the liability profile, the composition of creditors, and the debtor’s financial position.
The EPI: Which Debts Are Discharged and Which Are Not
This is the core of the entire mechanism. The Discharge of Unsatisfied Liabilities cancels debts that remain unpaid after the procedure, but not all of them.
Debts That ARE Discharged
- Personal loans, consumer credit and credit cards (including revolving credit).
- Mortgages to the extent they exceed the appraised value of the liquidated property (residual mortgage debt).
- Debts with suppliers and service providers.
- Personal guarantees given.
- Debts with property owners’ communities.
- Public debt (AEAT, TGSS) above the legal thresholds: under the 3-year payment plan, public debt exceeding €10,000 with AEAT and €10,000 with Social Security is discharged.
Debts That Are NOT Discharged
Article 489 TRLC sets out a closed list of debts excluded from discharge:
- Maintenance: child and spousal support payments, both those accrued before and those due in the future.
- Non-contractual liability for personal injury or death: compensation for accidents, bodily harm or death.
- Criminal convictions: fines and civil liabilities arising from criminal sentences.
- Public debt below the thresholds: the first €10,000 with the tax authority and the first €10,000 with Social Security are not dischargeable under the 3-year payment plan (they are partially dischargeable under the 5-year plan).
- Debts incurred after the application: those taken on by the debtor after the procedure has started.
It is important to understand that these limits are the legal minimums. Public creditors have room to negotiate conditions within the PAED framework, and in practice some courts interpret the good faith requirements with more or less strict criteria in relation to the origin of non-dischargeable debts.
The 3-to-5-Year Payment Plan as an Alternative to Liquidation
One of the most significant changes introduced by Ley 16/2022 is the consolidation of the payment plan as a route to retain assets — particularly the main residence — while still obtaining discharge of the remaining debts.
The plan can run for 3 years (for the majority of cases) or 5 years if the debtor has payment capacity above the subsistence minimum. During that period, the debtor devotes all available income above the non-attachment threshold (equivalent to the minimum interprofessional wage plus 50% of any excess) to paying non-dischargeable debts.
If the debtor fully complies with the plan, they obtain definitive EPI over the remainder of the liabilities. If they breach the plan without justification, the EPI may be revoked.
The main advantage of the payment plan over immediate liquidation is that it does not require selling the main residence if the debtor can meet the mortgage payments. For more detail on this issue, the guide on mortgages and main residence in the Second Chance Law analyses the different scenarios in depth.
Main Residence: How to Protect It
Protection of the main residence was one of the most frequently raised demands during the years of applying the original law. Ley 16/2022 introduced specific mechanisms to prevent the debtor from losing their home as a condition for obtaining discharge.
The basic framework is as follows:
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If the debtor can pay the mortgage and the lender agrees to continue the contract, the property does not enter the insolvency liquidation. The debtor continues paying the mortgage outside the procedure.
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If the debtor cannot pay the mortgage, the property is sold or liquidated. However, the residual mortgage debt — the amount that remains outstanding after the sale if the price does not cover the full loan — is discharged under the EPI.
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In liquidation proceedings, the judge may authorise direct sale of the property (without auction) to maximise the price and reduce the residual debt.
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Ongoing mortgage enforcement is automatically stayed from the moment the PAED or consecutive insolvency proceedings are applied for, which in many cases provides sufficient time to negotiate or for the insolvency procedure to manage the sale in an orderly manner.
Cost and Duration of the Process
Costs vary depending on the route chosen and the complexity of the case:
| Item | Indicative estimate |
|---|---|
| Solicitor fees (full process) | €1,500 – €4,000 |
| Insolvency mediator fees | €0 – €1,200 (regulatory scale) |
| Notary fee (PAED) | €200 – €400 |
| Court fees | €0 (natural persons exempt) |
Natural persons are exempt from paying court fees in all insolvency proceedings, which significantly reduces costs compared to other procedures. The main cost is therefore specialist legal representation.
As for duration:
- PAED with agreement: 2 to 4 months from application to formalisation of the plan.
- PAED without agreement + consecutive insolvency with no assets: 6 to 12 months in total.
- Consecutive insolvency with assets to liquidate: 12 to 24 months, depending on the court and the inventory.
CGPJ data show that commercial courts in large cities (Madrid, Barcelona, Valencia) carry a heavier caseload, which can extend timescales. In medium-sized cities, timeframes are generally shorter.
Common Mistakes That Derail the Procedure
The Second Chance Law fails more often due to debtor mistakes than for lack of legal requirements. The most common:
Concealing assets or income. This is the most serious mistake. Any concealment — even of a low-balance bank account or a vehicle — destroys the good faith requirement and results in refusal or revocation of the EPI. The mediator and insolvency administrator cross-reference declared information with the Land Registry, DGT, AEAT and bank statements.
Failing to declare all debts. Omitting creditors, even by oversight, can jeopardise the procedure. The list of creditors must be complete from the outset; correcting it late generates distrust.
Starting the procedure too late. Many debtors wait until they are completely blocked — with active enforcement orders, frozen accounts, or no income — before consulting a lawyer. Starting the process at the stage of imminent insolvency, before widespread payment default materialises, gives much more room to negotiate and better protects assets.
Proceeding without specialist legal advice. The Second Chance Law procedure requires precise documentation, strict procedural deadlines and knowledge of case law on good faith. Attempting to manage it without a lawyer specialising in insolvency law — or with an adviser who has no practical experience in this area — increases the risk of unfavourable outcomes.
Confusing the Second Chance Law with bank renegotiation. The Second Chance Law is a legal procedure with legal effects on all creditors. It is not a bilateral negotiation with a bank. Beginning informal conversations with financial institutions while the PAED is being processed can complicate the procedure if not managed correctly.
For an overview of the current case law position, including the Supreme Court’s recent doctrine on public debt and good faith, refer also to the Second Chance Law guide for debtors.
The Second Chance Law is not a magic solution or a shortcut for those who have made irresponsible decisions. It is a legal mechanism designed so that individuals who have reached a situation of genuine insolvency — due to an economic crisis, illness, divorce, or a prolonged run of bad luck — can rebuild their financial situation without carrying indefinitely the burden of debts they will never be able to repay.
The first step is always a concrete analysis of the specific case: the composition of the liabilities, the nature of the debts, the financial position and income prospects. With that information on the table, a specialist lawyer can determine whether the Second Chance Law is the right route and which specific modality is most suitable for each situation.
Want to know whether your situation meets the requirements? At BMC we have the Second Chance Law team of Raúl Herrera García, Of Counsel specialising in insolvency law with over a decade of experience in individual insolvency proceedings. The first consultation is free and no-obligation.
