Spain's Second Chance Law — known in Spanish as the *Ley de Segunda Oportunidad* — is the mechanism by which an over-indebted natural person can be discharged from debts they have been unable to repay and start fresh. The legal framework has evolved significantly since its introduction through Royal Decree-Law 1/2015 and its conversion into Law 25/2015. The most substantive reform came with Law 16/2022 of 5 September, which transposed the EU Restructuring and Insolvency Directive (Directive 2019/1023) and fundamentally improved both the pre-insolvency restructuring tools and the conditions for obtaining debt discharge.
The Legal Framework: From Law 25/2015 to the 2022 Reform
Spain was relatively late among major European economies in introducing a personal insolvency discharge mechanism. The original 2015 legislation was criticised for being too restrictive in practice: access to discharge required either completing a full insolvency proceeding and liquidating virtually all assets, or demonstrating the impossibility of reaching an extrajudicial payment agreement. Many debtors fell through procedural gaps.
Law 16/2022 addressed these shortcomings by amending the Consolidated Insolvency Act (TRLC) to introduce the Plan de Reestructuración Extrajudicial de Deudas (PAED) — an extrajudicial debt restructuring procedure — and by relaxing some of the conditions that previously made discharge effectively inaccessible for many eligible debtors. The 2022 reform also partially opened the door to discharging public debts, previously wholly excluded from the mechanism.
Who Is Eligible: The Good-Faith Requirements
The second chance mechanism is available only to natural persons — self-employed individuals (autónomos), sole traders and private consumers. Companies, regardless of size, cannot access this mechanism.
Eligibility depends on four substantive requirements:
Current or imminent insolvency: the debtor cannot meet their payment obligations on a regular basis, or foresees within three months that they will not be able to do so. Imminent insolvency allows preventive action before defaults actually occur.
Good faith: the debtor must not have been convicted by a final judgment for crimes against property, economic crimes, labour law violations or crimes against the public treasury in the ten years preceding the application. Good faith is presumed unless a disqualifying circumstance is established.
No fraudulent insolvency: if the insolvency is subsequently declared fraudulent by the court — for example, because the debtor concealed assets — access to discharge is barred.
No prior discharge within ten years: the benefit can only be obtained once per decade.
There is no maximum debt amount — a debtor with €500,000 in liabilities can access the mechanism just as one with €50,000 can, subject to meeting the eligibility criteria.
The Extrajudicial Phase: The PAED
The PAED (Plan de Reestructuración Extrajudicial de Deudas) is the mandatory first step for most debtors. It is processed before a notary or commercial registrar and follows these stages:
Application and insolvency mediator appointment: the debtor files an application with a full asset inventory, creditor list with amounts and maturities, and an explanatory statement. The notary or registrar notifies the Registro Público Concursal (public insolvency register), which triggers a temporary stay on individual enforcement actions by creditors — typically for three months, extendable by one further month.
Negotiation period: the insolvency mediator convenes creditors and proposes a restructuring plan that may include debt write-downs (quitas), payment deferrals (esperas), asset-for-debt swaps or a combination. For the plan to bind dissenting creditors, it must secure the support of creditors representing 60% of total liabilities (or 75% if the plan includes write-downs exceeding 25% or deferrals exceeding five years).
Judicial ratification: if agreement is reached, it can be ratified by the court to extend its binding effect to non-participating or dissenting creditors. Ratification is sought before the Commercial Court (Juzgado de lo Mercantil).
The Consecutive Insolvency Proceeding and Discharge
When the PAED fails — either because agreement cannot be reached or because the debtor subsequently defaults on the agreed plan — a concurso consecutivo (consecutive insolvency proceeding) is opened. At the conclusion of this proceeding, following liquidation of the debtor’s non-exempt assets, the debtor may apply for the Exoneración del Pasivo Insatisfecho (EPI) — the formal legal discharge of unpaid debts.
The EPI takes one of two forms:
Immediate discharge: the court grants discharge in the same resolution that concludes the insolvency proceeding due to insufficient assets. The discharged debtor enters a three-year monitoring period during which the discharge can be revoked if their financial situation improves materially.
Discharge conditional on a payment plan: if the debtor has foreseeable future income, the court may condition discharge on a five-year payment plan that applies a reasonable proportion of surplus income to partially paying creditors. At the end of the plan, provided the debtor has complied, the remaining debts are definitively discharged.
What Debts Can and Cannot Be Discharged
Not all debts are dischargeable. Under Article 491 of the TRLC, the following are excluded from discharge:
- Maintenance obligations (alimony or child support)
- Criminal penalties and administrative fines
- Public debts owed to the AEAT and Social Security below the minimum non-dischargeable threshold (€10,000 per public creditor); amounts above this threshold can be discharged, subject to the 50% cap on total public debt discharged
- Employment debts owed to the debtor’s employees
- Secured debts (mortgage) up to the value of the collateral
The partial inclusion of tax debts and social security contributions in the scope of discharge — introduced by Law 16/2022 — is the reform’s most significant practical improvement for self-employed individuals who accumulated arrears with public creditors during difficult years.
The Family Home and Second Chance Proceedings
Whether the debtor’s primary residence is at risk depends on the specific circumstances. In the PAED and consecutive insolvency, the family home forms part of the assets available to creditors if mortgaged and in arrears. However, if the debtor reaches an agreement with the mortgage lender to continue paying the mortgage within the restructuring plan, the residence can be retained.
Spain’s Law 12/2023 on the right to housing introduced additional protections for vulnerable mortgage debtors — including a mandatory pre-enforcement mediation phase — which may interact with second chance proceedings to provide additional time and options.
Tax Treatment of Discharged Debt
Debt discharge has personal income tax (IRPF) implications that are frequently overlooked. In principle, extinguishment of a debt obligation generates a wealth increase that could be taxable as general income. However, the Directorate-General for Taxes (DGT) has confirmed in binding rulings (including ruling V0195-21) that discharge arising from a second chance proceeding does not generate taxable income, on the basis that no real economic enrichment occurs — the debtor simply ceases to be liable for debts that, in practice, were already uncollectable.
This position, while administratively confirmed, remains technically debated and may be subject to future challenge. Expert tax advice before concluding a second chance process is essential.
At BMC our specialist tax team is here to help. See our tax services.
