Changes in over-indebtedness law: towards better protection for debtors

Over-indebtedness is a relatively recent phenomenon in our legal system. Since the Neiertz Act of 1989, there has been a steady succession of reforms. This constant evolution aims to adapt the law to new economic and social realities.

The emergence of over-indebtedness law in France

Over-indebtedness has not always been governed by specific legal provisions. Prior to 1989, debtors in difficulty could only benefit from the grace periods provided for in the Civil Code or from one-off moratorium laws.

Act no. 89-1010 of 31 December 1989, known as the "Neiertz Act", marked the real birth of the law on overindebtedness in France. For the first time, it defined over-indebtedness as "the debtor in good faith is clearly unable to meet all of his non-business debts that are due and payable"..

This law introduced a dual procedure:

• An out-of-court settlement phase before an administrative commission
• Civil receivership proceedings before the court of first instance

Several major reforms have subsequently shaped this law:

• Act no. 95-125 of 8 February 1995, which modifies the division of tasks between judges and commissions
• Law No. 98-657 of 29 July 1998 on combating exclusion, which takes account of the development of "passive" over-indebtedness
• Law no. 2003-710 of 1 August 2003, which introduced the personal recovery procedure
• Law no. 2010-737 of 1 July 2010 reinforcing consumer protection
• Act No. 2016-1547 of 18 November 2016 on the modernisation of the justice system for the 21st century, which emphasises the role of commissions

Major trends in recent reforms

Three major trends characterise recent developments in over-indebtedness law.

Diversion of proceedings

The Act of 18 November 2016 marks a decisive step in the diversion of dealing with over-indebtedness. Over-indebtedness commissions can now impose measures without prior court approval. Article L.733-7 of the French Consumer Code provides that the commission may, at the debtor's request, impose a personal recovery plan without judicial liquidation.

The judge will only intervene if the measures imposed by the commission are contested. As stated in article L.733-10 of the French Consumer Code : "A party may challenge the measures imposed by the commission before the protection litigation judge, within a time limit set by decree..

Speeding up case processing

Various reforms have been introduced to speed up the processing of cases. The law of 26 July 2013 on the separation and regulation of banking activities authorises the judge hearing an appeal to open a personal recovery procedure directly.

The Act of 17 March 2014 reduced the duration of conventional recovery plans to seven years instead of eight, allowing debts to be written off more quickly.

Strengthening the role of over-indebtedness commissions

The role of the commissions has been considerably strengthened. They can now impose measures that were previously subject to approval by the judge, such as partial debt write-offs. Article L.733-4 of the Consumer Code allows them to impose measures such as the reduction of home loans after the sale of the main home.

This reinforcement is intended to relieve the courts of their workload. According to parliamentary studies, over 90,000 applications for homologation were sent to the courts each year, with a homologation rate of over 98%.

The special case of the EIRL and former professionals

The introduction of the EIRL (Entrepreneur Individuel à Responsabilité Limitée) has changed the relationship between insolvency proceedings and overindebtedness.

Article L.711-7 of the French Consumer Code states that the law on overindebtedness applies to the EIRL. "on the grounds of over-indebtedness resulting solely from non-business debts"..

The Court of Cassation ruled that "the mere fact that the affected assets of a sole trader with limited liability come under the procedure instituted by Titles II to IV of Book VI of the Commercial Code [...] was not such as to exclude the debtor's unaffected assets from the procedure for dealing with overindebtedness". (Civ. 2e, 27 Sept. 2018).

For former professionals, article L.631-5 of the French Commercial Code prevents the opening of over-indebtedness proceedings for one year after ceasing trading. After this period, only household debts can be dealt with under the over-indebtedness procedure.

Protection for guarantors and co-obligated parties: how is it changing?

Developments in over-indebtedness law have not always been favourable to guarantors. Case law has established that discounts granted to the principal debtor do not benefit the guarantor (Civ. 1re, 13 Nov. 1996).

This questionable case law position departs from the principle of the accessory nature of the surety provided for in article 2290 of the Civil Code. It contrasts with the law governing companies in difficulty, which, under article L.626-11 of the French Commercial Code, allows guarantors who are natural persons to take advantage of the provisions of the insolvency plan.

However, the law of 1 August 2003 brought an improvement by allowing guarantors who are not directors to benefit from the over-indebtedness procedure. Article L.711-1 of the Consumer Code now includes "the undertaking he has given to guarantee or jointly and severally discharge the debt of a sole trader or of a company where he was not, in law or in fact, a director of that company"..

Current and future challenges

Overindebtedness law still faces a number of challenges:

1. The prevention of overindebtedness remains inadequate. The attempt to establish a national register of consumer credit was censured by the Constitutional Council (decision no. 2014-690 DC of 13 March 2014).
2. The link between residential leases and overindebtedness remains problematic despite the improvements made by the Elan law of 23 November 2018.
3. The situation of guarantors needs to be reconsidered. The current system can lead to situations where the guarantor is held more severely than the principal debtor.
4. Protection of the principal residence has been strengthened with the introduction of theArticle L.711-1 paragraph 2 of the Consumer Codebut may limit the overall assessment of the debtor's financial situation.

The firm can analyse your personal debt situation and advise you on the best strategy to adopt. The constant evolution of over-indebtedness law makes it essential to have the expertise of a specialist lawyer to navigate these complex procedures effectively, including enforcement proceduresand defend your interests to the best of our ability. Do not hesitate to contact the firm for an initial assessment appointment.

Sources

• Consumer Code, articles L.711-1 to L.761-2
• Law no. 89-1010 of 31 December 1989 on the prevention and settlement of difficulties linked to the excessive indebtedness of individuals and families
• Law no. 2003-710 of 1 August 2003 on town planning and urban renewal
• Law no. 2016-1547 of 18 November 2016 on the modernisation of the justice system for the 21st century
• Civ. 2e, 27 September 2018, n°17-10.090, published in the bulletin
• Civ. 1st, 13 November 1996, no. 94-12.856, Bull. civ. I, no. 492
• Constitutional Council, decision no. 2014-690 DC of 13 March 2014