Debt discharge

What it means

Debt discharge releases a natural person from their debts by court decision. It comes either through personal bankruptcy, where the assets are sold, or through a five-year payment schedule covering a set part of the unsecured claims. A sole trader clears business debts this way too.

It is for people, not companies: an s. r. o. is never discharged, its route is bankruptcy and deletion from the commercial register. Nor does everything vanish: maintenance for a minor child, damages for harm to health or for harm caused intentionally, and criminal fines stay enforceable.

Debt discharge is not restructuring. In restructuring the business carries on and agrees a plan with its creditors to repay at least part of the debts, whereas discharge is meant for a person who cannot repay and needs a fresh start.

How it works in practice

The petition goes through the Centre for Legal Aid, which represents the debtor or assigns a lawyer. The court appoints a trustee and publishes its decision in the Commercial Bulletin; the creditor deadlines run from that publication.

A creditor has little time: without filing the claim with the trustee it takes nothing from the distribution, and after the discharge it can never collect. The balance is then covered by an impairment allowance and closed by a write-off.

When a client’s customer enters discharge through bankruptcy and the receivable included VAT, we prepare a correction of the taxable amount, so the client is not left paying VAT on an invoice that will never be settled. At the same time we watch the deadline for filing the claim, since the two run in parallel.

What to watch out for

A discharge covers only debts from before the decisive day, and it can be repeated only after ten years. A sole trader who carries on trading at a loss builds fresh arrears at the Social Insurance Agency within months, and nobody writes those off.

Payments to chosen creditors, relatives for example, shortly before insolvency or the discharge petition are reviewed by the trustee and can be challenged. The money then goes back into the estate, and the debtor risks the court seeing a dishonest intent in the proceedings.