Improvements to the Chilean Bankruptcy Legislation
Keeping viable businesses operating is among the most important goals of bankruptcy systems. A firm suffering from bad management choices or a temporary economic downturn may still be turned around. When it is, all stakeholders benefit. Creditors can recover a larger part of their investment, more employees keep their jobs, and the network of suppliers and customers is preserved.
According to research completed by the World Bank, a good insolvency regime should exhibit several functions. First, it should inhibit premature liquidation of sustainable businesses. Secondly, It should discourage high-risk loans.
The Chilean governments current bankruptcy legislation dates back to the early eighties. As of January, the government published new bankruptcy legislation that will come into effect within the first nine months of the 2014.
According to government officials the legislation has two objectives. First, it aims to give struggling companies greater judicial leeway to reach agreements with creditors and stay in business.
Second, it aims to resolve the problems of companies unable to avoid bankruptcy in such a way that their assets can be used in the formation of new business, rather than being frozen.
Under current legislation, bankruptcy proceedings in Chile tend to last between four and five years, costing 15% of the debtor’s assets. Creditors tend to recoup 25% of their investment, a situation that places Chile in 110th out of 183 countries in the World Bank´s resolving insolvency ranking.
Under the new legislation, liquidation proceedings will take between 7 and 24 days to get underway, and seven months to complete.
For companies wishing to avoid bankruptcy and reorganize debt, proceedings will take 12 days to launch and will last four months, with financial protection for 30 days, extendable to 90 days with creditor support.
The law also creates a mechanism for individuals with debt problems to voluntarily enter into renegotiation proceedings once they have overdue payments totaling more than 80UF (inflation-indexed units, US$3,513) on two or more overdue loans for more than 90 consecutive days.
Alternatively, the liquidation of debt, whether forced or voluntary, can take place if an individual has two or more unpaid loans, via proceedings lasting no more than four months.
These changes should drastically improve on Chile current legislation. By how much? We will need to wait until next years World Bank ´s ¨Doing Business¨ index is released to see.