INSOLVENCY OF INDIVIDUALS

INSOLVENCY OF INDIVIDUALS

With the adoption of the Insolvency of Individuals Act (the “IIA”), Bulgarian law introduced a general mechanism for regulating the relationship between an insolvent individual and his or her creditors, in connection with Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019.

The Act was adopted in Bulgaria in June 2025, while its implementation was made conditional upon the establishment and commissioning of the Insolvency Register. The Register became operational on 3 August 2026, and proceedings under the IIA are now an effective legal mechanism through which a debtor acting in good faith and in a state of insolvency may seek judicial settlement of his or her relations with creditors.

Prior to the adoption of the Act, individuals whose liabilities were not related to commercial or business activities did not have access to a general procedure through which, in the event of a permanent inability to pay their debts, they could settle their relations with all creditors and, subject to certain conditions, obtain a discharge of part of their outstanding liabilities.

In practice, this meant that enforcement proceedings could continue for years, without any realistic prospect either of creditors being fully satisfied or of the debtor permanently overcoming his or her financial difficulties. Where a debtor was unable to pay his or her debts, the debtor was required to defend against each individual claim separately.

Pursuant to Article 112 of the Obligations and Contracts Act, monetary claims against individuals are extinguished upon the expiry of a ten-year limitation period, irrespective of any interruption thereof, except where the obligation has been deferred or rescheduled. The limitation period, however, does not operate automatically ex officio—the expiry of the limitation period must be invoked and established before the court.

The Insolvency of Individuals Act establishes proceedings aimed at reconciling the interests of a debtor acting in good faith and in a state of insolvency with those of his or her creditors, with a view to achieving the fair and proportionate satisfaction of creditors’ claims. The Act does not provide for the automatic cancellation of accumulated liabilities; rather, it establishes judicial proceedings for their settlement, taking into account both the creditors’ interest in obtaining satisfaction to the extent possible and the need for a debtor who has become permanently insolvent for reasons beyond his or her control to have the opportunity to obtain a discharge of the unsatisfied portion of the liabilities and restore his or her financial stability.

REQUIREMENTS FOR COMMENCEMENT OF INSOLVENCY PROCEEDINGS

One of the key features of proceedings under the IIA is that they may be commenced only upon an application by the debtor. Unlike insolvency proceedings under the Commerce Act, a creditor has no right to compel an individual into insolvency proceedings.

This legislative approach is directly related to the nature of the legal framework. Personal insolvency provides the debtor with an opportunity to seek judicial resolution of a state of permanent insolvency, rather than constituting an additional means of compulsory enforcement for the collection of creditors’ claims.

Not every financial difficulty, however, justifies the commencement of insolvency proceedings. The Act establishes a specific statutory test for insolvency, requiring that, for a period exceeding 12 months, the debtor has been unable to fully or partially perform one or more due and payable monetary obligations whose aggregate value exceeds ten minimum monthly wages.

Accordingly, insolvency within the meaning of the Insolvency of Individuals Act presupposes not merely the existence of overdue liabilities, but a permanent and objective inability to perform them. Temporary financial difficulties, a short-term lack of liquidity or a single default, in themselves, are insufficient.

Particular importance in the regulation of individual insolvency is attached to the requirement of good faith, which constitutes a fundamental prerequisite for access to the proceedings and for the application of the legal consequences provided for by the Act.

The Act associates good faith not only with the manner in which liabilities were assumed, but also with the debtor’s subsequent conduct and his or her attitude towards the interests of creditors. Under the statutory definition, a debtor acts in good faith where he or she assumes obligations in accordance with his or her assets and income and does not, through his or her conduct, prejudice the interests of creditors.

Accordingly, the assessment of good faith is not limited to the formal existence of insolvency, but requires an examination of the debtor’s conduct both at the time the obligations were assumed and during the period preceding and throughout the insolvency proceedings.

The Act sets out circumstances in which a debtor is deemed not to be acting in good faith, including where:

1. the debtor has been convicted of breach of trust, an offence against creditors, or an offence against the financial, tax or social security systems, unless the debtor has been rehabilitated;

2. the debtor is capable of working but, during the year preceding the filing of the application for commencement of insolvency proceedings, has, without good reason, failed to engage in employment or other income-generating activity, irrespective of the manner in which such activity is assigned or performed;

3. during the three years preceding the filing of the application for commencement of insolvency proceedings, the debtor has breached an obligation to declare income or assets;
4. during the three years preceding the filing of the application for commencement of insolvency proceedings, or after the filing of the application, the debtor has disposed gratuitously of assets of significant value, including by establishing a security interest—such as a mortgage or pledge—in respect of another person’s obligation;

5. the debtor has submitted false or incomplete information or documents, or has intentionally obstructed the exercise of the powers of the court or the insolvency administrator; or

6. any other circumstances specified in Section I of the Act are present.

In this way, the legislature makes access to the insolvency framework conditional upon the debtor having acted properly and not having used the proceedings as a means of prejudicing creditors or obtaining a discharge of obligations assumed in manifest disregard of his or her actual financial capacity.

The creditors in the insolvency proceedings are persons holding claims against the debtor, irrespective of the type or date on which such claims arose. Creditors’ claims are satisfied in the order prescribed by law, with the following claims enjoying priority:

1. claims secured by a mortgage or pledge;
2. claims in respect of which a right of retention is exercised;
3. costs and expenses of the insolvency proceedings;
4. maintenance claims;
5. public-law claims of the State and municipalities; and
6. other claims.

PROCEDURE

The application for commencement of insolvency proceedings is filed by the debtor with the district court having jurisdiction over the debtor’s current address.

The debtor is required to provide detailed information concerning his or her assets, income, bank accounts, creditors and liabilities, transactions carried out, as well as pending judicial and enforcement proceedings.

Where the court establishes that the statutory requirements have been met, it commences insolvency proceedings and appoints an insolvency administrator. The Insolvency Register records the name, telephone number, address and email address of the appointed insolvency administrator, as well as the date of his or her appointment and discharge.

Following the commencement of insolvency proceedings:

• individual enforcement proceedings against assets included in the insolvency estate are stayed, and creditors exercise their rights within the insolvency proceedings;
• judicial and arbitration proceedings concerning proprietary civil and commercial claims against the debtor are stayed, subject to certain exceptions;
• the debtor may not enter into new transactions involving the management or disposal of his or her assets;
• the debtor may not make payments without the insolvency administrator’s authorisation. This restriction does not apply to the payment of current liabilities necessary to meet the debtor’s basic living needs;
• performance of obligations owed to the debtor is received by the insolvency administrator;
• payments made for the benefit of the debtor are made into the debtor’s special bank account specified in the decision commencing the insolvency proceedings;
• the commencement of new judicial or arbitration proceedings concerning proprietary civil and commercial claims against the debtor is inadmissible, except where necessary for the protection of the rights of third parties who own assets forming part of the insolvency estate; and
• no security measures may be imposed over the debtor’s assets under the Civil Procedure Code or the Tax and Social Security Procedure Code.

The insolvency estate does not include assets exempt from enforcement against the debtor under the Civil Procedure Code, including items intended for ordinary use, necessary food and fuel, the debtor’s dwelling where neither the debtor nor any member of his or her household with whom the debtor lives owns another dwelling, and other protected assets.

Accordingly, the purpose of the proceedings is not to deprive the individual of the means necessary for his or her ordinary existence and that of his or her family.

Particular importance in the proceedings is attached to the possibility of adopting a repayment plan. Under such a plan, relations with creditors may be restructured through the deferral or rescheduling of payments, the use of future income, the liquidation of specified assets, partial reduction of liabilities, or a combination of different mechanisms.

Upon implementation of the repayment plan, all liabilities in respect of which the plan provides for full or partial discharge are extinguished.

CONSEQUENCES OF THE PROCEEDINGS

The court declares the debtor insolvent where, within the statutory period, no repayment plan has been proposed, or where the proposed plan has not been admitted for consideration by the creditors’ meeting or has not been approved.

By its decision declaring the debtor insolvent, the court:

• declares the debtor insolvent;
• deprives the debtor of the right to manage and dispose of the assets included in the insolvency estate; and
• orders the commencement of the liquidation of the assets included in the insolvency estate and the distribution of the proceeds thereof.

Once sufficient funds have been accumulated in the insolvency estate, the insolvency administrator prepares a distribution schedule for the available funds among the creditors.

Where the liabilities have been paid or the insolvency estate has been exhausted, the court terminates the insolvency proceedings.

Where no repayment plan has been approved and the debtor’s assets have been liquidated, the unsatisfied claims of creditors are discharged upon the decision terminating the insolvency proceedings on the grounds that the insolvency estate has been exhausted becoming final and binding.

Where the debtor has no assets, the liabilities specified in the application for commencement of insolvency proceedings are discharged upon the expiry of a three-year period from the date on which the decision declaring the debtor insolvent becomes final and binding, provided that: A) there are no grounds establishing that the debtor acted in bad faith; and B) no assets are discovered which were unknown at the time the proceedings were terminated.

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