Complete Guide to Insolvency for Individuals and Legal Entities

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Financial difficulties can befall any person or company regardless of experience and initial success. When debts become unbearable and creditors demand immediate repayment, many don't know where to turn or how to act correctly. The insolvency procedure may seem frightening and complicated, but it's actually a legal way to solve financial problems and start life with a clean slate. In this comprehensive guide, we'll examine all aspects of insolvency in Latvia for individuals and legal entities.

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What Is Insolvency and When Does It Occur

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Insolvency is a financial state when a person or company cannot fulfill their monetary obligations to creditors within the established deadlines. This isn't just a temporary shortage of funds for a few days, but a systematic inability to repay debts. According to Latvia's Insolvency Law, which can be found on the portal https://likumi.lv, an individual is considered insolvent if their debt amount exceeds 5,000 euros and the delay exceeds 90 days.

For legal entities, the criteria differ slightly. A company is recognized as insolvent when its obligations exceed the value of assets or when it cannot fulfill payment obligations for three consecutive months. Moreover, it's important to understand the difference between temporary financial difficulties and genuine insolvency. If a company has assets that can be sold to repay debts, or there's a real plan to restore solvency, bankruptcy may not be necessary.

Signs of approaching insolvency include constant delays in employee salaries, inability to pay rent for premises, accumulation of tax debts to the State Revenue Service, and systematic use of new loans to repay old debts. If you notice these symptoms in your situation, it's better to act proactively and seek specialist consultation rather than wait until the situation becomes critical.

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Types of Insolvency Procedures in Latvia

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Several different procedures exist in Latvia for dealing with insolvency, and the choice of a specific option depends on the debtor's circumstances. For individuals, the main procedure is personal bankruptcy, which allows debt write-off after going through a certain process. This procedure usually lasts from 12 to 36 months, during which the debtor transfers all income exceeding the established minimum to the administrator, and in return receives protection from creditor demands.

Legal entities can go through company bankruptcy procedure, which includes enterprise liquidation and distribution of remaining assets among creditors. An alternative to full bankruptcy is the out-of-court settlement procedure, when the debtor negotiates with creditors about debt restructuring without court participation. This option suits those who see the possibility to restore business provided debt payment conditions change.

There's also a protection from insolvency procedure that gives a company time to develop a restructuring plan under court protection. During this period, creditors cannot make demands or initiate forced collection. The term of such protection usually ranges from three to six months, and during this time the company must either reach an agreement with creditors or proceed to bankruptcy.

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Bankruptcy Procedure for Individuals

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The personal bankruptcy process begins with filing an application to the district court at the debtor's place of registration. The application must describe the financial situation in detail, list all creditors with debt amounts indicated, and provide a complete list of property. The state fee for considering such an application is 140 euros, but if the applicant doesn't have funds even for this amount, they can file a petition for exemption from fee payment.

After accepting the application, the court appoints an insolvency administrator who will manage the process. The administrator verifies all information provided by the debtor, compiles a creditor register, and evaluates existing property. If the debtor has real estate, a car, or other valuable assets, the administrator organizes their sale for partial debt repayment. At the same time, the debtor retains the right to housing and minimum necessary things for life.

Throughout the entire bankruptcy process, the debtor is obligated to transfer all income exceeding the established tax-free minimum to the administrator, which in 2025 amounts to 430 euros for one person plus 215 euros for each dependent. This period is called the realization period and can last from 12 to 36 months depending on the specific situation. At the end of this period, the court issues a decision on debt discharge if the debtor has conscientiously fulfilled all procedure requirements.

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Bankruptcy Procedure for Legal Entities

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Company bankruptcy is a more complex and lengthy process compared to personal bankruptcy. An application to recognize a legal entity as insolvent can be filed both by the company itself through its manager or liquidator, and by any creditor whose claims haven't been satisfied. It's important to note that company managers are obligated to file a bankruptcy application within 30 days after it became obvious that the company cannot fulfill its obligations.

Failure to fulfill this obligation can lead to managers' personal liability for losses caused to creditors after the moment when the application should have been filed. The state fee for considering a legal entity bankruptcy case is 280 euros. After accepting the application, the court appoints an administrator who takes control of all company operations and begins the asset inventory process.

The insolvency administrator conducts a detailed check of the company's financial condition, analyzes all transactions over the last three years regarding their legality, and identifies possible signs of deliberate bankruptcy. If suspicious transactions are discovered, such as asset withdrawal before bankruptcy or preferential payments to individual creditors, the administrator can challenge these transactions in court. The entire company bankruptcy process takes from 18 to 36 months, and sometimes longer in complex cases.

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Required Documents for Insolvency Procedure

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Document preparation is a critically important stage on which the success of the entire procedure depends. For individuals, an impressive package of papers will need to be collected:

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Mandatory documents for individuals:

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Completed application for recognition as insolvent according to the established form. Copy of the applicant's passport or identity card. Extract from the resident register about the declared place of residence. Complete list of all creditors with debt amounts, contract numbers, and contact details indicated. Copies of credit agreements, court decisions on collection, and other documents confirming obligations.

Income certificate for the last six months from the workplace or tax declaration for the self-employed. Extract from the Land Register about the presence or absence of real estate. List of movable property with approximate value indicated, including cars, equipment, jewelry. Bank statements for all accounts for the last 12 months. Documents confirming marital status and presence of dependents, if applicable.

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Additional documents for legal entities:

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Extract from the commercial register issued no earlier than 30 days before submission. Annual reports and balance sheets for the last three years of company operation. List of all enterprise assets with their estimated value, including real estate, equipment, inventory. Register of accounts receivable with debtors and amounts indicated. Copies of employment contracts with all employees and information about salary arrears.

Minutes of shareholders' or stockholders' meetings on the decision to file a bankruptcy application. Documents on concluded lease, leasing, and lending agreements. Tax declarations and certificates of debt to the State Revenue Service. Explanatory note with description of reasons that led to insolvency.

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Debtor's Rights and Obligations During the Procedure

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When the court makes a decision to start the insolvency procedure, the debtor gains both certain restrictions and important rights. The main right consists of protection from creditor actions. From the moment of case initiation, all enforcement proceedings are suspended, creditors cannot start new court proceedings for debt collection, and penalty and fine accrual stops. This gives the debtor breathing room and the opportunity to focus on going through the procedure.

An individual has the right to keep the minimum funds necessary for life, which we mentioned earlier. Also, the only housing of up to 100 square meters cannot be taken away if the debtor and their family live in it, and this housing's value doesn't exceed the average market value for the region. Basic necessities, clothing, basic household appliances, and tools necessary for work also remain with the debtor.

However, there are also serious obligations. The debtor is obligated to fully cooperate with the administrator, provide all requested information and documents within established deadlines. Property cannot be hidden, large purchases cannot be made, or new loans taken without coordination with the administrator. Any attempt to deceive creditors or the administrator can lead to refusal of debt discharge and even criminal prosecution for fraud.

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Cost and Timeframes of Insolvency Procedure

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The financial side of the insolvency procedure concerns everyone who finds themselves in a difficult situation. The state fee for filing a personal bankruptcy application is 140 euros, but these are only initial expenses. The insolvency administrator's remuneration is formed from a percentage of realized assets and managed funds, usually ranging from 5 to 15 percent depending on case complexity.

If the debtor has absolutely no property and income, the state can appoint an administrator at budget expense, but such cases are considered individually. For legal entities, the state fee is 280 euros, and the administrator's remuneration can reach substantial sums, especially if the company had large turnover and many assets. On average, expenses for an administrator in company bankruptcy range from 3,000 to 15,000 euros.

Regarding timeframes, personal bankruptcy takes from 12 to 36 months with standard process flow. The first three months go to preparatory procedures, property evaluation, and creditor register formation. Then the realization period begins, when property is sold and funds are distributed among creditors. Legal entity bankruptcy usually lasts from 18 to 48 months, depending on company size, number of creditors, and complexity of asset structure.

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Consequences of Bankruptcy for Individuals

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Going through personal bankruptcy procedure has both positive and negative consequences that need to be known in advance. The main plus is that after successful completion of the procedure, most debts are written off completely. A person gets the opportunity to start financial life anew without the burden of old obligations. However, there are debts that aren't written off even in bankruptcy.

Such obligations include alimony for child or former spouse support, fines and compensation for harm caused to health or property of other people as a result of a crime, as well as student loans in some cases. Information about going through bankruptcy procedure is entered into credit history and remains there for five years after procedure completion. This can significantly complicate obtaining new loans, mortgages, or even renting housing.

For three years after bankruptcy procedure completion, a person cannot hold managerial positions in companies, be a board member or auditor. The ability to register new enterprises in one's name is also restricted. When attempting to travel abroad, problems may arise if there are unpaid obligations not covered by bankruptcy procedure. Some employers check candidates' credit history, especially for positions related to finance.

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Consequences of Bankruptcy for Legal Entities

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Company bankruptcy means its complete liquidation and exclusion from the commercial register. All enterprise assets are sold by the administrator, and the proceeds are distributed among creditors according to the sequence established by law. First, expenses for the bankruptcy procedure itself and administrator's remuneration are covered. Then salary arrears to employees for the last three months are paid, but not more than 3,000 euros per employee.

After this, secured creditors' claims are satisfied, meaning those whose claims are backed by pledge or mortgage. Tax obligations to the state are at the next priority level. Lastly, remainders are distributed among unsecured creditors, such as suppliers of goods and services. In practice, unsecured creditors often receive nothing, as funds are insufficient even to cover priority claims.

Managers of a bankrupt company may face personal liability if it's proven they acted in bad faith or didn't fulfill the obligation to file a bankruptcy application in time. In such cases, directors may be obligated to repay part of the company's debts from personal funds. Participation in bankruptcy as a manager is also entered into the register and can negatively affect reputation in business circles.

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Alternatives to Bankruptcy and Ways to Avoid the Procedure

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Bankruptcy should be considered as a last resort when other options have already been exhausted. Several alternative ways exist to solve the debt problem that may prove more suitable in a specific situation. Debt restructuring represents negotiations with creditors about changing repayment conditions. You can agree on extending the loan term, reducing the interest rate, or providing payment deferral for a certain period.

Debt consolidation means combining several loans into one with more favorable conditions. Some banks offer special refinancing programs for clients who find themselves in difficult situations. Selling part of assets can help repay the most urgent debts and avoid bankruptcy. Sometimes it's enough to sell a car, country house, or other property to settle accounts with main creditors.

For entrepreneurs, a good option may be attracting an investor or partner willing to invest funds in the business in exchange for a share in the company. It's also worth considering the possibility of obtaining state support through programs for small and medium-sized businesses. The State Revenue Service can provide installment payment for taxes if you show a real plan to restore solvency. The main thing is to start acting at the first signs of problems, rather than waiting until the situation becomes hopeless.

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How to Behave with Creditors During Financial Difficulties

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Many people make the mistake of avoiding contact with creditors when they cannot pay obligations. Actually, open communication often helps find a compromise solution. Banks and other financial institutions are interested in getting money back, so they're usually willing to discuss options for helping a client in a difficult situation. The main thing is to show that you have a desire to solve the problem and willingness to cooperate.

When communicating with creditors, it's important to be honest about your financial situation. Prepare a detailed list of all income and expenses to demonstrate the real picture. Offer a specific repayment plan that you can realistically fulfill, rather than promising the impossible. If a creditor sees that the debtor is acting conscientiously and making efforts to solve the problem, chances of reaching an agreement increase significantly.

All agreements with creditors must be recorded in writing. Verbal promises have no legal force and can lead to misunderstandings in the future. If a creditor has agreed to restructuring, ask to draw up an additional agreement to the credit contract with new conditions. Keep copies of all documents and payment orders confirming fulfillment of obligations according to the new schedule.

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Psychological Aspects and Life After Bankruptcy

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Financial problems and bankruptcy carry not only material but also psychological consequences. Many people experience shame, guilt, and depression finding themselves in an insolvency situation. It's important to understand that financial difficulties can happen to anyone due to job loss, illness, divorce, or economic crisis. This doesn't make a person bad or incapable, it's simply a life situation that needs to be overcome.

The bankruptcy procedure provides an opportunity to legally close old debts and start building a new financial life. After completing the procedure, it's important to draw conclusions from past mistakes and develop new money management habits. Create a budget and strictly adhere to it, set aside even small amounts for a rainy day, avoid impulse purchases and consumer loans.

Many people after bankruptcy build successful careers and businesses using the experience gained. History knows many examples of famous entrepreneurs who went through bankruptcy but then reached great heights. The main thing is not to stop and continue moving forward, using bankruptcy as a lesson rather than a sentence. If you feel you can't cope with psychological pressure, don't hesitate to consult a psychologist or join a support group.

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Insolvency is a serious financial condition requiring a balanced approach and professional help. Bankruptcy procedures for individuals and legal entities in Latvia are regulated by clear legislation and provide a legal way to solve the problem of unbearable debts. Although bankruptcy has certain negative consequences, such as restrictions on obtaining loans and holding managerial positions, it also provides an opportunity to be freed from the debt burden and start financial life anew.

A key factor for successful completion of the procedure is timely seeking help and full cooperation with the insolvency administrator. Attempts to hide property or deceive creditors lead only to worsening of the situation and possible criminal prosecution. It's always worth considering alternatives to bankruptcy, such as debt restructuring or loan consolidation, before making a final decision.

Remember that financial difficulties are temporary, and the right approach to solving the problem can not only relieve you of debts but also teach valuable lessons in managing personal or corporate finances. Don't be afraid to seek professional legal help, as qualified specialists can significantly ease the process and help avoid typical mistakes.

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Frequently Asked Questions

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Can you declare yourself bankrupt if you have stable employment and income?

Yes, having employment and income is not an obstacle to declaring bankruptcy if the debt amount exceeds 5,000 euros and the delay exceeds 90 days. However, in this case the debtor will be obligated to transfer to the administrator all income exceeding the tax-free minimum of 430 euros plus 215 euros for each dependent. The procedure may last longer, up to 36 months, precisely so that the debtor can partially repay debts from their income.

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What debts are not written off in individual bankruptcy?

Even after successful completion of bankruptcy procedure, the following obligations are not written off: alimony for child or former spouse support, fines and compensation for harm caused by intentional criminal actions, student loans in certain cases, and obligations arising from fraudulent actions. All other debts, including consumer loans, utility debts, and tax arrears, are subject to write-off.

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Can a company manager avoid liability in legal entity bankruptcy?

A manager bears no personal liability for company debts if they acted conscientiously and fulfilled all their duties, including timely filing of bankruptcy application. However, if it's proven that the manager withdrew company assets before bankruptcy, concealed information, continued taking loans with obvious insolvency, or didn't file an application within 30 days after the critical situation arose, they can be held personally liable for creditor losses.

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How many times can you declare yourself bankrupt during your lifetime?

Latvia's legislation doesn't establish a specific limit on the number of bankruptcy procedures a person can go through during their lifetime. However, repeated bankruptcy is possible no earlier than five years after completing the previous procedure. Moreover, the court will more carefully study the reasons for repeated bankruptcy and may refuse debt discharge if it considers that the debtor is abusing the procedure or acting in bad faith.

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What happens to jointly acquired property in one spouse's bankruptcy?

In one spouse's bankruptcy, only their share in jointly acquired property is included in the procedure, which by default is 50 percent. If the spouses haven't concluded a marriage contract with different share distribution, the administrator may demand sale of common property to allocate the debtor's share. The second spouse has preferential right to buy out the debtor's share at market price. If property is registered only to one spouse and acquired before marriage, it's considered that spouse's personal property.

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How Lex&Finance Specialists Can Help

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Lex&Finance company provides comprehensive legal services in the field of insolvency for both individuals and legal entities. Our specialists have many years of experience in bankruptcy case management and deep understanding of all nuances of Latvian legislation. We begin work with detailed analysis of the client's financial situation and determination of optimal problem-solving strategy. If bankruptcy is not the only way out, we'll help organize negotiations with creditors about debt restructuring or find other alternative solutions.

If it's necessary to go through bankruptcy procedure, our team will prepare all necessary documents, compile an application to court considering all legislation requirements, and will represent your interests at all stages of the process. We'll ensure proper interaction with the insolvency administrator, help protect your rights, and maximize preservation of necessary property. For company managers, we offer consultations on minimizing personal liability risks and proper execution of all procedures.

Lex&Finance also provides support to creditors, helping effectively protect their interests in bankruptcy procedures, properly execute and present claims, and challenge suspicious debtor transactions. We understand that financial problems are stressful, so we offer not only legal assistance but also psychological support at all stages of the process. By contacting us, you get a reliable partner who will help you go through a difficult period and emerge from it with the best possible result.