Consumer Insolvency in Lithuania – a Status Quo Update

With the Law on consumer insolvency in Lithuania (the “Law”) having come into force only in March 2013, following its adoption in May 2012, and in light of the now proposed amendments to the Law, we find ourselves at a more than suitable timing to draw few initial conclusions on the introduction of the consumer insolvency in Lithuania, that the international insolvency law community will hopefully find of interest. The amendments now proposed by the Government of Lithuania are mainly focused on a proper implementation of the European Commission‘s Recommendation on a new approach to business failure and insolvency (2014/135/EU) (the “Commission Recommendation”) in Lithuania. Accordingly, the key issues proposed by the Government would be as follows:

(1) shortening the timeframe of bankruptcy procedures (from up to five to a fixed term of three years);

(2) the possibility for an individual to retain certain types of real estate during bankruptcy;

(3) differentiation of creditors into groups; and

(4) the possibility for the individual in bankruptcy to assume new financial obligations during bankruptcy procedures.

We shall briefly present to the international insolvency and restructuring community the initial developments in relation to consumer insolvency ever since its introduction in Lithuania, the lessons already learned, if any, and the reasoning and contents of the amendments currently proposed to the Law as well as, to the extent possible, the broader implications thereof.

Virginity lost

Following years and years of all sorts of mixed feelings in relation to consumer insolvency regime including, among others, shying off, reluctance, hesitation, resistance but also jealousy and temptation, Lithuania in 2012 finally adopted its own Law allowing individuals to undergo consumer insolvency, rather than have to move abroad to be able to benefit from such solution, with Latvia and United Kingdom having been the most popular destinations for personal insolvency prior to adoption of the Law. The fact that since the Law came into force on 1 March 2013 until the moment of writing of this article more than 700 individuals have chosen to undergo the personal insolvency procedure in Lithuania, considering the countries’ population is a clear proof such regime was necessary. Furthermore, as indicated by the Ministry of Economy of Lithuania in the traveaux preparatoires to the currently proposed amendments discussed further below, it is estimated that many more individuals may be interested in going through the consumer insolvency in Lithuania, but the lack of legal certainty in certain areas discourages them from doing so.

Lessons of (dis-)honesty learned?

From the outset of the functioning of the personal insolvency regime it was stressed only honest and fair individuals should be allowed to benefit from the mechanism. In line with this idea, the purpose of the Law was formulated as providing the means for the restoration of solvency of honest individuals and businessmen ensuring satisfaction of creditors’ claims and finding the right balance between the rights of the debtor and the interests of his creditors. Accordingly, insolvency of an individual is declared when he / she is insolvent and there are no grounds for denial of declaring the insolvency of an individual. An individual is deemed insolvent in a situation where he is unable to discharge his liabilities exceeding 25 minimum monthly wages, approved by the Government of the Republic of Lithuania, as they mature. Simplifying the grounds when a personal insolvency case can be denied, they can be formulated as follows:

When before the insolvency is declared it turns out the individual is in fact not insolvent (as defined by the Law);

When the individual has been dishonest and became insolvent as a result of entering into transactions detrimental to the interests of his creditors or dishonest ones;

When the individual became insolvent because of his addictions (gambling, alcohol substance abuse, etc.);

When the individual became insolvent due to his certain criminal activities;

When his last personal insolvency case took place less than ten years ago;

When the individual is a member of an unlimited liability legal entity undergoing bankruptcy.

In a landmark decision from November 2014, interpreting the “dishonest debtor” criterion above, the Supreme Court of Lithuania stated that individual’s honesty must be verified from two perspectives – firstly, whether he was honest when initiating the insolvency case, and, secondly, whether he was honest while becoming insolvent. The petitioner is to be deemed dishonest when circumstances in relation to origins of his debts as well as debtor’s behaviour with his finances or any other related issues give grounds to conclude he deliberately allowed the debts to form in order for the not satisfied creditors’ claims to be eventually written off. Therefore, dishonesty may be declared based on, both, the specific activities (knowingly undertaking obligations one is not going to fulfil, misleading one’s creditors as to his financial stance, etc.) as well as lack of activities whereby no enough efforts are put into settling with creditors which results in the individual becoming insolvent. An individual who had been too passive and not taken enough measures to improve his solvency is to be considered as dishonest, when it is established the individual did in fact comprehend and intentionally failed to improve his financial stance. However, with reference to the factual background of the aforementioned landmark case, where the individual quit her job, refused each of the 19 (!) job offers suggested by the jobcentre, failed to prove she engaged in job-hunting, took short-term loans, increased her debts for residential amenities, failed to sell or lease her real estate and move into a smaller home, took no actions to rearrange her debt payments were all concluded to be not sufficient to establish the debtor’s dishonesty and deny consumer insolvency. The lower instances’ courts found the refusal of the numerous job offers to be material for establishment of debtors dishonesty. They however were overturned by the Supreme Court which held that mere existence of the aforementioned circumstances does not prove debtor’s dishonesty, for other matters that might have been relevant, i.e. the economic crisis, overall increase of unemployment, real estate price volatility, the fact that the particular lady studied for a degree to eventually land a better paying job, etc., should also have been considered. Accordingly, since examination of all the material circumstances would also require the analysis of the factual situation, the Supreme Court, who only concerns itself with the matters of law, rather than those of facts, ordered a retrial at the court of appeal. Between the lines of the judgement, we can draw the most obvious conclusion – that the standard for establishing debtor’s dishonesty is high and the courts should be proactive in these kinds of situations.

Amendments proposed

On a different note, based on the lessons learned from the first three years of functioning of the Law, the amendments now proposed whilst implementing the Commission Recommendation also seek to fix certain drawbacks of the current regime in Lithuania.

In particular, the shortening of the period of implementation of the insolvency plan, more formally, and using the more precise language of the Law itself, known as the “Plan for individual’s creditors’ claims resolution and solvency rehabilitation”, from up to five to a fixed term of three years shall hopefully minimise the still existent forum shopping, whereby individuals prefer to head abroad for them to undergo personal insolvency, since timeframes there are shorter (See Table below). In addition, such continuing forum shopping is unfavourable to the local creditors, whose participation in the personal insolvency procedure conducted abroad is complicated. Furthermore, as also pointed out by the Ministry of Economy of Lithuania, studies in different countries tend to show an inverse correlation between the length of the established insolvency plan implementation period and the degree of success in its implementation. Finally, and at a danger of stating the obvious – shorter insolvency period will allow the individuals to get back on track faster.

Secondly, the amendments now proposed, also on the basis of the recommendations of the International Monetary Fund and experience of the foreign jurisdictions, would allow the insolvent debtor to retain certain mortgaged property, provided all three following circumstances occur:

It is the only residential property of the insolvent debtor;

It is indispensable to satisfy the needs of the insolvent debtor and his dependents;

Monthly payments to the mortgage creditor would be lower than potential monthly rental fee, if the only residential property were sold or this residential property is material for profitable business of the insolvent individual.

The World Bank’s Report on the Treatment of the Insolvency of Natural Persons shows certain jurisdictions do allow the insolvent individual to keep his home if this alternative is more economically beneficial to the creditors rather than the sale thereof. Situations like that are particularly common when the real estate depreciates and living expenses are low.

Thirdly, following the Commission Recommendation, the insolvency plan would be voted for in separate groups of secured and non-secured creditors. This proposal is in line also with the Legislative Guide on Insolvency Law of the United Nations Commission on International Trade Law (UNCITRAL). The decision on the approval of the plan would be deemed adopted when a simple majority of the creditors from both secured and non-secured groups whose claims represent more than half off all the claims of the particular group, respectively, vote in favour of the approval.

Fourthly, in order to allow the insolvent individual to engage in business activities, he would be allowed to take on certain new financial obligations for the conduct of such activities. Such situation would hopefully allow to satisfy the creditors’ claims in a greater extent, since the profit received would be added to the bankruptcy estate.

Finally, certain more minor adjustments are suggested to simplify the sale of assets of the bankruptcy estate. In particular, it is suggested that an auction of the mortgaged property takes place only if the value of the property is higher than the auction’s expenses (currently all the mortgaged property must be sold via auctioning) and that agreements for the sale-purchase of both movable and immovable properties as well as sales through auctioning out of the bankruptcy estate pursuant to the proposed amendments would not need to be concluded before a public notary.

Concluding remarks

The introduction of the personal insolvency regime in Lithuania had been long overdue, forcing individuals with financial difficulties to move abroad where they were able to take advantage of such solutions. Now that the Law has been introduced and operating for almost three years debates continue whether it achieves the desired balance between the rights of debtors and creditors. Anyway, it is without question that the amendments currently proposed will indeed improve the regime.


Country / Regime

(Maximum) Years for implementation of the consumer insolvency plan






Up to 3,5


Up to 5 (currently) / 3 (proposed)

Commission Recommendation




By Sebastian Okinczyc, GLIMSTEDT Associate

The article published in Eurofenix Winter 2015-16, Issue 62  

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