Our director of the Civil Litigation and Arbitration Group, Francisco Fuentes, spoke with Diario Financiero about the impact of the reform of the Insolvency and Restart Law on credit recovery for creditors.
The reform that amended Law 20,720, known as the Insolvency and Restart Law, to make way for Law 21,563, not only seeks to impact micro and small businesses, but also redefines the rules of the game for those who lend them assets, shortening deadlines and digitizing procedures.
One of the purposes of this regulation is precisely “to improve credit recovery rates for creditors,” says Francisco Fuentes, director of civil litigation and arbitration at Albagli Zaliasnik (az). He explains that, statistically—even since the Bankruptcy Law—creditors recover a higher percentage of their credits in reorganization proceedings compared to liquidation proceedings, so “the advantage of having shorter and less cumbersome proceedings also aims to reassure the credit market and the financial/banking world.”
Among the main changes introduced by the debt recovery reform is the reduction in processing times for liquidation and reorganization cases, “which previously could take more than two years and now take only months,” notes Andrés del Real, director of the dispute resolution and arbitration practice at Arteaga Gorziglia.
It also regulated financing during reorganization, “giving legal preference to those credits in the event of liquidation, which encouraged those who provide liquidity at critical moments,” explains Del Real. On the other hand, bankruptcy financial protection was extended to 120 days, which froze foreclosures and forced creditors to organize and negotiate quickly.
The Association of Banks and Financial Institutions of Chile (ABIF) asserts that these modifications “led to a significant increase in the number of people taking advantage of the renegotiation procedure before the Superintendency,” generating a “significant delay” in its review, which affects the efficiency of the collection procedure.
However, they point out that changes such as the new verification deadlines and financial protection mechanisms have had limited effects.
Benefits and challenges
Iván Cifuentes, consulting partner at Cifneg, comments that streamlining and digitizing bankruptcy proceedings makes the process more predictable and transparent, which helps creditors anticipate the timing and potential outcomes of a liquidation or reorganization. “This greater clarity in the stages and deadlines reduces the uncertainty traditionally associated with insolvency proceedings, where long delays and lack of information made strategic decision-making difficult,” says Cifuentes. In turn, he outlines that this can translate into a higher rate of asset recovery, as administrative costs are minimized and the timeframes for enforcing guarantees or obtaining payments are shortened.
However, these changes may also involve risks, says Cifuentes, given that the speed of the proceedings could limit the reaction time for negotiating or reviewing agreements, which may mean that the best payment or recovery conditions are not always achieved. He adds that digitization requires creditors to be technologically prepared to participate in electronic platforms, which could be a challenge for those who have not adapted their internal processes.
For Del Real, this reform helps balance the relationship between debtors and creditors, as it sought to give debtors real tools to restructure, avoiding liquidations that destroyed value, “and that also benefited creditors.” However, he points out that the balance was not automatic: ‘The playing field was leveled, but those who did not organize themselves lost’. The executive also highlights that these changes marked an important step forward in bringing the system closer to international standards, but warns that challenges remain, such as the eventual coordination with labor regulations to make the structuring of plans more flexible.
To assess in the future whether this mechanism meets its objectives and creates balance between debtors and creditors, Fuentes suggests that ‘the first thing we should look at is better statistics in terms of reducing the duration of new reorganization proceedings, and with that, an increase in the percentage of creditor credit recovery’. He adds that another indicator could be an increase in the number of individuals and companies undergoing this type of procedure to reorganize their assets.
