Payments fall behind, collection notices pile up and the feeling that there is no way out grows day by day. If this sounds familiar, you are not alone, and the law provides solutions both for those who owe money and for those who are owed it.
In Portugal, financial default has two sides. On one side is the debtor, whether an individual or a company, who can no longer pay their debts. On the other is the creditor, who needs to recover what they are owed. This article explains both, clearly and rigorously, so that you can make informed decisions before the situation gets worse.
How do you know if you are insolvent?
In legal terms, a debtor is insolvent when they are unable to meet their obligations as they fall due. What matters is a genuine inability to pay, not a temporary cash-flow squeeze. A company is also considered insolvent when its liabilities clearly exceed its assets.
Some warning signs:
- Taking out new credit to pay off old credit;
- Repeatedly missing mortgage, car loan or other loan repayments;
- Receiving collection letters, payment orders or court summonses;
- Having your salary, bank account or assets seized;
- For companies, recurring delays in paying suppliers, Social Security or the Tax Authority.
Insolvency: what it is and what the options are
Insolvency is governed by the Portuguese Insolvency and Corporate Recovery Code (CIRE). It does not mean the “end of the road”. Used properly, it is a legal mechanism for organising payment to creditors and, for individuals, for making a fresh start.
Personal insolvency: discharge of remaining debts
For individuals, the most important tool is the discharge of remaining debts (exoneração do passivo restante), which releases the debtor from any debts not paid in the insolvency proceedings.
In broad terms, it works as follows:
- Insolvency petition, filed by the debtor or by a creditor;
- Application for discharge, in which the debtor undertakes to comply with certain rules;
- Assignment period, currently three years, during which the debtor hands over to a trustee the part of their income that exceeds what is needed for a minimally dignified living;
- Final discharge order, which extinguishes the debts still outstanding, subject to the exceptions provided by law.
There are conditions to meet. The debtor must act in good faith, must not have concealed assets or information and must cooperate with the insolvency administrator. Certain debts, such as maintenance obligations, fines or compensation for intentional unlawful acts, are not covered by the discharge.
Corporate insolvency: deadlines and liability
For companies, the law requires them to file for insolvency within 30 days of becoming aware of the situation (or of the date on which they should have become aware of it). Those in management must keep this deadline firmly in mind. If they fail to meet it, directors risk having the insolvency classified as culpable, with consequences that may affect their personal assets.
Before reaching insolvency, viable companies have alternatives such as the Special Revitalisation Process (PER) and the Out-of-Court Corporate Recovery Regime (RERE), which allow them to negotiate with creditors and avoid liquidation.
The sooner you seek legal help, the more solutions there are. The later you leave it, the fewer options remain.
Before insolvency: renegotiation is still possible
Not every situation requires court proceedings. Banks are required to support customers at risk of default through PARI (Action Plan for the Risk of Default) and, subsequently, PERSI (Out-of-Court Procedure for the Settlement of Default Situations). Under these procedures, you can negotiate an extension of the term, a reduction in instalments or the consolidation of loans. A lawyer can accompany the negotiation and make sure that every step respects your rights.
Debt recovery: how to collect what you are owed
If you are a creditor, whether an individual, a company or a service provider, you know that an unpaid debt is a loss that worsens over time. Debt recovery brings together the legal routes for collecting what you are owed, from the simplest to the most demanding.
Stage 1: out-of-court collection
The first step is usually a formal demand to the debtor: a letter identifying the debt, the amount, the deadline for payment and stating that legal action will be taken. Many debts are settled at this stage, saving time and costs. Alternatively, an instalment payment plan can be proposed, provided it is formalised in writing.
Stage 2: payment order and declaratory action
If amicable collection fails, you can use the payment order procedure (injunção), a simplified and more economical route to obtain an enforceable title for lower-value contractual debts. If the debtor files an objection, the case goes to court. For higher-value or more complex debts, the route is a declaratory action.
Stage 3: enforcement proceedings
With an enforceable title, such as a judgment, a payment order with enforceable effect or a document recognised as such by law, enforcement proceedings can begin, seeking the seizure of the debtor’s assets: bank accounts, wages, property or vehicles. The law protects part of the debtor’s income from seizure, so it is worth assessing their real ability to pay in advance.
What if the debtor becomes insolvent?
In that case, the creditor must lodge their claim in the insolvency proceedings within the deadline set in the judgment. Those who do not lodge a claim risk not being paid. The ranking of the claim (secured, preferential, ordinary or subordinated) determines the order of payment, and this is where a sound legal strategy makes a difference.
Watch out for limitation periods
Debts become time-barred. Limitation periods vary according to the nature of the claim: the general period is 20 years, but rents, interest and periodic payments become time-barred after 5 years, and debts for essential services such as water, electricity or communications have much shorter periods. Letting time pass can cost you the right to collect.
Debtor or creditor: what to do now?
If you owe money, gather your contracts, statements and any notices received, make a complete list of your debts and income, and seek advice before signing any agreement. Do not ignore court notices, as the deadlines to respond are short.
If you are owed money, keep the invoices, contracts and correspondence exchanged, and do not let the debt “go cold”. Every month of waiting reduces the chances of recovery.
Frequently asked questions
Does insolvency mean losing all your assets?
Not always. As a rule, the insolvent party’s assets are seized and sold to pay creditors, but some assets cannot be seized and, for individuals, the discharge of remaining debts allows a fresh start.
Can insolvency be avoided?
In many cases, yes. Renegotiating with the creditor, PERSI and, for companies, PER or RERE are alternatives to consider first.
How long does it take to recover a debt?
It depends on the amount, whether there is an objection and the debtor’s assets. Out-of-court collection can be resolved within weeks; enforcement proceedings can take months or longer.
Speak to a lawyer before the situation gets worse
Every case is unique, and the best solution depends on the figures, the deadlines and the goals of each person or company. Our team analyses your situation rigorously and in confidence and proposes the safest course of action, whether to get out of over-indebtedness or to recover an outstanding debt.
Book your consultation today and take the first step towards solving the problem.
This article is for information purposes only and does not replace personalised legal advice. Legislation may change, so you should confirm the current position with a lawyer.