BizCLIR

El Salvador has no bankruptcy practice as such. Apparently, the delays that plague court proceedings in El Salvador (described in the section on collateral) account for most of the debtors’ lack of interest in filing insolvency cases, because they find sufficient protection in the normal delays attendant to creditors’ attempts to collect debts and enforce guaranties through normal court processes. In countries where bankruptcy is more common, it is usually triggered by creditors’ foreclosure procedures against debtors, who then seek the protection of the bankruptcy to halt the foreclosures.

The law also limits the parties who may initiate bankruptcies in El Salvador. The country’s laws permit only voluntary bankruptcy, filed by the debtor. Creditors may not file involuntary bankruptcy against the debtor.

Lawyers interviewed for this assessment remembered a mere handful of insolvency proceedings in the country within the last generation. The legal possibilities that encompass such proceedings include concurso or concurrencia, or consumer bankruptcies, under the Civil Code; quiebra, or merchant bankruptcies, under the Code of Commerce; and suspensiones de pago, or merchant reorganizations, under the Code of Commerce. No lawyers interviewed ever had handled an insolvency proceeding let alone considered such practice part of their own expertise or normal workload, nor did they know of anyone else who did.

Insolvency proceedings in countries where modern bankruptcy laws are effectively and forcefully applied take on a character lacking in El Salvador.

First, modern insolvency regimes depend on creditors’ effective remedies in collecting debts, most notably by foreclosing on collateral guaranties, to drive honest debtors to seek relief in insolvency proceedings. El Salvador’s debtors lack such an incentive, because creditors cannot collect debts in a manner efficient enough to pressure debtors into insolvency proceedings and, even if they did, the insolvency proceedings do not shelter debtors from creditors’ pursuit of guaranties against collateral.

Second, modern bankruptcy laws in other countries operate in tandem with collateral guaranty laws to provide two major elements lacking in El Salvador: the clear demarcation of priorities among creditors and the vindication of those priority claims. Most importantly, such legally mandated respect for creditors’ security interests in movable collateral gives creditors with a guaranty real leverage against an insolvent debtor. No doubt exists as to the creditors’ right to certain collateral or to the creditors’ ability to foreclose on that collateral. By seeking bankruptcy in such regimes, debtors can buy time otherwise not available to them. Debtors’ respite in modern insolvency regimes is temporary, however. Bankrupt debtors either gain their secured creditors’ agreement to the debtors’ plans—if any—for reorganization, or acquiesce in the creditors’ possession of collateral assets by turning them over to the court as the first step in bankruptcy. Salvadoran insolvency and collateral laws entirely lack such internal pressure points and therefore cannot impose the proper leverage on modern creditor-debtor relations.

Finally, El Salvador’s insolvency laws do not provide debtors with a full and final discharge of their debts. Although the statutes refer to rehabilitación for debtors, they do not require all creditors to participate by binding their claims to discharges granted within the insolvency.

El Salvador’s lack of bankruptcy practice hampers business and investment by leaving creditors without an effective ultimate remedy against defaulting debtors. The typical credit dialectic runs from (1) default by debtor to (2) foreclosure against collateral by creditor, forcing (3) bankruptcy by debtor that temporarily stops foreclosures but leads to recognition of secured creditors’ collateral claims and means that all debts will be resolved in the relatively short-term. Without bankruptcy, then, creditors cannot foreclose even debts guarantied against movable collateral, let alone assert unsecured claims with any hope of payment in a realistic time frame. The attendant increased risk to any lender reduces the supply of credit offered to potential borrowers and weeds out a number of them even when their collateral should be sufficient to guaranty a needed loan.