When debt begins to dictate the rhythm of life and financial obligations start pushing people to the margins of society, a natural question arises: is there still a way out? Rokas Puodžiūnas, a lawyer with the law firm AVOCAD, comments on one of the realistic solutions—personal bankruptcy .
Today, large debts affect both people with lower incomes and those who are financially better off. A failed business, ill-considered financial decisions, inherited obligations, or unexpected life situations—there can be many reasons. However, the consequence is usually the same: limited opportunities to live with dignity, actively participate in economic life, and plan for the future.
Although bankruptcy is still often associated solely with the end of a business, in reality it is a legal tool available to individuals as well. The personal bankruptcy framework, in effect in Lithuania since 2013, offers the opportunity to get back on one’s feet: to manage debts, return to financial stability, and avoid long-term social decline.
“It’s not an easy or quick path, but if done right, it can be a real opportunity to regain control of your life,” says the lawyer.
Petition for Bankruptcy
According to AVOCAD attorney Rokas Puodžiūnas, before filing for bankruptcy in court, an individual must first notify all of their creditors. This must be done in writing no later than one month before the petition is filed with the court. This is important because the court will later require proof that this obligation was properly fulfilled.
Only after this one-month period following notification of the creditors has elapsed may a petition be filed with the court to initiate bankruptcy proceedings.
Under the Law on Personal Bankruptcy (FABĮ), an individual may initiate bankruptcy proceedings only if they meet all of the following conditions: they are insolvent, their insolvency arose in good faith, and there are no other obstacles provided for by law.
What constitutes insolvency?
The law defines insolvency as a situation in which a person is no longer able to meet their overdue financial obligations, and the total amount of those obligations exceeds 25 times the minimum monthly wage (MMA). At the time of this article’s publication, the MMA in Lithuania is 1,153 euros, so insolvency is established when debts exceed 28,825 euros.
However, according to an AVOCAD lawyer, the numbers alone are not enough—the courts take a broader view of the situation. Insolvency is not merely a temporary financial hardship, a refusal to pay, or simply the fact that the value of one’s assets is less than the amount of debt.
For insolvency to be recognized, all of the following conditions must be met:
- The total amount of debt exceeds 25 times the minimum monthly wage;
- The payment deadlines for the debts have passed;
- The individual has no realistic means of repaying the debt, either from assets or from income.
According to Rokas Puodžiūnas, it is very important to understand that the assessment is not merely a formality. If a person, despite having significant debts, earns sufficient income and is able to pay them off within a reasonable period of time, they are not considered insolvent. “On the other hand, even a high income does not automatically mean solvency. If it is insufficient to meet obligations, insolvency may be declared. Therefore, in each case, the actual financial situation is assessed: income, obligations, and necessary living expenses,” notes the AVOCAD lawyer.
A person's integrity
The lawyer emphasizes that it is very important to understand that the legal framework in force in Lithuania is designed to help only honest individuals restore their solvency. Therefore, honesty is one of the essential conditions for filing for personal bankruptcy.
This is assessed in two respects: whether the person, when applying to the court, disclosed all information in good faith, and whether the person became insolvent while acting in good faith.
Dishonesty may serve as grounds for refusing to initiate bankruptcy proceedings only if it had a material impact on the onset of insolvency—in other words, a causal link must be established between the dishonest acts and the resulting financial situation.
In practice, dishonesty most often manifests itself when a person:
- provides inaccurate or misleading information about their financial situation (debts or assets);
- conceals important facts;
- does not disclose all of its liabilities or sources of income.
Courts may also deem a person to be acting in bad faith if it is determined that they deliberately allowed their debts to accumulate—for example, by borrowing money in the expectation that their obligations would later be written off, or by acting in a highly irresponsible manner with regard to their finances.
However, each situation is assessed on a case-by-case basis. The assessment takes into account not only the actual financial situation, but also the individual’s behavior and motives—whether they genuinely sought to resolve the issues or, on the contrary, exacerbated them.
For example, the mere fact that a person has entered into numerous consumer credit agreements does not necessarily imply dishonesty. It is important to determine:
- what the borrowed funds were used for (whether for essential needs or not);
- whether there were other ways to meet those needs;
- whether the borrowing was proportionate and justified;
- what steps the person took to prevent the debt from increasing.
Even a careless assessment of one’s financial circumstances does not in itself imply dishonesty—if there is no evidence that the person acted intentionally or with gross negligence, bankruptcy proceedings may be initiated.
It is also important to note that good faith is generally assessed over a three-year period preceding the filing of the petition. If, during this time, the individual acted in good faith but was unable to restore solvency, they should not be prevented from initiating bankruptcy proceedings.
However, in exceptional cases, the court may consider a longer period—for example, if it is clear that the insolvency was caused by prior dishonest acts.
When does a court refuse to initiate bankruptcy proceedings?
Even in cases of substantial debt, bankruptcy proceedings will not always be initiated. The law specifies clear circumstances under which a court may refuse to do so.
First of all, according to the lawyer, bankruptcy will not be permitted if a person’s insolvency was caused by their harmful habits—such as alcohol abuse, drug abuse, or compulsive gambling.
The court may also refuse to hear the case if the person has been convicted of certain financial crimes and that conviction has not yet been expunged, and if those specific acts contributed to the person’s insolvency.
Bankruptcy proceedings cannot be repeated too frequently—if less than 10 years have passed since the conclusion or termination of the previous bankruptcy, a new case will not be filed.
Finally, an obstacle may arise if a person is associated with a company (a legal entity with unlimited civil liability) against which bankruptcy proceedings have already been initiated.
In other words, according to an AVOCAD lawyer, bankruptcy is an option, but not in all cases—the court always considers not only the debts but also the circumstances surrounding their origin.
What happens after bankruptcy proceedings are initiated?
If a court declares a person insolvent and finds no obstacles, bankruptcy proceedings are initiated against them. A bankruptcy administrator is then appointed to oversee the entire process and ensure that it proceeds smoothly and fairly.
Next, a solvency restoration plan is drawn up—a clear agreement on how and over what period of time creditors will be repaid. This plan must be approved by the creditors and subsequently confirmed by the court. The plan is implemented over a period of 3 years. Once all payments specified in the plan have been made, the process is concluded with an official act.
Important considerations before deciding to file for bankruptcy
Lawyer Rokas Puodžiūnas warns that personal bankruptcy is not an “easy way” to get rid of debts. It is a mechanism designed to help honest people return to a normal financial life while also protecting the interests of creditors. Once a solvency restoration plan is implemented, any remaining unpaid debts may be discharged. However, he notes that it is important to understand that not all debts are eliminated. Debts are not written off if they result from criminal activity, child support, fines imposed by the state for violations, or debts secured by a pledge or mortgage, provided an agreement is reached to retain the property.
Furthermore, these debts are not even taken into account when determining whether a person meets the criteria for bankruptcy.
Therefore, before deciding to file for bankruptcy, it is important to realistically assess your situation: where the debts came from, whether they can be repaid within a reasonable time frame, and whether the court will consider you to be a person of good faith. You also need to understand that your debts will not be eliminated immediately—you will have to live under financial restrictions for some time. For these reasons, it is always worth consulting with lawyers before going to court.