Few were caught off guard by the sudden adoption of the change in the implementation of insolvency and enforcement deductions. In order to shed as much light as possible on this issue, we have prepared this summary article. Should you still have further confusion, please keep an eye on the website Payroll Academy, where dates will be gradually announced with webinars on this topic.
With effect from 1 October 2024, there are fundamental changes in the implementation and calculation of enforcement and insolvency deductions. This is based on Act No. 252/2024 Coll., which amends the following legislation:
- Act No. 182/2006 Coll., on bankruptcy and methods of its resolution (Insolvency Act),
- Act No. 99/1963 Coll., Code of Civil Procedure,
- Act No. 120/2001 Coll., on bailiffs and enforcement activities (the Enforcement Code),
- Act No. 119/2001 Coll., which lays down rules for cases of concurrent enforcement,
- Act No. 312/2006 Coll., on insolvency practitioners.
The adopted amendments are the implementation of the Directive of the European Parliament and the Council of the EU.
The problem with the legislation in question is the short period of time between its publication in the Collection of Laws and the entry into force of the individual legal regulations amended by the aforementioned Act. There was also a lack of communication of the planned changes to the public.
The changes will have an impact both on the debtors themselves and on the work of payroll accountants, as the changes were not communicated previously and were made "in secret", so to speak. Act No. 252/2024 Coll. was published in the Collection of Laws on 3 September 2024, but the changes it introduces will take effect on 1 October 2024. Many accountants therefore had no idea until the last minute what they would be facing when calculating their payroll deductions for the month of October 2024. Unfortunately, even debtors had no idea that some of them would receive a smaller payout for the month of October.
Changes in enforcement deductions
"Rule 4 foreclosures"
A fundamental change in the execution deductions based on the amendment to the Code of Civil Procedure is that two thirds of the remaining net wages are always deducted if the following two conditions are met:
- there are 4 simultaneous enforcement orders for the recovery of outstanding monetary debts on the wages of the debtor,
- the order for enforcement or the order containing the notice of enforcement has been served on the payer.
The rule of 4 foreclosures does not apply in the following cases:
- the debtor shall prove to the paymaster that he has been granted an old-age pension, a second- or third-degree disability pension or an orphan's pension (should the debtor cease to meet this condition, he shall notify the paymaster without delay) and at the same time.
- unless one third of the remainder of the debtor's net salary is equal to the sum of the monthly out-of-pocket expenses and the monthly insolvency administrator's remuneration due in the insolvency proceedings for the period of the instalment plan, increased by
on value added tax. This is currently the amount 1 089 Kč.
If the "4 executions rule" is applied in calculating the deductions from wages, then the second third of the remainder of the net wages will be added to the first third. If the debtor has any priority claims, the second third will first satisfy those claims and then the remainder of the second third will be added to the first third.
Rule 4 executions are not affected by statutory deductions, agreed deductions from wages or the assignment of another monetary claim, e.g. for an overpayment from an annual tax settlement.
Borrowers who have 4 or more non-priority foreclosures will be hit the hardest, as until now they have only been deducted from the first third. From now on, they will also be deducted from the second third.
Postponement of the effects of enforcement decisions until the following month
Effective October 1, 2024, the employer is required to defer the effect of the enforcement decision until the following month for these actions:
- start of execution deductions,
- the end of the execution deductions (we will see what practice brings, as this would mean that if the effect of the decision is postponed at the end of the execution deductions, one extra payment will be made, which will then be returned to the debtor),
- change in the execution deductions (change in the amount of debt, change in the amount not to be seized - birth of a child, marriage, divorce, termination of maintenance of a person, change in the amount of the monthly instalment - maintenance).
The postponement of the effect of the enforcement decision until the following month does not apply:
- depositing (beginning and end)
- payment of the amount deposited
Changes in insolvencies
The period of debt relief is shortened
With effect from 1 October, the period of debt relief will be reduced from 5 years to 3 years.
The redemption limit of 30 % claims is deleted
The obligation to repay 30 % of the registered claims is cancelled. As from 1 October 2024, each debtor will have an individual claim settlement rate. Several criteria will be assessed (debtor's assets, ability to repay).
Suspension and extension of debt relief
The debtor may apply for interruption or extension of the insolvency arrangement if he or she is unable to satisfy the amount intended to meet the insolvency arrangement. Extension of the arrangement may also be granted by a court decision if the debtor has breached his/her obligations. The interruption may be for up to 6 months, the extension may be for 12 months, and in special cases it may be for 6 months longer.
Possibility to repay also from the uncollectible amount
The debtor now has the possibility to pay his debts also from the funds that fall within the non-chargeable amount. However, the debtor's subsistence needs must not be jeopardised.
Employers' cooperation
The amendment to the Insolvency Act introduces mandatory cooperation for employers of debtors. They are obliged to disclose information on the debtor's income to the insolvency administrator without delay.
Payment of ordinary maintenance in the opening phase of insolvency proceedings
Until now, if insolvency proceedings were initiated against the debtor, the employer stopped sending the enforcement deductions to the beneficiaries and started depositing the deductions until the insolvency court decided to approve or reject the insolvency.
With effect from 1 October 2024, ordinary maintenance will be sent to the beneficiary at this stage of the insolvency proceedings, i.e. it will not be deposited.
The reason for the above-mentioned legislation was to ensure that the beneficiary would have access to ordinary maintenance even during the opening phase of the insolvency proceedings and would not remain without such funds for several months.
Deduction from the advance on insolvency costs
The insolvency costs advance will now be deducted with effect from 1 October 2024 until the insolvency is approved. This advance is intended to cover the insolvency practitioner's remuneration and out-of-pocket expenses due for the period until the insolvency is confirmed.
The amount that the employer will deduct each month will be communicated to the obligor. It will be a fixed amount. The amount must not exceed the maximum amount of the deduction laid down in Article 7a of Decree No 313/2007 Coll. on the insolvency administrator's remuneration and reimbursement of his or her out-of-pocket expenses.
Currently, the maximum allowable amount is CZK 1,800; in the case of debt relief granted on the basis of a joint proposal of the spouses, the amount is CZK 2,700. These amounts may be increased by VAT if the insolvency administrator is a VAT payer.
This deduction will be a priority claim and will be deducted from the second third, immediately after the satisfaction of the normal maintenance.
Deductions in the opening phase of insolvency proceedings:
1) Ordinary maintenance - deducted and sent
2) advance payment of insolvency costs - deducted and sent
3) other receivables - to be deposited
At the end of the opening phase of the insolvency proceedings and after the approval of the insolvency arrangement, the total amount of the insolvency costs advance deducted in the opening phase, the amount still to be satisfied by the debtor and the amount to be deducted in the insolvency arrangement will be calculated
