Insolvency Law at Chile

30 Apr 2025 --
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In Chile, insolvency law is governed by Law No. 20,720, which was enacted in 2014. This law aims to modernize and improve the process for dealing with insolvencies for both individuals and businesses. The law replaced the previous legal framework and introduced new mechanisms to provide debt relief, facilitate restructuring, and promote the efficient liquidation of insolvent entities.

Key Features of Insolvency Law in Chile (Law No. 20,720):

Types of Insolvency Proceedings:

Reorganization (Reorganización): Allows financially distressed businesses and individuals to restructure their debts and continue operations. It is aimed at finding a solution that benefits both the debtor and the creditors.

Liquidation (Liquidación): If reorganization is not feasible, the company or individual may be liquidated. This process involves the sale of assets to pay off creditors, and the entity is typically dissolved after the liquidation is completed.

Initiation of Proceedings:

Insolvency proceedings can be initiated by the debtor, creditors, or a public prosecutor.

The debtor can request reorganization if they are unable to meet obligations but are not completely insolvent. The court will determine whether the debtor is eligible for reorganization or if liquidation is necessary.

Creditors can also initiate liquidation proceedings if the debtor is not in a position to meet obligations.

Pre-packaged Reorganization (Preacuerdo de Reorganización):

This is an option under the law that allows debtors to negotiate a reorganization plan with creditors before formally entering insolvency proceedings. If creditors agree, the plan can be confirmed and implemented quickly, avoiding the full process of court-based reorganization.

Debt Settlement (Acuerdo de Pago):

A debtor can propose a settlement plan to creditors to reduce or extend payment obligations, usually as part of a reorganization plan. This plan is subject to creditor approval.

Role of the Court and Insolvency Administrator:

The court appoints an Insolvency Administrator (Síndico) to oversee the insolvency process. The administrator plays a key role in managing the debtor's assets, overseeing reorganization, or guiding the liquidation process.

The court supervises the process to ensure that it is fair and that the interests of creditors are protected.

Creditors’ Meetings:

Creditors are organized into classes and are invited to meetings where they vote on reorganization plans, payment agreements, or liquidation proposals. The goal is to reach a consensual solution that maximizes value and addresses the interests of all parties.

Debt Discharge for Individuals:

A significant feature of the new law is the ability for individuals to obtain a debt discharge (known as “Cierre de la Liquidación”) after completing a liquidation process. This allows individuals to get a fresh start after their assets have been liquidated and their debts settled.

Cross-Border Insolvency:

Chile’s insolvency law includes provisions for cross-border insolvency, particularly in cases where international assets are involved or the debtor has operations in other countries. Chile adheres to international guidelines like the UNCITRAL Model Law on Cross-Border Insolvency.

Impact on Small and Medium Enterprises (SMEs):

The law provides specific mechanisms designed to help small and medium-sized businesses go through reorganization or liquidation, providing them with better access to insolvency proceedings and financial relief options.