Personal Insolvency: Where the Law Creates More Questions Than Answers

The introduction of personal insolvency procedures under Book Five of the Code of Ukraine on Bankruptcy Procedures has already moved beyond the theoretical concept of a “second chance” and entered the realm of daily legal practice, where key issues are resolved not by the wording of the law itself, but by its interpretation by courts—primarily courts of first instance. It is at this level that the initial logic of assessing the debtor’s good faith, the admissibility of restructuring, the nature of debts, and the balance of creditors’ interests is formed. And it is here that it becomes evident that the legislative framework is not internally consistent.

The problem begins with the very nature of the institution. Personal insolvency simultaneously combines social and economic functions, creating a constant tension in practice: whether the procedure serves as a mechanism of social protection for the debtor or as a tool for the fair satisfaction of creditors’ claims. While economic logic dominates in corporate bankruptcy, in personal insolvency it is intertwined with elements of debt forgiveness, which complicates the development of consistent legal approaches and results in divergent standards for assessing similar cases.

This tension is further aggravated by another structural issue—the regulation of both individual entrepreneurs and non-entrepreneur individuals within a single legal framework. In reality, these are fundamentally different models: for entrepreneurs, insolvency reflects ongoing economic activity, whereas for ordinary individuals, debts are often consumer-based and carry a strong social dimension. As a result, courts are required to apply identical legal provisions to materially different relationships, which inevitably leads to inconsistency in judicial practice.

A separate set of issues arises already at the stage of opening proceedings. Although formally technical, this stage effectively determines the trajectory of the entire procedure, as it is here that the court evaluates the debtor’s financial position, behavior, asset structure, and prospects for restoring solvency. Given the steady increase in such cases, the workload of first-instance courts directly affects the quality of these initial assessments and, consequently, the overall consistency of practice.

Even more illustrative is the restructuring stage, which in practice often turns from a genuine mechanism for restoring solvency into a formal step preceding debt discharge. A typical scenario involves a debtor with no assets or stable income initiating the procedure primarily to expedite the transition to the next stage. In such cases, the restructuring plan loses its substantive function, and courts are forced to assess its realism rather than merely its formal compliance—an approach that is not explicitly prescribed by law but has emerged through judicial practice.

The nature of debts themselves presents another layer of complexity. Courts increasingly encounter cases where obligations have questionable or even morally problematic origins, complicating the assessment of the debtor’s good faith. The law does not provide clear criteria for such evaluations, leaving courts to develop them case by case, balancing the debtor’s right to discharge debts against the protection of creditors’ interests.

Additional uncertainty arises when creditors submit claims at later stages of the procedure, including during the implementation of a restructuring plan. This disrupts what is presumed to be a stabilized process and may require courts to effectively reconsider previously established arrangements. Similar challenges arise with respect to public debts, particularly tax liabilities, whose legal status within insolvency proceedings remains insufficiently defined.

Another important issue concerns the procedural participation of the debtor, especially under conditions of martial law, where many individuals are located outside Ukraine. This raises questions about the admissibility of proceedings in the absence of physical presence, the need to adapt procedural mechanisms, and, at the same time, the guarantees of access to justice.

Overall, personal insolvency in Ukraine has reached a stage where the primary challenges lie not in the absence of regulation, but in its internal contradictions and lack of coherence. дальнейшее развитие этого института will depend not only on legislative amendments, but primarily on the ability of judicial practice to develop stable criteria—particularly regarding the debtor’s good faith, the feasibility of restructuring, and the permissible limits of the “social” approach within bankruptcy proceedings.