The Trustee
Declaring Bankruptcy
Creditors' Claims and Meetings
Treatment of Debtor's Estate
Relief from Debt


Chile's Bankruptcy Law, applicable to both natural and legal persons, was enacted in October 1982. It favours liquidations rather than reorganizations, and provides that debtors and managers may incur criminal liability for the creation of culpable or fraudulent bankruptcies. The law does little to impede secured creditors' efforts to realize collateral, and grants substantial priority status for labour claims. Finally, liquidation and payments in bankruptcy proceedings are administered by an appointed bankruptcy trustee.

Chapter 1, Article 1 sets out the objective of the law as facilitating the transformation of a debtor's assets into cash to pay the debtor's obligations. Article 2 states that a bankruptcy creates an estate comprised of all of the debtor's assets and liabilities, with the exception of any assets or obligations that the law explicitly excludes.

Chapter 2 addresses the structure and function of the National State Attorney's Office for Bankruptcies. This agency has functions akin to the US trustee, and supervises bankruptcy trustees in their activities as liquidators.

The Trustee

Trustees (sindicos) are regulated in Chapter 3. Article 14 calls for the establishment of a national registry of qualified trustees. A court draws from this registry in making trustee appointments. Other articles describe required qualifications, list disqualifying attributes, and provide for reviewing and challenging trustee actions.

The trustee is required to represent the interests of creditors. Among the trustee's duties is the duty to set the date upon which the debtor ceased to make payments on its obligations. This date must be set within 60 days from the date of assumption and cannot be less than one year before the declaration of bankruptcy. The date is important because it determines which of the debtor's transfers may be annulled.

The trustee is vested with all the debtor's rights and liabilities and is charged with operating the debtor's business to the extent necessary to protect creditors' interests. The trustee has various management and reporting duties to ensure the smooth administration of the case. However, the trustee's principal function is to organize the liquidation of the bankrupt's estate and to distribute the proceeds to creditors.

Declaring Bankruptcy

Chapter 4 of the Bankruptcy Law governs the process of declaring bankruptcy. A declaration of bankruptcy may be solicited by either the debtor or one or more of its creditors. A distinction is drawn between debtors in general and those engaged in commercial, industrial or agricultural activities (ie, merchant debtors). Merchant debtors must solicit a declaration within 15 days after ceasing to make required payments on a commercial obligation. Failure to do so is one factor the court may consider when determining whether a declaration is fraudulent.

To make a declaration of bankruptcy, a debtor must submit documentation detailing its assets, security interests in those assets, pending lawsuits, and liabilities. The debtor is also required to describe the causes of its financial difficulties.

Article 43 describes the circumstances under which creditors may solicit a declaration of bankruptcy. As a general matter, the non-payment of an obligation evidenced by documents that give the creditor a right to a summary collection proceeding, entitles that creditor to solicit a declaration of bankruptcy. A creditor solicitation may also be supported by (i) the debtor's disappearance without leaving anyone to represent him, or (ii) the nullification or cancellation of a composition entered into by the debtor and its creditors.

A creditor solicitation may include the names of three eligible individuals the court may select as trustee and backup trustee. The Bankruptcy Law requires any solicitation to be accompanied by a deposit of approximately $3,000 to cover the costs of the bankruptcy's administration.

The court's declaration
The court's formal declaration of bankruptcy must comply with requirements set forth in the Bankruptcy Law. It must contain a finding on the question of whether or not the debtor is a merchant, and it must order the vesting of the bankruptcy estate in the appointed trustee. The declaration must also contain (i) an assertion of the court's jurisdiction over all suits which may have an effect on the estate and (ii) an order to all persons in possession of the debtor's property to surrender such property to the trustee within three days of receiving notification of the declaration of bankruptcy.

The declaration marks the start of a 30-day period for the filing of claims by general creditors. The 30-day period is applicable to creditors resident and present in the territory of Chile. Creditors outside the country are given individual notices and deadlines for filing their claims. Claims that are filed late only share in distributions made subsequent to the date of filing. The declaration also sets the date for the first meeting of creditors.

Classifying the bankruptcy
The provisions regarding the procedure for determining the proper classification of the bankruptcy (ie, whether fortuitous, culpable or fraudulent) are found in Chapter 13 and apply only to merchant debtors. Article 219 lists factors indicating a culpable bankruptcy. These include, among others:

  • preferential payments to certain creditors;

  • excessive personal expenditures;

  • large imprudent investments;

  • failure to solicit a declaration of bankruptcy in compliance with Article 41; and

  • failure to make the required disclosures in compliance with Article 42.

Factors indicating a fraudulent debt include, among others:

  • hiding assets;

  • creating false obligations;

  • fraudulently transferring assets;

  • using bankruptcy estate assets for personal use without court approval; and

  • employing deceptive and ruinous practices.

A legal entity's management is criminally liable for a culpable or fraudulent bankruptcy.

Article 74 permits the recovery of any gratuitous transfer of the debtor's assets occurring anytime after 10 days before the date fixed as the date upon which such debtor ceased making payments on its obligations. In the case of individual debtors, the 10-day limit is extended to 120 days if the transfers were to certain of the debtor's relatives (ie, relatives within four degrees of separation).

In the case of merchant debtors, Article 76 renders inoperative a number of transfers occurring after 10 days before the date fixed as the date the debtor ceased making payments on its obligations. Article 77 provides authority to void transfers, even if for valuable consideration, if they were made to transferees with knowledge of the debtor's cessation of payments. Since the date of cessation of payment may not be within one year from the bankruptcy declaration, contracts executed by the debtor within one year and 10 days of the declaration may be annulled where the parties to the contract acted with full knowledge of the debtor's poor business condition.

Creditors' Claims and Meetings

Meetings with the trustee
The trustee and the creditor group are expected to work jointly in order to achieve the goals of the Bankruptcy Law. Chapter 8 governs creditor meetings. It requires that the first meeting of creditors take place no earlier than 30 days but no later than 40 days following the declaration of bankruptcy. The first meeting of creditors is valid only if at least two creditors are present and the creditors present hold claims amounting to at least two-thirds of the debtor's liabilities. At the meeting, if properly convened, the trustee gives an initial report of the debtor's affairs. Creditors choose to elect the court-appointed trustee as the permanent trustee or they elect another qualified individual.

If the trustee's report suggests that the liquidation of the estate will result in the realization of an amount below a certain minimum threshold (approximately $1,500), then the proceedings will be conducted in a summary fashion. If the report does not make this suggestion, then the creditors will continue to remain actively involved in the various decision-making aspects of the proceedings. The liquidation of the estate under summary proceedings is meant to occur over a period of no more than six months. In practice, however, the proceedings generally last longer.

Automatic stay
Article 71 provides a general stay of all actions of unsecured creditors to collect their claims, but specifically excludes actions by secured creditors. However, secured creditors have an obligation to file proof of their claims and to become recognized creditors in order to preserve their rights to the proceeds from any sale or other disposition of the collateral. Furthermore, secured creditors may not collect from the proceeds of the sale of their collateral until creditors having a higher priority in distributions have been paid, or an adequate provision for payment of their priority claims has been made.

Recognizing claims
Chapter 10 governs the process of recognizing claims and requires the trustee to carefully examine the claims and to propose adjustments if warranted. Objections to claims must be filed no later than 15 days following the formal declaration of the end to the verification period. Claims that are filed late may share in any future distributions.

Prioritizing claims
Generally, claims are classified as follows:

  • a first class consisting of priority claims including administrative claims and claims for labour services;

  • a second class consisting of claims secured by pledges or mortgages; and

  • a third class consisting of general unsecured creditors.

Claims in the first class are paid out of the proceeds from the sale of secured creditors' collateral if there is an insufficient amount of estate assets.

The Bankruptcy Law affords priority to labour claims. These claims may include:

  • remuneration due labour as of the date of the declaration of bankruptcy;

  • social security payments which should have been made by the bankrupt out of monies withheld from wages; and

  • severance payments to workers terminated as a consequence of the bankruptcy and having 10 or more years seniority (capped at approximately $4,500).

Treatment of Debtor's Estate

Operation of debtor's business
The trustee is required to present a plan for the liquidation of the estate at the second creditor meeting. The plan should include provisions for the coverage of costs and identify contracts deemed necessary to complete the plan. The plan should also specify whether or not the debtor's business is to continue being operated in whole or in part, and whether or not assets are to be disposed of individually, in groups or as a single unit. Creditors vote on the plan according to prescribed voting procedures.

A proposal to continue operation of the debtor's business requires the approval of creditors holding at least two-thirds of the debtor's liabilities. Generally, the debtor's business may not be operated for more than one year. However, this period may be extended for an additional six months if the creditors so agree at least 15 days prior to the period's expiration. Also, if the court authorizes the sale of the debtor's enterprise as a going-concern (ie, as a whole), the period of continued operations may be extended beyond one year.

The operation of the debtor's business is at the risk of the approving creditors, and the benefits available to the approving creditors are limited to the permitted claims for principal and interest.

Continuation of the debtor's business does not suspend the bankruptcy proceedings but does suspend secured creditors' rights to realize against collateral employed in the continued business operations. Secured creditors' rights are also suspended when the collateral in question is being sold as part of a package of assets forming a single economic unit.

Liquidation of the estate
Chapter 9 contains provisions relating to the manner in which assets may be liquidated. Article 130 contains a directive that in the absence of an agreement to continue the operation of the debtor's business, the estate should be liquidated during a period of no more than six months (nine months for the sale of real estate). This period may be extended by six months if the creditors agree. As a practical manner, liquidations generally take much longer.

Relief from Debt

Chapter 11 provides for the termination of bankruptcy proceedings and relieves the debtor from remaining unpaid obligations if the debtor has not been found guilty of having filed a culpable or fraudulent bankruptcy.

Chapter 14 governs the declaration of the debtor's rehabilitation. Once declared rehabilitated, the debtor is relieved of all the disabilities imposed by the Bankruptcy Law. This, however, does not amount to a discharge.


Compositions are governed by Chapter 12 which provides for two types of court supervised compositions: (i) preventative composition, that is a composition entered into prior to the actual declaration of bankruptcy, and (ii) simple judicial composition, entered into at anytime after the declaration of bankruptcy.

A preventative composition requires the following:

  • disclosure of the debtor's affairs;

  • agreement that the debtor and the composition are subject to the court's and the trustees' intervention; and

  • review and reporting by the trustee.

If a proposed preventative composition is submitted to the court with the backing of creditors holding 51% of all claims, all creditors are prevented from seeking a declaration of bankruptcy for a period of 90 days.

Proposals for a simple composition require (i) the appointed trustee to submit the list of recognized creditors, and (ii) a finding that the bankruptcy is not classified as either culpable or fraudulent.

Both preventative and simple judicial compositions require the approval of two-thirds of the creditors holding three-fourths of the estate's liabilities excluding creditors holding secured liabilities. The composition may contain provisions relating to:

  • the payment of the amounts owed;

  • the periods over which payments may be made; and

  • any other objectives that are related to the payment of the estate's liabilities.

Voting on judicial compositions occurs at an ordinary creditor meeting. The court has authority to permit holders of disputed claims to vote and to assign their claims. Secured creditors have the right to vote, but if they do vote, they surrender their claims to collateral. An approved composition binds the creditor and all creditors with the exception of secured creditors who refrained from voting.


The Bankruptcy Law appears to favour prompt liquidation of the debtor's assets. The provisions regarding the operation of the debtor's business and compositions impose significant burdens on creditors who urge a course of action other than a straight liquidation. Alternatives to straight liquidation are also less likely to be chosen in light of the preferential treatment afforded secured creditors.

Other features of the Bankruptcy Law such as the criminal liability for culpable or fraudulent bankruptcies and the absence of a comprehensive scheme of exemptions impose harsh penalties for failed risk-taking.

For further information on this topic please contact Marcelo Armas at Philippi, Yrarrazaval, Pulido & Brunner by telephone (+56 2 364 3700) or by fax (+56 2 364 3796) or by e-mail ([email protected]).

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