Latvia’s Constitutional Court has ruled that legislation allowing individuals to be released from debt obligations without assessing their overall financial situation is incompatible with the Constitution, the court said.
The existing regulation does not ensure that only people who are genuinely unable to repay their debts are released from their obligations.
The Constitutional Court said the contested provisions restrict creditors’ property rights because when a debtor is released from their obligations, the creditor loses the right to pursue the corresponding claim.
At the same time, such restrictions are intended to help people who, because of their financial circumstances, are unable to meet their debt obligations, allowing them to restore their solvency and participate more fully in the economy. The rules are also intended to support groups of people whom the state has made a particular commitment to protect.
However, the court explained that
releasing a person from debt is justified only when that person is objectively unable to repay it.
A person’s income level or membership of one of the groups specified by law does not in itself demonstrate an inability to repay debt.
Low income alone also does not necessarily mean that a person is unable to meet their obligations, as they may own property or have savings, while their expenses may be relatively low. Therefore, a person’s ability to repay debts can only be properly assessed by taking into account their income, expenses and assets.
The Constitutional Court found that the existing legislation does not provide for such a comprehensive assessment of a person’s financial situation.
Under the current debt relief procedure, a person’s income level and compliance with criteria laid down by law are assessed, but
their expenses and assets are not fully taken into account.
As a result, the regulation does not make it possible to ensure that debt relief is granted only to people who genuinely have no means of meeting their obligations.
The court also noted that unjustifiably releasing a solvent person from debt does not promote public welfare or guarantee the rights of groups requiring special protection.
The contested provisions restrict creditors’ property rights without objective justification and also increase lending risks, which in turn may affect the availability and cost of credit even for the people whom lawmakers intended to provide with particular protection.
The Constitutional Court concluded that a fair balance had not been achieved between creditors’ property rights and the interests of society, and that the restriction on fundamental rights contained in the contested provisions was disproportionate.
The contested provisions have been declared invalid as of the 1st of October 2027,
giving lawmakers time to adopt new legislation.
Lawmakers have discretion to determine which groups of people should receive protection under the law and to choose the most appropriate mechanism to ensure that debt relief is granted only to people who are unable to meet debt obligations that have become due.
The Constitutional Court’s ruling is final and cannot be appealed. It enters into force on the day it is published in the official gazette Latvijas Vēstnesis.
The contested provisions stipulate that, in certain circumstances, a person is not required to repay part of their debt and may be released from debt obligations if their income and the amount of their debt do not exceed thresholds established by law and they meet one of the social criteria specified in the legislation.
The application to the Constitutional Court was submitted by debt recovery company SIA GelvoraSergel,
which purchases debts and carries out out-of-court debt recovery.
According to the company, the contested provisions significantly expanded the range of people and circumstances in which debt relief could be granted. As a result, the value of the company’s debt portfolio had allegedly fallen substantially.
The applicant had acquired claims against specific debtors at market prices, relying on the assumption that those debts would not be subject to the Law on the Release of a Natural Person from Debt Obligations.
According to the applicant, the contested provisions fail to ensure that debt relief is granted only to people who genuinely need it. The company argued that the legislation disproportionately restricts its constitutionally guaranteed property rights and violates the principle of protection of legitimate expectations enshrined in the Constitution.
The Constitutional Court considered the case through written proceedings.
Amendments to the Law on the Release of a Natural Person from Debt Obligations entered into force on the 21st of January, 2025, significantly expanding the range of people eligible to apply for debt relief.
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