Navigating Debt in Ecuador: Personal vs. Corporate Insolvency and Their Impact on Expats

The dream of retiring or relocating to Ecuador involves careful financial planning. However, unforeseen circumstances can lead to overwhelming debt for individuals and their businesses. For expatriates, understanding Ecuador's legal framework for insolvency is not just important—it is critical to protecting your assets and residency status. This article provides an expert breakdown of the distinctions between personal and corporate insolvency, highlighting the specific laws, procedures, and common pitfalls you need to be aware of.

Understanding Insolvency in Ecuador: The Modern Legal Framework

While many still refer to the old Ley de Concursos Preventivos y Quiebras, it is crucial to understand that since 2015, insolvency proceedings in Ecuador are primarily governed by the Código Orgánico General de Procesos (COGEP). This comprehensive law consolidated civil and commercial procedures, establishing the modern "procedimiento concursal" as the main legal mechanism for handling both personal and corporate insolvency.

Personal Insolvency (Concurso Necesario de Acreedores)

In Ecuador, a formal "bankruptcy" for a natural person (an individual) who is not a registered merchant is known as a concurso de acreedores (creditors' arrangement). It is initiated when an individual is demonstrably unable to meet their financial obligations.

Key Legal Provisions:

The process is outlined in Book IV, Title II, Chapter V of the COGEP and supplemented by provisions in the Código Civil. The goal is an orderly liquidation of the debtor's assets to satisfy creditors' claims.

The Process for Individuals:

1. Identification of Insolvency: The process begins when you are in a state of cesación de pagos (cessation of payments), meaning you can no longer pay your debts as they come due.
2. Involuntary Proceedings: Typically, a personal insolvency proceeding is initiated by a creditor. The creditor files a petition with a Civil Court, proving the existence of an overdue debt. A debtor cannot voluntarily declare themselves bankrupt in the same way a company can; the process is usually forced upon them by creditors.
3. Court Petition and Asset Declaration: Once a creditor files the petition, the debtor is required to present a detailed financial disclosure to the court, including:
   • A complete inventory of all assets (real estate, vehicles, bank accounts). This must be supported by official documents like a Certificado de Gravámenes from the Registro de la Propiedad (Property Registry) to show any liens, which typically costs around $15 per property.
   • A comprehensive list of all creditors, the amounts owed, and the nature of each debt.
4. Judicial Declaration and Its Consequences: If the court finds the petition valid, it declares the concurso (insolvency). This has immediate and severe consequences:
   • Appointment of a Síndico de Quiebra: The court appoints a liquidator/receiver who takes control of all the debtor's assets.
   • Estado de Interdicción: This is a critical and often misunderstood consequence. The debtor is legally declared to be in a state of interdiction, meaning they lose the right to administer their own property or enter into new contracts. All financial activities must go through the Síndico.
5. Creditor Claims and Ranking: Creditors are notified and must present their claims. The Síndico and the court rank these claims based on legal priority.
6. Liquidation and Distribution: The Síndico liquidates the assets and pays creditors according to the established priority. Tax debts to the Servicio de Rentas Internas (SRI) and social security contributions to the Instituto Ecuatoriano de Seguridad Social (IESS) have super-priority.
7. Discharge of Debts: Unlike in some other jurisdictions, a full discharge of remaining debts is not guaranteed. The outcome depends heavily on the specifics of the case and the debtor's cooperation.

Common Expat Pitfalls:

• Ignoring a Citación Judicial: Failing to respond to a court summons from a creditor is the fastest way to have a default judgment entered against you, leading to a forced insolvency proceeding.
• Attempting to Transfer Assets: Moving property into a spouse's name or wiring funds out of the country after insolvency is imminent can be classified as fraudulent conveyance (acción pauliana), leading to severe civil and even criminal penalties.
• Impact on Residency: An insolvency declaration and the resulting estado de interdicción can be grounds for the revocation of a residency visa. It is imperative to consult an immigration attorney simultaneously.

Corporate Insolvency (Procedimiento Concursal)

Corporate insolvency applies to legal entities like a Limited Liability Company (Compañía de Responsabilidad Limitada) or a Corporation (Sociedad Anónima). The COGEP provides two main pathways: a preventive arrangement to save the company, or liquidation.

Key Legal Provisions:

The entire process is governed by the COGEP, with oversight from the Superintendencia de Compañías, Valores y Seguros (SUPERCIAS).

The Process for Corporations:

1. Preventive Arrangement (Concurso Preventivo): A company facing financial distress but not yet completely insolvent can voluntarily petition the court for a preventive arrangement. This is a court-supervised negotiation with creditors to restructure debt and allow the company to continue operating. It requires the approval of a significant majority of creditors at a junta de acreedores (creditors' meeting).
2. Insolvency and Liquidation (Concurso Necesario): If a preventive arrangement fails or is not viable, the company enters liquidation.
   • Voluntary: The company's legal representatives can petition the court for liquidation.
   • Involuntary: Creditors can force the company into liquidation if it has ceased payments.
3. Judicial Declaration and Síndico: The court declares the company insolvent and appoints a Síndico de Quiebra to take control of all operations and assets. The company's administrators lose all their powers.
4. Liquidation and Priority of Payments: The Síndico liquidates all company assets. The proceeds are distributed in a strict order of priority mandated by law:
   1. First Priority: Unpaid wages and social benefits for employees.
   2. Second Priority: Debts owed to the state, specifically taxes to the SRI and social security to the IESS.
   3. Third Priority: Secured creditors (e.g., banks with mortgages).
   4. Fourth Priority: Unsecured creditors.
5. Dissolution: After all assets are distributed, the Síndico submits a final report to the court and registers the company's extinction with the SUPERCIAS. The legal entity ceases to exist.

Key Differences and How They Affect You

Feature	Personal Insolvency (Concurso de Acreedores)	Corporate Insolvency (Procedimiento Concursal)
Debtor	Natural person (individual)	Legal entity (Compañía Ltda., S.A., etc.)
Governing Law	Código Orgánico General de Procesos (COGEP), Código Civil	Código Orgánico General de Procesos (COGEP), Ley de Compañías
Assets Involved	All personal assets, worldwide in some cases.	Only the company's assets.
Impact on Debtor	Debtor is placed in estado de interdicción (loses control of assets), severely impacting personal finances, credit, and residency.	Affects the business entity. Shareholders' personal assets are protected, UNLESS a personal guarantee was signed.
Personal Guarantees	Not applicable; all personal assets are already liable.	This is the critical risk. If you signed as a garante solidario for a company loan, your personal assets are fully exposed.
Debt Priority	Tax and social security debts are high priority.	Employee wages, then tax and IESS debts, have absolute priority over almost all other creditors.
Outcome	Potential partial discharge of debt after liquidation.	The company's debts are extinguished upon its legal dissolution.

Crucial Considerations for Expats:

• The Garante Solidario Clause: This is the single most dangerous phrase for an expat business owner. When obtaining a loan or signing a major lease for your company, banks and landlords will often insist you sign as a garante solidario (joint and several guarantor). This completely bypasses the corporate veil, making you personally liable for the entire corporate debt.
• Tax and IESS Debts are Non-Negotiable: Many foreign entrepreneurs underestimate the power of the SRI and IESS. These state entities have the authority to freeze company bank accounts and initiate legal action very quickly. Their debts are paid out before almost any other creditor in a bankruptcy.
• Intermingled Finances: Never use your personal bank account for company business or vice versa. This "commingling of funds" can be used by a court to "pierce the corporate veil" and hold you personally responsible for corporate debts, even without a personal guarantee.

⚠️ Legal Alert: When to Stop and Consult an Attorney

You must immediately consult with an experienced Ecuadorian lawyer specializing in derecho concursal if:

• You have received a formal payment demand (requerimiento de pago) or a court summons (citación judicial).
• You are considering transferring assets to family or moving funds out of Ecuador to protect them from creditors.
• The SRI or IESS has initiated a coercive collection action (juicio coactivo) against you or your company.
• You signed a contract as a garante solidario for a company that is now failing.
• You are unable to pay your employees or your social security contributions.

Navigating insolvency in Ecuador under the COGEP is a complex, procedure-driven process with severe consequences. For an expatriate, the interplay between commercial law, civil procedure, and immigration regulations requires expert legal guidance. Acting proactively with a qualified attorney is your only defense against catastrophic financial and legal outcomes.