An Ecuadorian Lawyer's Guide to Insolvency: Navigating Financial Distress for Individuals and Businesses

For many expats and Ecuadorian nationals, the dream of a stable life or a thriving business can be tested by unforeseen financial challenges. When debts become unmanageable, the prospect of insolvency can seem daunting, fraught with complex legal jargon and bureaucratic hurdles. As an Ecuadorian lawyer with extensive experience assisting the international community from my practice in Cuenca, I understand the unique anxieties this situation creates. My aim is to demystify the process, outlining the definitive legal options available under Ecuadorian law for both individuals and businesses facing financial distress.

Ecuadorian law provides a structured path to address insolvency. While many still refer to "bankruptcy" using the old term Quiebra, the primary legal framework has been modernized and consolidated within the Código Orgánico General de Procesos (COGEP – Organic General Code of Processes). The procedures are overseen by judicial bodies, with the Superintendencia de Compañías, Valores y Seguros playing a key role in the oversight of corporate entities.

The Modern Legal Framework: Understanding the Procedimiento Concursal

In Ecuador, the concept of insolvency is now governed by the Procedimiento Concursal (Concursory Proceeding), as stipulated in Artículo 414 and subsequent articles of the COGEP. This unified process replaces older, disparate laws and applies to individuals and companies engaged in commercial activities who are in a state of "cessation of payments."

It’s crucial to understand this is a formal judicial process with two primary outcomes:

1. Concordato (Reorganization Agreement): An agreement between the debtor and creditors to restructure debts and allow the business to continue operating. This is a preventive measure to avoid liquidation.
2. Liquidación (Liquidation): The court-ordered sale of the debtor's assets to pay creditors when a reorganization agreement is not feasible or fails. This is the process colloquially known as Quiebra.

Legal Options for Businesses: The Procedimiento Concursal

When a business can no longer meet its payment obligations, it or its creditors can initiate a Procedimiento Concursal.

Key Objectives:

• Protect Value: To preserve the business as a going concern through a reorganization plan if possible.
• Orderly Liquidation: If reorganization fails, to sell the company's assets in a fair and transparent manner.
• Equitable Distribution: To distribute proceeds to creditors according to a strict legal hierarchy.

The Concursal Process: A Step-by-Step Guide:

1. Initiation of Proceedings:

   • Voluntary: The business owner petitions the court, acknowledging cessation of payments. This is the recommended route as it demonstrates good faith.
   • Involuntary: One or more unpaid creditors can file a petition to force the business into the process.
   • Jurisdiction: The petition is filed with a Juez de lo Civil y Mercantil (Civil and Commercial Judge) in the company's legal domicile.

2. Declaration and Immediate Effects:

   • The judge reviews the petition and, if valid, declares the concurso open. This order is published in a major national newspaper.
   • Hyper-Specific Detail: Be prepared for this initial cost. The publication of the judicial order in a newspaper like El Mercurio in Cuenca or El Universo nationally can cost between $150 and $300, an immediate out-of-pocket expense for the petitioner.
   • The court appoints a Liquidador (Liquidator), a qualified professional from a list maintained by the Consejo de la Judicatura (Judicial Council). This is not just a random appointee but a regulated expert.
   • An immediate "stay" is placed on all individual lawsuits and collection actions against the debtor.

3. Asset Inventory and Creditor Claims:

   • The debtor must submit a detailed inventory of all assets, a list of all creditors, and complete financial statements.
   • Hyper-Specific Detail: A critical mistake is failing to declare worldwide assets. Under the principle of universalidad de bienes, an Ecuadorian court will consider all your assets, regardless of location. Hiding property or bank accounts in your home country is considered fraudulent concealment (ocultación de bienes) and can lead to severe civil and even criminal penalties.
   • Creditors are formally notified and have 20 days from the publication date to submit their formal claims (insinuación de crédito) to the liquidator.

4. Creditor Classification and Payment Priority:

   • The liquidator verifies claims and classifies them according to a strict hierarchy mandated by law.
   • Hyper-Specific Detail: Many are shocked to learn who gets paid first. The Servicio de Rentas Internas (SRI) for unpaid taxes and the Instituto Ecuatoriano de Seguridad Social (IESS) for unpaid social security contributions are créditos privilegiados de primera clase (first-class privileged debts). They are paid before most other creditors, including suppliers and unsecured lenders. Never assume your commercial debts take precedence.

5. Reorganization or Liquidation:

   • The liquidator and debtor may propose a concordato (reorganization plan) to the creditors for a vote.
   • If no agreement is reached, or if the debtor is clearly unviable, the process moves to liquidation. The liquidator sells all assets through public auctions to generate funds.

6. Distribution and Conclusion:

   • The liquidator distributes the funds according to the legal priority of creditors.
   • Once all assets are distributed, the judge declares the proceedings concluded. The company is effectively dissolved.

Legal Options for Individuals: A More Complex Reality

Ecuador does not have a personal bankruptcy system equivalent to Chapter 7 or Chapter 13 in the United States. The formal Procedimiento Concursal is generally reserved for individuals classified as comerciantes (merchants).

For non-merchant individuals, the legal landscape is different:

1. Direct Negotiation: This is the most practical first step. Proactively contacting creditors to negotiate a payment plan (convenio de pago) can often prevent legal action.

2. Facing Executive Lawsuits (Juicios Ejecutivos): If negotiations fail, creditors will likely file individual lawsuits to collect their debts. This can result in court-ordered wage garnishments (retención de sueldo) or liens and eventual seizure of assets (embargo).

3. Asset Protection:

   • There are very limited protections for personal assets. The primary protection is establishing a patrimonio familiar (family patrimony) over your primary residence.
   • Hyper-Specific Detail: Declaring a patrimonio familiar is a notarial process that shields your home from most creditors. However, it is a preventive measure. You cannot establish it after you are already insolvent to protect it from existing debts; it must be done when you are financially stable. This is a common and tragic misunderstanding.

Essential Documentation for Any Proceeding:

• Personal Identification (Cédula or Passport with visa).
• Company Documents: RUC, incorporation documents (escritura de constitución).
• Financials: Detailed balance sheets, income statements, bank statements for the last three years.
• Asset List: Property deeds (escrituras), vehicle registrations (matrículas), inventory lists. A certificado de gravámenes from the Property Registry is vital to show existing liens.
• Debt List: A complete list of creditors with names, contact information, amounts owed, and supporting documents (contracts, pagarés, invoices).

Critical Expat Pitfalls to Avoid

• Ignoring Official Notifications: In Ecuador, a court summons or official notice from a government body like the SRI cannot be ignored. Failure to respond can result in a default judgment against you.
• Signing Documents You Don't Understand: Never sign a Spanish-language legal or financial document without a trusted, professional translation or the guidance of your own attorney. A creditor-provided "translator" is not impartial.
• Using Foreign Debt Consolidation Services: Services based in your home country have no legal standing here and cannot negotiate with Ecuadorian creditors or courts. You must use local legal mechanisms.
• Transferring Assets to "Hide" Them: Moving property or funds to family members' names after becoming insolvent is a classic fraudulent conveyance (acción pauliana). Creditors can and will ask the court to reverse these transactions.

⚠️ Legal Alert: When to Immediately Consult an Attorney.

• You receive a citación judicial (court summons).
• A creditor serves you with a formal demand letter (requerimiento de pago).
• You have missed multiple payments to the SRI or IESS.
• You are considering selling a major asset (like a property or vehicle) to pay one creditor over others. This can be deemed a preferential payment and challenged in court.
• The moment you realize you cannot meet your monthly obligations. Early intervention provides the most strategic options. Proactive engagement is always superior to reactive damage control.

Navigating financial insolvency is one of the most stressful experiences a person or business can face. However, the Ecuadorian legal system provides a clear, if strict, process for resolution. By understanding these options, preparing meticulously, and seeking expert local legal guidance, you can confront these challenges with a strategy for moving forward.

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Facing financial distress in Ecuador? You are not alone, and you have legal options.

Schedule a confidential consultation today to assess your situation and understand the specific legal pathways available to you.