Can a debt be collected through the debtor's insolvency?

Insolvency as a Debt Collection Tool – When It Doesn’t Work

In debt collection, it is often believed that simply threatening potential insolvency proceedings is enough to get the debtor to pay the debt. However, practice shows that this approach is often not only ineffective but even harmful to the creditor.

This is also clearly confirmed by the judgment of the Senate of the Republic of Latvia dated March 17, 2026, in Case No. SPC-6/2026, which analyzes the distinction between debt collection through the courts and the use of insolvency proceedings as a means of debt recovery.

Debt Disputes and Insolvency Are Incompatible

The Senate once again emphasized a fundamental principle: insolvency proceedings are not intended to resolve disputes regarding the existence of a debt.

If litigation is pending between the parties regarding the existence or amount of a debt and the debtor disputes this debt and defends their position in court, then insolvency proceedings must not be used as a means of pressure against the debtor.

In the specific case, the creditor had simultaneously filed a lawsuit seeking debt recovery and, in parallel, filed an insolvency petition, citing the debtor’s failure to respond to the creditor’s insolvency warning. The Senate held that such conduct by the creditor—attempting to justify declaring the debtor insolvent based on the debtor’s failure to respond to the insolvency warning—is impermissible, as insolvency proceedings are not an alternative to ordinary litigation and dispute resolution regarding debt.

Why is insolvency often a poor solution for debt collection?

From a practical standpoint, this ruling illustrates several key insights that are important for every creditor.

1. Insolvency does not speed up the recovery of funds

Even if insolvency proceedings are initiated, this does not mean that the creditor will receive their money quickly or at all. Often, there are insufficient assets, and the creditor is left with partial satisfaction or even no satisfaction at all.

2. In the event of a dispute, the insolvency petition may be dismissed

If the debtor disputes the debt and the dispute is already being heard in court, the insolvency petition may be dismissed or the proceedings themselves may be terminated. The result is a waste of time and money.

What did the Senate clearly state?

Simply put, the Senate reaffirmed the principle already established in case law: if a creditor has initiated legal proceedings to recover a debt, this in itself indicates the existence of a dispute, and initiating insolvency proceedings against the debtor in such a situation is not a justified course of action.

From this Senate ruling, one can also conclude that the debtor’s silence and failure to respond to the creditor’s insolvency warning do not automatically mean that the debt is uncontested by the debtor. The debtor’s objections to the creditor’s claim must be assessed not formally—i.e., whether or not the debtor has responded to the insolvency notice—but on the merits, namely, whether the debtor’s objections to the debt arise from the totality of the circumstances.

Debt collection is a strategy, not a single step

This ruling clearly illustrates one of the common mistakes made in practice—a creditor’s reliance on insolvency as a universal solution and a means of forcing the debtor to pay the debt. However, effective debt collection typically requires a legal analysis of the situation, the selection of the appropriate instrument—filing a lawsuit, securing collateral, negotiations, and an assessment of time and procedural risks. In certain cases, insolvency is justified, but quite often it is the last resort, not the first choice, if a creditor wishes to recover their debt.

In conclusion

For both creditors and debtors, this Senate ruling serves as a reminder of one crucial point: there is no one-size-fits-all solution to debt collection, and a creditor’s decision to initiate insolvency proceedings against a debtor does not always succeed.

If you wish to recover a debt more effectively or understand how to defend against unfounded threats of insolvency, it is advisable to develop a well-thought-out legal strategy together with an attorney from the outset. Our law firm will help you assess your situation and find the most effective practical solution.

You can contact us via email at info@paunins.lv.