PREAMBLE
Background information
In recent years, Vietnam's economy has experienced rapid growth, with the private sector emerging as a key player in the economic structure This shift signifies a gradual dismantling of the command economy, as market forces increasingly influence economic dynamics.
In a market economy, establishing a robust legal framework for bankruptcy is crucial The Vietnamese government acknowledged this necessity by addressing and resolving various issues related to the previous Bankruptcy Law through the enactment of the Law on Bankruptcy (LOB) in 2014.
During the drafting of LOB 2014, there were proposals to include individuals as regulated entities, but the majority opposed this idea, leading to the exclusion of personal bankruptcy in the final draft The prevailing argument against including individuals was based on the notion that they are not legally required to register capital when engaging in economic activities, suggesting that civil laws should govern their insolvency However, this rationale appears insufficient.
Article 51.2 of Vietnam Constitution 2013 also provides for that “Participants in different economic sectors are equal, cooperate and compete under the law” Therefore, giving the incorporate entity the right to declare bankruptcy but not giving the same to the individual entity, as the chance to restart not only its economic activities but also its social life, is not appropriate
UNCITRAL advises that insolvency law should apply to all debtors involved in economic activities, regardless of whether they are individuals or legal entities, as outlined in its legislative guide on insolvency law.
Research issues
Under Vietnam's laws, natural persons have unlimited liability for their debt This means that if an individual owes an amount of money, his or her responsibility
1 The Supreme People's Court, 2013 Explanation report on opinion collection, adjustment of draft law on bankruptcy (Amended), p.5-6
According to the UNCITRAL Legislative Guide on Insolvency Law (2005), the obligation to repay a debt continues until the total amount, including any accrued interest, is fully settled or until the debtor's death, which may also involve inheritance considerations This debt management system ensures that there is no definitive end to a debt unless it is properly paid or renegotiated.
In Vietnam, the jurisdiction's authority over debt cases is limited to enforcing or annulling debts as permitted by law, or recognizing agreements between parties They lack the power to unilaterally establish repayment plans, forgive portions of the debt, or implement measures to safeguard the rights of either creditors or debtors.
This has resulted in some social and legal issues relating to debt collection and related activities
Unforeseen insolvency can create significant debt repayment pressure, overwhelming individuals with unexpectedly large financial obligations that exceed their ability to manage This situation can lead to severe consequences, including criminal behavior or even suicide, as individuals struggle to cope with their financial distress Such extreme reactions not only affect the individuals involved but can also result in a spill-over effect, impacting the wider community.
In Gia Lai, some farmers tragically took their own lives after their pepper crops failed and prices plummeted, while in Nghe An, a couple resorted to suicide using dynamite due to overwhelming debts of VND 5 billion Additionally, a used car seller in Bac Giang committed bank robbery to settle a debt of VND 400 million If these individuals had been offered more manageable and less stressful repayment plans from the authorities, would they have chosen to end their lives or instead focused on rebuilding their futures?
When individuals face insolvency, they often seek new loans to repay existing debts, leading to a complex and scattered debt situation This emotional approach to repayment can hinder logical prioritization, complicating the debt collection process Creditors, uncertain of the debtor's ability to repay and the timeline for payments, are compelled to expedite their collection efforts The situation can worsen when creditors become aware of each other's involvement in the debtor's financial struggles.
Picture 1.1 The Growth of Consumer Credit in 2017
Source: Vietnam National Financial Supervisory Commission 2018
Demand for consumer and trust loans in Vietnam has significantly risen in both quantity and quality The National Financial Supervisory Commission estimates that consumer credit will grow by 65%.
In 2017, the growth of financial companies offering loans surged to 50.2%, surpassing the previous year's increase These companies have intensified their debt collection methods, often resorting to threats and harassment A disturbing report highlighted the aggressive tactics employed, revealing that one financial company made 17 calls and sent 20 messages to a debtor's spouse in a single day.
The equal treatment of creditors is crucial, as outlined in Article 42.1 of the 2015 Laws on Civil Procedures, which allows the court to consolidate multiple cases for resolution However, this provision poses challenges in debt collection scenarios, as creditors often face significant conflicts of interest, particularly when a debtor is approaching insolvency.
Without a unified procedure, creditors may act independently to safeguard their interests, potentially resulting in an inequitable situation for those lacking information or resources for debt collection A parallel can be drawn with the Hui, a Vietnamese savings and capital-raising scheme, which can become "broken," leaving the Hui master in debt.
The 2017 Financial Market Report by the National Financial Supervisory Commission highlights that many individuals find themselves in difficult situations with unexpected creditors In these instances, pursuing legal action against the Hui master through standard civil proceedings often proves to be inadequate.
Concerning this immense need for personal credit and liability, it is strongly necessary to redraw a more comprehensive picture of the necessity and possibility of personal bankruptcy in Vietnam.
Research questions
This thesis aims to provide a detailed overview of personal bankruptcy in Vietnam, highlighting its necessity and feasibility based on the findings of the study.
In light of that, this thesis is devoted to solving the following questions
1.3.1 Would Vietnam’s socio-economic context need the adoption of personal bankruptcy?
Vietnam's lawmakers have acknowledged the potential for corporate insolvency, permitting companies to declare bankruptcy In contrast, the concept of personal bankruptcy is perceived from a different angle, highlighting distinct challenges and considerations.
Analyzing Vietnam's socio-economic context alongside the potential benefits of personal bankruptcy is crucial for establishing a strong foundation for this thesis.
1.3.2 What are the international legislation and experience in regard to the personal bankruptcy?
Personal bankruptcy is less commonly regulated worldwide compared to corporate bankruptcy, and while it is often recommended, its implementation remains controversial Many countries are hesitant to adopt personal bankruptcy laws, reflecting a diverse approach to financial insolvency across different legal systems.
Finding the countries that apply the personal bankruptcy regulation, whose legal system would be the valuable references, will provide the research with a comprehensive perspective on personal bankruptcy regulation
This research aims to enhance Vietnam's personal bankruptcy laws by integrating key provisions from highlighted countries' regulations, focusing on essential aspects rather than merely adopting terminologies from other legal systems.
The process of answering this question will, hopefully, also disclose the advantages and disadvantages of application of personal bankruptcy regulation in legal systems around the world
1.3.3 What was taken into account when the Vietnam legislators considered the need for, and consequently set aside the personal bankruptcy regulation?
The topic of personal bankruptcy was initially considered during the drafting of LOB 2014, but ultimately it was excluded Addressing this issue will help clarify the concerns of Vietnamese government bodies regarding the implementation of personal bankruptcy regulations in Vietnam, which will aid in establishing a more suitable direction for research and strengthen the applicable outcomes.
The findings aim to identify the key issues surrounding the personal bankruptcy regulation in Vietnam, highlighting the current concerns of government bodies and the potential risks faced by executives in managing related cases.
Research methodology
Based on and to adequately address the research questions, this thesis will be applied with the following methods for researching activities
The initial phase of the research involves a comprehensive analysis of the written laws governing personal bankruptcy regulations across various countries This examination includes a thorough review of relevant legal articles to provide a clear understanding of the frameworks and guidelines that shape personal bankruptcy legislation.
These legislations will be studied and analysed to extract the critical provisions of personal bankruptcy
The reports and opinions given by Vietnam government bodies during the drafting of LOB 2014 will also be considered to record all concerns of Vietnam legislator on personal bankruptcy
- Legal comparison analysis: The process of comparing the legal systems is expected to reveal the advantages and disadvantages of personal bankruptcy regulation
Nevertheless, few similar analyses will be applied throughout the research, as they may contribute copious economic, social and even political data to refine the outcome thereof.
THE NECESSITY TO REGULATE PERSONAL
The volatility of consumer credit market
2.1.1 The rise of consumer credit in Vietnam
Consumer lending originated from the necessity to manage personal expenses, but it has evolved beyond its initial purpose Today, consumer credit plays a crucial role in enhancing social quality, providing access to legitimate credit services instead of predatory lending, and supporting domestic production.
Consumer credit is a vital indicator of economic health, significantly impacting GDP growth, with consumer loans accounting for 70% of the growth in the United States In the first quarter of 2018, US consumer credit increased by 5.1% year-over-year, reaching $3.82 trillion, encompassing various forms of credit such as credit card debt, home loans, and student loans Additionally, household debt levels are notable, standing at 94% of GDP in the United Kingdom, 95.6% in South Korea, 88% in Malaysia, and a striking 136% in Australia.
As of the end of 2017, Vietnam's consumer lending sector saw outstanding loans surpassing 1 trillion Dong, reflecting a nearly fivefold increase over the past five years, according to the Financial Market Overview Report 2017 by the Vietnam National Financial Supervisory Commission Consumer credit grew by 65% in 2017, raising its share of total credit from 12.3% in 2016 to 18% This data highlights a vibrant consumer lending market in Vietnam, where the accessibility of loans is evident, allowing individuals to secure financing with minimal requirements, often without the need to demonstrate income or repayment capability.
In recent years, the consumer finance market has experienced significant growth due to shifts in consumer behavior and an increased demand for real estate credit among middle-income individuals in Vietnam This trend reflects the evolving spending habits of Vietnamese consumers, highlighting the importance of consumer finance in meeting their financial needs.
Consumer lending has become a significant aspect of modern economies, as highlighted in Hoang Ngan's article "Consumer Lending: Lessons from the Top Economies." The piece explores how leading economies manage consumer credit and the implications for financial stability It emphasizes the importance of regulatory frameworks and responsible lending practices to mitigate risks associated with consumer debt By analyzing the experiences of these economic powerhouses, the article offers valuable insights for emerging markets looking to enhance their consumer lending strategies Overall, understanding these lessons can help foster sustainable economic growth and financial health.
In the article "Be Careful in Carrying Debt from the Card," published by Sai Gon Dau Tu, the author emphasizes the importance of being cautious when managing credit card debt It highlights how individuals often transition from borrowing small amounts from friends and family to taking on larger debts from banks and financial institutions, which can lead to financial strain The piece serves as a warning about the potential pitfalls of accumulating debt beyond one's current income.
Vietnam is experiencing a "golden population" period, with around 63 million individuals aged 20 to 59, representing a key target demographic for financial companies This age group primarily seeks small-value loans for personal consumption, household goods, and transportation needs, highlighting the growing demand for financial services in the country.
In 2017, Vietnam experienced a significant surge in consumer credit growth, with an increase of nearly 60% Experts predict that this sector will continue to thrive, with an average annual growth rate expected to reach 29-30% over the next three years.
The blooming of consumer loans has a positive impact on the economy in many respects, including:
Consumer lending plays a crucial role in providing low-income individuals with access to financial services, especially those often denied by commercial banks due to challenges in demonstrating their repayment capability This inclusive approach not only empowers underserved communities but also significantly reduces reliance on informal lending practices, particularly predatory loans and "black credit."
- Encourage consumer demand, thereby increase productivity and create more employment opportunities at the macro level, which contributes to economic growth
The increasing trend of consumer credit should not be viewed negatively, and media interference should be minimal However, it is crucial to analyze the potential downsides of consumer credit management to mitigate its adverse effects effectively.
2.1.2 The risky nature of consumer credit
The rise in consumer loans in Vietnam poses a risk of increased overindebtedness, particularly among individuals who lack a clear understanding of interest rates and repayment plans.
A significant surge in consumer loans has been observed, reflecting a growing trend among individuals seeking financial support for personal expenditures This increase is driven by various factors, including rising consumer confidence and attractive lending rates offered by financial institutions As more people turn to consumer loans to finance their purchases, it raises concerns about the potential risks associated with increased debt levels Financial experts emphasize the importance of responsible borrowing and the need for consumers to carefully assess their repayment capabilities before taking on additional loans.
Interest rate programs have become essential in off-plan real estate projects across all market segments, offering loans up to 70% of property value However, the affordability of these loans is often overstated, as low-interest rates are typically available only for a short period After this initial phase, borrowers face market interest rates, which are influenced by deposit rates plus an additional 3.5-4% for bank management costs Consequently, rising deposit rates lead to higher loan interest rates, making borrowers vulnerable to insolvency if interest rates spike or their earnings are adversely affected for an extended duration.
The accessibility of small loans from financial companies for transportation, smartphones, and other consumer goods, coupled with the rise of credit cards, may lead to poor spending habits among Vietnamese consumers, ultimately impairing their financial management skills.
Japan has faced significant social unrest due to financial companies that lend to low-income workers at exorbitant interest rates Until the government implemented a ceiling on consumer loan interest rates in 2006, these companies were crucial for borrowers deemed too risky by traditional banks In 2005, Japanese consumers borrowed $292 billion from non-bank lenders, representing 10% of the total outstanding loans in the credit system However, the high-interest rates and aggressive debt collection practices of these lenders often pushed borrowers into dire financial situations A notable case is Toyoki Yoshida, who borrowed a small amount in 1991 for a car but saw his debt balloon to $17,000 due to interest rates, eventually spiraling to $70,000 across 50 lenders after seeking help from illegal credit sources.
Back to Japan's consumer credit crisis, Japan's per - capita consumer credit
Insolvency in case of unlimited liability business
The concept of unlimited liability in business is necessary that the owner of a
In Vietnam, certain business structures are subject to unlimited liability for debts and financial obligations, meaning that all assets of the business can be used to settle these debts This applies to three main legal forms: household businesses, sole proprietorships, and partnerships where partners hold unlimited liability.
Aside to several businesses that legally require the paradigm of unlimited liability, many Vietnamese still choose one of the types mentioned above of business due to the following benefits:
- The ability to raise more capital than his or her investment in the business, as the liability limitation is merely estimated upon his or her owned assets
- The unlimited liability can help to build up trust with the customers and partners
- In most cases, the management and operation of these businesses is more straightforward than those with limited liability
As of October 2017, approximately 5 million individuals are involved in household businesses in Vietnam, highlighting the importance of personal bankruptcy laws Currently, these laws fail to address the indefinite liability of these individuals for their business operations, neglecting the need for a comprehensive solution in cases of personal insolvency The legislators' stance that individuals engaging in economic activities are not required to register capital and thus are ineligible for bankruptcy procedures appears superficial and lacking compassion.
Other advantages that may come with the personal bankruptcy system
Among other things, the personal bankruptcy system also has a positive impact on society and the economy in the long term
Firstly, the possibility of bankruptcy in the event of unforeseen misfortune can encourage individuals to borrow money to invest in their personal lives, which boost
In an article by Thuy Dung, published in The Saigon Times on October 3, 2017, it is highlighted that many household businesses in Vietnam prefer to remain small rather than transition into larger enterprises This reluctance to scale up not only affects the growth of individual businesses but also has broader implications for the country's economic development.
Personal bankruptcy plays a crucial role in safeguarding creditors' rights, despite primarily benefiting debtors While creditors may not recover the full amount of their loans in bankruptcy cases, the process ensures equitable treatment among them in debt collection No creditor can independently claim repayment from the debtor while others remain unpaid; all must await the court's declaration of bankruptcy for the fair distribution of the debtor's assets, excluding secured creditors By facilitating a fair resolution of interests between creditors and debtors, bankruptcy law helps mitigate conflicts and tensions, thereby promoting social order and discipline.
The mandatory requirements for personal bankruptcy petitions enhance the state's capacity to oversee individual finances and assets Debtors must fully and transparently disclose their financial situations, including living expenses, income, assets, and tax compliance proof; failure to do so will result in petition rejection Consequently, the enforcement of personal bankruptcy laws significantly improves the state's management of personal financial matters.
INTRODUCTION TO INTERNATIONAL EXPERIENCES IN
A human right to declare bankruptcy
The concept of bankruptcy has a complex history, originating from the Italian term “banca ratta,” which translates to “broken bench or table.” This term reflects a medieval practice where creditors would ceremoniously break the merchant's table when debts went unpaid In ancient Rome, severe measures included dismemberment for those who defaulted on their debts, while in early England, individuals facing financial ruin were often imprisoned in dungeons This historical context highlights the evolution of bankruptcy laws and the gradual acceptance of individual rights in financial distress.
Bankruptcy is a legitimate right for individuals facing financial difficulties, allowing them to address their debts when lacking sufficient assets or income The primary objective of bankruptcy is to enable individuals to meet their debt obligations through liquidation or financial reorganization The specific processes and regulations governing bankruptcy differ across countries, reflecting their unique legislative perspectives.
The personal bankruptcy process provides a legal solution for insolvent debtors to regain control over their finances and cease harassment from creditors It also ensures that creditors receive payment according to what the debtor can afford and what the law allows Typically, personal bankruptcy involves multiple creditors, and once the court is involved, all debt collection activities must cease The process may involve liquidating the debtor's assets or creating a repayment plan, aiming to balance the interests of all creditors involved.
The US personal bankruptcy law is notably forgiving, promoting financial recovery for individuals who have faced economic hardship Its generous exemptions often permit debtors to retain an unlimited amount of equity in their homes, facilitating their reintegration into the economy.
10 James P.Caher and John M.Caher, 2006 Personal Bankruptcy Laws For Dummies Wiley Publishing, Inc
11 Nathalie Martin, "The Role of History and Culture in Developing Bankruptcy and Insolvency Systems:
Globally, attitudes toward debt forgiveness differ significantly, with many countries viewing unpaid debts as a serious disgrace, unlike the more lenient approach seen in the United States However, a shift is occurring as several nations begin to adopt the American model of corporate bankruptcy and emulate U.S personal bankruptcy laws.
International legislation on personal bankruptcy reveals a significant divide between the US and Europe The US embraces a "fresh start" philosophy, viewing personal bankruptcy as a market failure, while Europe adopts an "earned start" approach, attributing bankruptcy to macroeconomic issues like recession and unemployment Consequently, US law allows for a straightforward discharge of debts, whereas European legislation typically mandates a compulsory payment plan before discharge can be granted This fundamental difference highlights the contrasting perspectives on personal bankruptcy and its underlying causes.
Developing countries now usually take into account the comparative advantages and disadvantages of US or European approaches to personal bankruptcy when considering measures to resolve overindebtedness
In Singapore, individuals can file for bankruptcy if their unpayable debt exceeds 10,000 Singapore Dollars As of July 2018, the Insolvency Office reported 17,463 undischarged insolvent persons, representing about 0.3% of the population The number of bankruptcy applications has steadily risen, with 2,932 filings in 2017 and projections indicating over 3,000 in 2018 The primary reasons for bankruptcy among Singaporeans include excessive credit card spending, gambling addictions, and unmanageable investments in real estate or business ventures.
Apparently, during the bankruptcy procedure and even afterwards, the insolvents shall suffer from both personal and social consequences They can
The Perils of Legal Transplantation", Boston College International and Comparative Law Review, published
In the context of consumer bankruptcy, individuals are required to continue working while sharing a portion of their income with creditors, and they must provide a detailed report justifying their expenditures, which are subject to periodic court review For instance, the bankrupt individual must explain the necessity of using a taxi over public transportation, especially in emergency situations Furthermore, employers are obligated to publicly disclose the names of bankrupted employees, which can hinder their professional advancement Before leaving the country, a bankrupt individual must obtain court permission, typically granted only for business-related purposes Despite these restrictions, individuals in bankruptcy have the opportunity to rebuild and move forward in their lives.
Role of culture and economic in the development of personal bankruptcy
Insolvency systems are deeply influenced by the legal, historical, political, and cultural contexts of their respective countries This results in notable differences in how businesses and personal bankruptcies are handled, even among nations with similar legal traditions Countries with distinct legal frameworks, such as those in Europe and Japan, exhibit considerable variations in their bankruptcy systems, although many are increasingly adopting practices aligned with U.S models.
Cultural factors significantly influence national attitudes towards credit and bankruptcy, with the Japanese typically viewing consumer credit negatively and perceiving bankruptcy as highly stigmatizing In contrast, both the French and Belgians exhibit a general aversion to borrowing A notable case is the Korean Individual Rehabilitation Proceeding, which faced criticism for its lenient discharge policy, raising concerns about potential moral hazards, such as individuals borrowing excessively and lacking motivation to repay their debts.
Culture encompasses a diverse array of practices that often seem natural and apolitical, yet it is essential to recognize the historical conflicts and contingent nature of cultural values The notion that law reflects society oversimplifies the complexities of cultural development, highlighting the importance of a historical perspective For instance, the concept of a "pro-debtor" culture in the US is often viewed as a fundamental aspect of its history, but this perspective may overlook the ongoing historical tensions surrounding laws and institutions that continue to evolve.
13 Nathalie Martin, "The Role of History and Culture in Developing Bankruptcy and Insolvency Systems: The Perils of Legal Transplantation", Boston College International and Comparative Law Review, published
Chapter 13 under the US Bankruptcy Code may demonstrate these matters Since the Chandler Act, the US Congress has been convinced that Chapter 13 is a more responsible way of handling consumer debts The BAPCPA has also acknowledged the rise of such culture, though it is difficult to predict the actual influence of the legislation at present
Japan exemplifies the profound impact of cultural attitudes on financial behavior, where overindebtedness and bankruptcy carry a significant stigma, often leading individuals to choose suicide over declaring bankruptcy However, recent amendments to Japan's insolvency laws have improved accessibility, resulting in a higher rate of bankruptcy filings than in England and Wales, which may have contributed to a decrease in suicide rates Furthermore, legal research indicates that underlying institutional and legal factors influence these cultural attitudes, suggesting that changes in these areas can positively affect social standards.
Arguments on the adverse impacts of personal bankruptcy
Personal bankruptcy serves as a mechanism that disrupts legally binding agreements between debtors and creditors, applicable under both US and European frameworks Typically, it culminates in a discharge that provides significant advantages to the debtor.
Therefore, it has always been concerned about several negative impacts that may result from the application of personal bankruptcy, especially the moral hazard and the downturn of credit supply
When the Individual Rehabilitation Proceeding was introduced in Korea, it faced criticism for its lenient discharge policy, which raised concerns that it might encourage excessive borrowing and reduce debtors' motivation to repay their debts.
Theoretically, there may be moral hazard, but for the following reasons, it cannot have any significant impact:
- Debtors receiving discharge must have a bad credit rating The discharge
14 Kent Anderson, 2006 Japanese Insolvency Law After a Decade of Reform
15 Mark D West, 2003 Dying to Get Out of Debt: Consumer Insolvency Law and Suicide in Japan
Personal bankruptcy in Korea primarily eliminates legal liability for discharged debts; however, it does not guarantee that creditors will engage with these individuals Lenders may still opt to offer minimal credit amounts and impose elevated interest rates and fees to safeguard against potential default losses.
- The reputation of the debtor must be severely affected, especially among individual creditors like friends and colleagues
- The punishment of those who are fraudulently discharged, and the accompanying cancellation of the discharge also deter potentially fraudulent debtors
The debate surrounding full discharge highlights concerns about its potential impact on creditors' financial health However, it's important to recognize that creditors' financial difficulties stem from unpaid claims or non-performing loans, not from the discharge of personal debt Discharge serves to eliminate uncollectible claims once they have been established as such If there is a possibility of recovering claims, creditors have the right to contest the bankruptcy adjudication or discharge decision by providing evidence of that possibility.
The failure to manage debt effectively can prompt creditors, particularly financial institutions, to alter their credit supply in reaction to debt relief This may result in increased interest rates, stricter qualification criteria for loans, heightened collateral demands, and more rigorous screening of loan applicants due to the implications of bankruptcy.
Research indicates that in the U.S., higher bankruptcy exemptions in a state significantly increase the likelihood of potential borrowers being denied credit or deterred from borrowing Additionally, households with lower asset levels tend to have less debt and encounter higher interest rates on car loans in states with generous bankruptcy exemptions, compared to those in states with lower exemptions Conversely, households in the upper half of the asset distribution benefit from increased credit availability in states with higher bankruptcy exemptions.
In their 2011 study, Song Han, Benjamin J Keys, and Geng Li investigate the impact of credit supply on individuals filing for personal bankruptcy, utilizing data from credit card mailings Their research, published in the Finance and Economics Discussion Series by the Federal Reserve Board in Washington, D.C., provides valuable insights into the relationship between credit availability and bankruptcy outcomes.
In their 1997 study published in The Quarterly Journal of Economics, Reint Gropp, John Karl Scholz, and Michelle J White explore the dynamics of personal bankruptcy, highlighting that households often experience a higher demand for credit than lenders are prepared to supply This imbalance in credit demand and supply has significant implications for financial stability and access to credit for individuals facing economic challenges.
The research indicates that personal bankruptcy leads to an increase in credit for high-asset households while simultaneously decreasing credit availability for low-asset households This suggests that personal bankruptcy does not diminish the overall supply of credit; rather, it redistributes credit resources, favoring high-asset borrowers.
The moral hazard associated with creditors is a significant concern, as the lack of sufficient protections for overindebted debtors allows creditors to extend excessive credit without thoroughly evaluating the debtor's financial situation.
The decline in credit availability stems from limited statistics that overlook borrowers' initial financial capacity to repay However, in the long term, personal bankruptcy serves as a mechanism to more effectively redistribute credit and enhance creditor behavior in lending practices.
The historical evolution of personal bankruptcy
3.4.1 The development of personal bankruptcy law in US
Since its inception, the US Constitution has empowered Congress to create a consistent framework for naturalization and to establish uniform laws regarding bankruptcies across the nation.
However, the beginning of bankruptcy law in the US was not easy, as there were no “actual” bankruptcy laws for the first 120 years of the US
The initial bankruptcy act, enacted in 1800, was short-lived, lasting only three years before its repeal in 1803 Subsequent acts introduced in 1841 and 1867 faced similar fates, being repealed after just 18 months and 11 years, respectively The brief duration of these bankruptcy laws can be attributed to several contributing factors.
- During the period of 17th – 18th centuries, the demand for bankruptcy legislation was not permanent as it wildly fluctuated between the recession
19 Soogeun Oh, 2006 Personal Bankruptcy in Korea: Challenges and Responses
20 Thomas A Garrett, 2007 The Rise in Personal Bankruptcies: The Eighth Federal Reserve District and Beyond Federal Reserve Bank of St Louis Review,89:15-37 and boom of the US economy
- There were the political divides between the pro-creditor and pro-debtor parties in the US Congress
- The bankruptcy filing process under these acts was complicated, as it must be done at the few federal courts across the country with a costly administrative procedure
The 1841 Bankruptcy Act marked the inception of personal bankruptcy provisions in the U.S., establishing the enduring concept of "honest but unfortunate" individuals, a principle that has influenced U.S bankruptcy law for centuries.
Table 3.1 Summary of US Personal Bankruptcy Legislation Development
1800 The enactment of the first Bankruptcy Act, which followed the model of
England bankruptcy legislation and merely regulated the involuntary bankruptcy process to be initiated by the merchants
1803 The repeal of 1803 Bankruptcy Act
1839 The abolishment of imprisonment for debt
1841 The enactment of the second Bankruptcy Act, which allowed both voluntary and involuntary bankruptcy, and even introduced the paradigm of personal bankruptcy
1843 The repeal of 1843 Bankruptcy Act
1867 The enactment of the third Bankruptcy Act, which allowed the negotiation of repayment plan between the creditors and the debtor
1874 The 1867 Bankruptcy Act is amended to allow the debtor to propose a plan
21 US Federal Judicial Center, 2018 The Evolution of U.S Bankruptcy Law: a time line of assets distributed among the creditors
1878 The repeal of 1867 Bankruptcy Law
1898 The enactment of the fourth Bankruptcy Act, which was the first permanent bankruptcy legislation of the US This Act is more debtor- oriented as narrowing the exceptions for discharge
1933 The 1898 Bankruptcy Act is amended to include railroad reorganisation, corporate reorganisation, and individual debtor arrangements
In 1938, the Chandler Act revised the 1898 Bankruptcy Act, enabling both corporate and individual debtors to undergo reorganization Although there was a prior amendment to the Bankruptcy Act between 1933 and 1934, it was quickly repealed in 1936.
1978 The Bankruptcy Reform Act replaces the 1898 Bankruptcy Act
The Bankruptcy Reform Act, the fifth Bankruptcy Act, was enacted to replace the 1898 Bankruptcy Act, addressing the trend of increasing individual bankruptcies and decreasing corporate bankruptcies in the US from 1930 to 1970 This legislation established key provisions that form the foundation of modern US personal bankruptcy law, particularly focusing on Chapter 7 and Chapter 13 bankruptcy protections.
7 provides for liquidation and Chapter 13 provides for repayment and reorganisation
1994 The 1978 Bankruptcy Reform Act is amended to expedite the procedures of the bankruptcy filing and extend the debtors’ assets to be exempt from creditors
2005 The enactment of Bankruptcy Abuse Prevention and Consumer Protect
The 2005 Bankruptcy Act aims to decrease the rising number of personal bankruptcies that have escalated since the 1978 Bankruptcy Reform Act It introduces a "means test" to evaluate individual debtors' income, raises filing costs, and mandates that debtors complete financial management training to qualify for debt discharge.
Source: US Federal Judicial Center, 2018
Since its inception in 1978, US personal bankruptcy legislation has undergone significant changes, including amendments in 1994 and a substantial overhaul in 2005 Initially regarded as the most generous personal bankruptcy law globally, it was founded on the principle that bankruptcy represents a market failure The US Bankruptcy Laws Commission, while drafting the 1978 Bankruptcy Reform Act, aimed to create a framework that reflects this philosophy.
- The primary target of personal bankruptcy is the credit market If the access to credit market should be open (which is the best description for
US credit market from time to time), the personal bankruptcy, serving as an exit from the credit market, should be open as well; and
- The personal bankruptcy should take the role of risk allocation amongst the parties involved in the credit market
The current personal bankruptcy laws in the US aim to shift the risks associated with the consumer credit market onto creditors, who are better equipped to manage these risks.
The development of US personal bankruptcy legislation explains its importance in the US economy and society
Picture C.1 US Personal Bankruptcies in 1900-2004
Source: Administrative Office of the US Courts 2004
Personal bankruptcy filings in the United States have seen significant growth since the early 20th century, starting at approximately 0.15 per 1,000 persons This rate began to rise in 1960 and experienced a dramatic increase from 1980 onward By 2004, the rate of bankruptcy filings reached 5.3 per 1,000 persons, marking a fourfold increase since 1980 and a staggering 35-fold increase compared to 1900.
European governments view personal bankruptcy primarily as a social issue rather than a market failure As a result, their focus is on reforming consumer protection policies and market regulations to address this challenge, rather than prioritizing the debtor's right to discharge debts Notably, most personal bankruptcy laws in Europe lacked discharge provisions in the early 1980s.
Until the 1980s, the consumer credit market in Europe was heavily regulated, resulting in rare instances of default and overindebtedness While many individual debtors faced financial difficulties, their situations were typically addressed through creditor actions like debt write-offs rather than legal proceedings This led to increased political pressure on European governments to reform personal bankruptcy laws.
In the 1980s, the deregulation of European credit markets significantly boosted the availability of consumer credit This surge was driven by pent-up demand from the previously regulated era, resulting in a rapid expansion of the credit market Consequently, the total outstanding volume of consumer credit is estimated to have doubled in various European countries during this decade.
22 Niemi-Kiesilainen, Johanna "Consumer Bankruptcy in Comparison: Do We Cure a Market Failure or a Social Problem." Osgoode Hall Law Journal 37.1/2 (1999):473-503
23 Nuria Diez Guardia, 2002 Consumer credit in the European Union ECRI Research Report, 1-39
Picture 3.2 Private credit in Europe as a percentage of GDP
The rise in unemployment has significantly impacted households burdened with high debt since the onset of the recession at the beginning of the decade Unlike lower-income individuals, the emerging middle-class debtors have successfully exerted political influence to advocate for substantial debt-reduction measures.
European governments view personal bankruptcy as a social issue rather than a market failure, integrating bankruptcy laws into welfare systems to assist individuals burdened by excessive debt This approach prioritizes support over quick economic recovery and re-entry into the credit market, which is not considered essential or even beneficial The focus of economic recovery is to facilitate a payment plan for the partial reimbursement of existing debts.
All EU debt adjustment legislation emphasizes the importance of maintaining the moral obligation to repay debts For example, the Swedish Debt Adjustment Law explicitly states that its primary purpose is to uphold debt payment commitments Additionally, other legislative proposals highlight that only debts deemed impossible for the debtor to repay should be eligible for discharge.
Nevertheless, due to the need for economic rehabilitation, for only ten years, the personal bankruptcy laws in the form of the consumer debt adjustment had been
Finland Sweden United Kingdom produced and quickly expanded across Europe as demonstrated in the table 3.2 24
Table 3.2 Summary of Europe Personal Bankruptcy Legislation
1984 Denmark has taken the lead as the first European country to introduce a specific process for adjusting consumer debt and discharging the debt
AN OVERVIEW OF INTERNATIONAL LEGISLATIONS ON
Personal bankruptcy law in US
4.1.1 The modern US personal bankruptcy law
Under the current US Bankruptcy Act, individuals seeking bankruptcy relief have two primary options: they can file for Chapter 7 liquidation bankruptcy or opt for Chapter 13 repayment bankruptcy.
Picture 4.1 US personal bankruptcy cases by chapter
Since the amendment of the 1978 Bankruptcy Reform Act in 1994, which aimed to streamline bankruptcy procedures and increase exemptions for debtors, personal bankruptcy filings under Chapter 7 have consistently outnumbered those under Chapter 13 by a factor of two This trend reflects a preference among Americans for a quick financial reset rather than a prolonged repayment plan A significant fluctuation in filing rates occurred in 2005 due to the Bankruptcy Abuse Prevention and Consumer Protection Act Although the total number of personal bankruptcy cases has seen a slight decline over the past five years, the ratio of Chapter 7 to Chapter 13 filings remains unchanged.
PERSONAL BANKRUPTY CASES BY CHAPTER
Chapter 7, known as Liquidation, outlines a court-supervised process where a trustee converts the debtor's assets into cash to distribute among creditors, while allowing the debtor to retain certain exempt properties and respecting secured creditors' rights When an individual files for bankruptcy under Chapter 7, most unsecured debts are addressed, enabling the debtor to keep some assets while the trustee is tasked with liquidating the remaining property to maximize debt repayment.
Chapter 13, known as Adjustment of Debts for Individuals with Regular Income, allows debtors with consistent income to keep valuable assets, like their homes, while proposing a repayment plan to creditors over a period of 3 to 5 years Unlike Chapter 7, where debtors may lose assets, Chapter 13 enables them to retain their possessions and make payments through a trustee based on their projected income Additionally, debtors must complete all required payments under the plan before receiving a discharge of their debts.
A bankruptcy discharge is a legal resolution that releases debtors from personal liability for specific debts, meaning they are no longer obligated to pay those debts This permanent order prevents creditors from pursuing any collection actions, including legal proceedings and communication methods like phone calls, letters, or personal contact regarding the discharged debts.
4.1.2 Eligibility to petition for personal bankruptcy
A person is eligible to file for bankruptcy if they have not had a previous bankruptcy petition dismissed in the last 180 days due to failure to appear in court, non-compliance with court orders, or voluntary dismissal of the case Additionally, the debtor must complete credit counseling from an approved agency within 180 days prior to filing.
Furthermore, the eligibility requirements will be subject to which chapter the debtor petitions under:
If an individual files for bankruptcy under Chapter 7 and their monthly income exceeds the state median, the Bankruptcy Code mandates the completion of a means test to assess eligibility for Chapter 7 relief.
A Chapter 7 filing is considered presumptively abusive if the debtor's current monthly income, after accounting for legally allowable expenses, exceeds a specified threshold To counter this presumption, the debtor must provide evidence of special circumstances that warrant increased costs or altered income levels If the presumption of abuse is not successfully challenged, the case may be converted to Chapter 13 with the debtor's agreement or dismissed entirely.
Individuals can qualify for relief under Chapter 13 as long as their total debts, whether secured or unsecured, do not exceed the limits that are periodically adjusted to align with fluctuations in consumer price indexes.
4.1.3 The first steps to petition for personal bankruptcy
A personal bankruptcy case (either under Chapter 7 or Chapter 13) begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives
When filing a petition, the debtor must include several key documents: schedules of assets and liabilities, current revenue and expenses, a financial statement, executory contracts, unexpired leases, a credit counseling certificate, and a copy of any debt repayment plan from credit counseling These documents should disclose essential information, including a comprehensive list of all creditors along with their claims, the debtor's sources of revenue detailing amounts and frequency, a complete inventory of the debtor's properties, and a breakdown of monthly expenses such as food, clothing, shelter, utilities, taxes, transportation, and medical costs.
When filing a Chapter 7 bankruptcy petition, debtors must include a schedule of "exempt" property, which is protected from creditors' claims under the Bankruptcy Code This code allows individual debtors to safeguard specific assets, and many states have opted to implement their own exemption laws instead of relying solely on federal exemptions In certain states, debtors have the option to choose between federal and state law exemptions, providing them with flexibility in protecting their property.
Filing for personal bankruptcy triggers an automatic stay that halts most collection actions against the debtor and their property, without the need for judicial intervention This means creditors are prohibited from initiating or continuing legal proceedings, wage garnishments, or making phone calls demanding payment while the stay is in effect.
In a Chapter 7 bankruptcy case, there is no repayment plan like in Chapter 13; instead, a bankruptcy trustee is responsible for collecting and selling the debtor's non-exempt assets The proceeds from these sales are then distributed to creditors in accordance with the provisions of the Bankruptcy Code.
Chapter 7 bankruptcy relief is accessible to debtors regardless of their solvency status, provided they meet the means test requirements Although Chapter 7 typically results in debt relief, the right to discharge debts is not guaranteed, and specific types of debts remain non-dischargeable Additionally, a bankruptcy discharge does not eliminate any liens on the debtor's property.
4.1.4.1 The Involvement of Case Trustee under Chapter 7
Upon filing a Chapter 7 petition, the U.S Trustee, or the bankruptcy court in Alabama and North Carolina, designates an impartial case trustee responsible for managing the case and liquidating the debtor's non-exempt assets.
Personal bankruptcy law in Europe
4.2.1 Personal bankruptcy law in Denmark
In 1984, Denmark amended its bankruptcy laws to incorporate consumer debt adjustments, following a thorough evaluation by a preparatory committee The committee assessed the likelihood of recovering hopeless debts versus the efforts made by creditors to collect them Ultimately, they concluded that discharging such debts would not significantly harm any party involved and could offer various societal benefits.
A key objective of the amendment was to establish the necessary conditions for debt adjustment, aimed at identifying unmanageable debts eligible for discharge This included clarifying the debtor's insolvency status and overall financial situation.
- The debtor has total debts of 40,000 USD approximately in case of employed or 15,000 USD approximately in case of unemployed (or retired, as the case may be)
The court has the discretion to evaluate the debtor's overall situation, considering factors such as the origin, age, and payment history of the debt Additionally, the court will assess the circumstances under which the debtor incurred the debt, as well as the likelihood of the debtor accumulating new debts or receiving an inheritance in the near future.
The debtor must submit an application to the court, which will evaluate the necessary conditions to determine its admissibility If accepted, a private attorney will act as the trustee, responsible for thoroughly investigating the debtor's circumstances and assisting in the development of a repayment plan.
A debtor typically proposes a payment plan lasting five years, during which creditors can voice their opinions, though these are not binding on the court The court will discharge any debt not included in the plan, and the debtor is required to pay off the debt using income that exceeds essential living costs, generally aligned with the national minimum social security standards However, a straight discharge may be available for debtors who are unemployed or retired.
4.2.2 Personal bankruptcy law in France
26 Johanna Niemi-Kiesilainen, 1999 Consumer Bankruptcy in Comparison: Do We Cure A Market Failure or A Social Problem?
Under the French Law on individual and household overindebtedness, established in 1989, debtors can submit a rescheduling application to an administrative commission that includes representatives from the Bank of France, local banks, consumer groups, and local governments Upon receiving the application, the commission facilitates negotiations to create a mutually acceptable repayment plan If the plan is rejected, the debtor has the option to take the matter to court, where the commission will propose an alternative plan.
Under the 1989 Law, courts generally do not discharge debts, with limited exceptions They can grant time extensions, adjust interest rates, and prioritize payments towards the principal before interest However, courts cannot reduce the principal amount of the debt Rescheduling of debt payments is permitted for up to one and a half times the original period or a maximum of five years.
The existing provisions fall short in assisting debtors with minimal or no ability to make payments As a result, commissions and courts have implemented grace periods for these struggling debtors In response to this issue, the law was revised in 1998 to permit a discharge for debtors lacking payment capacity after a three-year grace period.
4.2.3 Personal bankruptcy law in Finland
Under Finnish law, insolvent debtors must provide a valid explanation for their overindebtedness, which can include factors such as unemployment, illness, or layoffs Filings that violate the moral obligation to repay debts are typically denied Notably, in early 1997, legislation was amended to exclude provisionally unemployed debtors from certain protections.
Before filing an application to the court, the debtor must submit a voluntary payment plan to the creditors If an agreement cannot be reached, the court will appoint a trustee to create a new repayment plan Similar to Danish law, creditors' opinions are considered, but the court is not obligated to accept their approval of the plan The repayment period can last up to five years, or longer if the debtor is allowed to retain a private residence and continue repaying the mortgage Additionally, mortgage payments may extend beyond five years, and interest rates can be adjusted accordingly.
4.2.4 Personal bankruptcy law in Norway
Norwegian legislation regulates access to debt adjustment, aligning with Finnish principles that prohibit adjustments if they violate the moral obligation to repay debts.
In Norway, bankruptcy filings are initially managed by an enforcement official rather than the court, who compiles the necessary debtor information This official then submits the filing to the court, which subsequently issues a three-month stay of proceedings against the debtor.
During the debtor's stay, a plan will be submitted for approval by the enforcement official, who will meet with creditors to confirm it unless there are objections Since creditors often challenge the proposed plan, a judge is usually required to validate it even in the face of such objections The standard duration of the plan is five years, although the court has the authority to extend this period if necessary.
In Norway, housing loans are a significant contributor to overindebtedness, leading to their inclusion in the debt adjustment law, similar to Finnish legislation Most debtors are allowed to keep their homes during adjustment procedures, selling only if the property exceeds their reasonable needs and it benefits creditors Debtors are required to pay secured debt up to the total value of the home plus ten percent, with only interest payments made during the debt adjustment plan, while principal payments commence after the plan concludes.
4.2.5 Personal bankruptcy law in Austria
Under Austrian law, the adjustment process begins with negotiations between the debtor and creditors After the debtor has engaged in two rounds of negotiations, the court establishes specific conditions for the adjustment This plan lasts for seven years and is similar to wage garnishment.
The debtor is subject to the supervision of the trustee and creditors concerning its employment, domicile, and other situations The trustee is responsible for the administration of the payments
Personal bankruptcy law in Asia
Under Japanese law, there are currently two types of personal bankruptcy proceedings: a straightforward bankruptcy process that allows debtors to be discharged, and a specific civil rehabilitation procedure designed for individual debtors.
In general, the court will grant a debtor a discharge, but there are specific reasons for denial Discharge may be refused if the debtor engages in misconduct related to insolvency, such as concealing assets or making false claims about their creditworthiness Additionally, a discharge can be denied if the debtor fails to cooperate with the trustee or the court Furthermore, if the debtor has received a discharge in a prior bankruptcy or rehabilitation case within the last seven years, their request for discharge may also be denied.
The law allows for exemptions that cover a debtor's household furnishings, goods, apparel, appliances, and a limited amount of cash Courts may also broaden these exemptions upon request from the debtor or at their discretion Additionally, temporary extensions can include specific amounts in bank accounts and the ownership of a motor vehicle, particularly for debtors residing in areas with inadequate public transportation or those operating a carrier business.
Many debtors eligible to file for bankruptcy do not undergo formal liquidation, as creditors often perceive the estate to lack non-exempt assets Consequently, instead of appointing a trustee, alternative resolutions may be pursued.
27 Junichi Matsushita, 2006 Comprehensive Reform of Japanese Personal Insolvency Law
28 Junichi Matsushita, 2007 Japan’s Personal Insolvency Law Texas International Law Journal, Vol 42, 765-771 trustee, the bankruptcy proceeding will start and end at the same time
4.3.1.2 Civil Rehabilitation proceedings for individual debtors
These special procedures are, in principle, the procedures for regularly waged debtors owing less than a certain amount of debt for the repayment plan of three years
The court can designate a "Rehabilitation Officer for Individuals" (Kojin Saisei Iin) to evaluate a debtor's assets and income This officer aids the court in assessing the validity and quantity of creditor claims, which may be contested by the debtor or other creditors Additionally, the officer provides guidance to the debtor in formulating the necessary rehabilitation plan.
In Korea, the court may grant a discharge to a debtor who has repaid over 75% of their debts under a repayment plan, particularly when continuing payments become challenging However, this option is only available if each creditor receives at least as much as they would in a bankruptcy liquidation of the debtor's assets.
The number of Korean credit defaults has increased steadily since 1997, reaching 3,700,000 in late 2003, representing around 8.4% of the Korean population
29 The government launched several support programs, but the number of credit defaults slowly decreased It was then determined that, in order to successfully recuperate the credit defaults, debt reductions must be more comprehensive, personal bankruptcy mechanisms must be used in a simple manner and incentives must be provided to encourage debtors to proceed their repayment plans
The Korean personal bankruptcy legislation also includes Bankruptcy Proceeding and Individual Debtor Rehabilitation Proceedings
The Bankruptcy Act regulates the bankruptcy process for individuals and companies, establishing a bankruptcy estate once the court adjudicates bankruptcy The bankruptcy trustee exclusively holds all debtor properties and the rights to manage and dispose of them, under the court's supervision Upon liquidation, the debtor may receive certain concessions.
In South Korea, personal bankruptcy discharge is typically granted unless the debtor has committed bankruptcy-related crimes, presented a false list of creditors, or has received a discharge within the past ten years.
The Korean Bankruptcy Act, effective since 1962, did not allow for personal debt relief until 2001, leading to ongoing challenges regarding discharge decisions Initially, courts faced difficulties, often issuing partial discharges due to judges' hesitance to grant full relief, despite the absence of statutory support for such actions However, as judges have gained more experience and understanding of the bankruptcy process, there has been a noticeable shift towards more generous discharge practices in recent years.
In March 2004, the National Assembly passed the Individual Debtor Rehabilitation Act in response to the political concern
The Individual Rehabilitation Proceeding is available for wage earners and self-employed individuals seeking bankruptcy relief due to insufficient funds to cover specific debts A court-appointed Rehabilitation Administrator is responsible for reviewing the submitted documents, including the repayment plan, assessing the debtor's assets and income, and managing the creditors’ meeting This administrator also has the authority to pursue avoidance rights and distribute payments to creditors according to the approved repayment plan The court may request modifications to the payment plan, and debtors have the opportunity to revise it before final court approval.
In September 2004, the introduction of the Individual Rehabilitation Proceeding faced significant criticism due to its strict eight-year repayment plan, which deterred many debtors from applying However, it was later amended to allow a five-year repayment period for those deemed unable to repay their debts within that timeframe, ensuring that any remaining debts would be discharged.