unlicensed personal bankruptcy in vietnam the necessity and possibility

DECLARATION This thesis is a presentation of my original research work Wherever contributions of others are involved, every effort is made to indicate this clearly, with due reference to the literature, and acknowledgement of collaborative research and discussions Author Huynh Tuong Linh CONTENT DECLARATION CONTENT SCHEDULE OF ABBREVIATIONS SCHEDULE OF TABLES SCHEDULE OF PICTURES SUMMARY TÓM TẮT CHAPTER PREAMBLE 1.1 Background information 1.2 Research issues 1.3 Research questions .4 1.4 Research methodology .5 CHAPTER THE NECESSITY BANKRUPTCY IN VIETNAM TO REGULATE PERSONAL 2.1 The volatility of consumer credit market 2.2 Insolvency in case of unlimited liability business 10 2.3 Other advantages that may come with the personal bankruptcy system 11 CHAPTER INTRODUCTION TO INTERNATIONAL EXPERIENCES IN REGULATING PERSONAL BANKRUPTCY 13 3.1 A human right to declare bankruptcy .13 3.2 Role of culture and economic in the development of personal bankruptcy 15 3.3 Arguments on the adverse impacts of personal bankruptcy .16 3.4 The historical evolution of personal bankruptcy 18 CHAPTER AN OVERVIEW OF INTERNATIONAL LEGISLATIONS ON PERSONAL BANKRUPTCY 25 4.1 Personal bankruptcy law in US 25 4.2 Personal bankruptcy law in Europe 34 4.3 Personal bankruptcy law in Asia 38 CHAPTER 5.KEY PROVISIONS OF PERSONAL BANKRUPTCY LAWS 41 5.1 Discharge 41 5.2 Mechanism of debt liquidation 42 5.3 Case administrator 44 5.4 Protection against debt collection activities .45 5.5 Avoidance of abuse 45 CHAPTER 6.APPLICATION OF PERSONAL BANKRUPTCY IN VIETNAM 49 6.1 Personal bankruptcy in Vietnam as provided by the current law .49 6.2 Vietnamese lawmaker’s argument against personal bankruptcy .50 6.3 Proposed concept, prerequisites and recommendation for adaptation of personal bankruptcy in Vietnam law .53 CHAPTER CONCLUSION .58 REFERENCES BAPCPA – US Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 IRS – US Internal Revenue Service LOB 2014 – Vietnam Law on Bankruptcy 2014 UNCITRAL - United Nations Commission on International Trade Law US – United States of America USD – US Dollar UST – US Trustee USTP – US Trustee Program VND – Vietnam Dong Table 3.1 Summary of US Personal Bankruptcy Legislation Development Table 3.2 Summary of Europe Personal Bankruptcy Legislation Development Picture 1.1 The Growth of Consumer Credit in 2017 Picture 3.1 US Personal Bankruptcies in 1900-2004 Picture 3.2 Private credit in Europe as a percentage of GDP Picture 4.1 US personal bankruptcy cases by chapter Picture 5.1 Debt liability in personal bankruptcy case SUMMARY Vietnam's credit market, especially the consumer credit sector, has grown steadily in recent years However, under the current Vietnam law, an individual’s liability is unlimited, and personal bankruptcy is not recognised Because of the absence of a legal framework for personal bankruptcy, economically an individual cannot get out from the credit market and settle his/her debts in civilised ways when he/she has unfortunately become insolvent Vietnamese lawmakers initially discussed the personal bankruptcy during the drafting of the LOB 2014 but concluded that allowing individuals and business households to declare bankruptcy is not urgent By studying and analysing the Vietnam socio-economic conditions, international experiences with personal bankruptcy (of which the US personal bankruptcy legislation is mainly focused) and the potential challenges in case of Vietnam personal bankruptcy law to be adopted, this thesis is expected to find out whether the personal bankruptcy law is necessary, applicable and implementable to Vietnam Upon the findings, it is believed that personal bankruptcy is necessary and applicable in consideration of socio-economic conditions in Vietnam The basics and preliminary mechanisms of personal bankruptcy to be adopted in Vietnam are also proposed in this thesis for future research TĨM TẮT Thị trường tín dụng Việt Nam, đặc biệt khu vực tín dụng tiêu dùng, đà tăng trưởng năm vừa qua Tuy nhiên, theo quy định pháp luật Việt Nam, trách nhiệm cá nhân vô hạn, phá sản cá nhân chưa thừa nhận Xuất phát từ thiếu vắng hành lang pháp lý cho phá sản cá nhân, xét phương diện kinh tế cá nhân khơng thể khỏi thị trường tín dụng giải nợ theo đường dân trường hợp họ không may bị vỡ nợ Nhà làm luật Việt Nam đề cập sơ đến phá sản cá nhân trình soạn thảo Luật Phá sản 2014 kết luận việc cho phép cá nhân hộ kinh doanh cá thể tuyên bố phá sản không cấp thiết Qua việc nghiên cứu đánh giá điều kiện kinh tế-xã hội Việt Nam, kinh nghiệm quốc tế phá sản cá nhân (trong hệ thống pháp luật phá sản cá nhân Hoa Kỳ trọng) thử thách tiềm tàng trường hợp luật phá sản cá nhân Việt Nam áp dụng, luận văn mong đợi làm rõ việc liệu phá sản cá nhân có cần thiết, áp dụng có khả thực thi Việt Nam hay không Dựa kết nghiên cứu, người viết tin phá sản cá nhân cần thiết áp dụng điều kiện kinh tế-xã hội Việt Nam Những yếu tố phương thức sơ phá sản cá nhân áp dụng Việt Nam đề xuất luận văn nhằm phục vụ cho nghiên cứu khác tương lai dismissal of such case, denial or revocation of debtor’s discharge or even criminal penalties CHAPTER VIETNAM APPLICATION OF PERSONAL BANKRUPTCY IN 6.1 Personal bankruptcy in Vietnam as provided by the current law 6.1.1 Existing procedure for bankruptcy case Although the LOB 2014 does not have an individual as a regulated entity, the procedure is generally still involved with the judge, debtor, creditors and trustee with several stages The primary purpose of the bankruptcy process is the liquidation of assets and settlement of debts Therefore, the existing bankruptcy procedure still plays an essential role if personal bankruptcy laws are recognised and applied In principle, the existing procedure for bankruptcy case under Vietnam legislation comprises of six essential steps - Step 1: The debtor or creditor files the petition for bankruptcy - Step 2: Right after a duly petition was filed, the debtor and creditors may propose with the court to negotiate and withdraw the filing - Step 3: Provided that no self-negotiation was conducted between the debtor and creditors or the filing was not withdrawn, the court shall accept the petition, inform related parties and temporarily suspend the previous claim for payment obligations if any - Step 4: The court initiates bankruptcy process, including the appointment of a trustee, monitoring of debtor’s operation, inventory of debtor’s assets and the listing of creditors - Step 5: Conducting the meeting of creditors, to decide whether the court should dismiss the case as the debtor still has solvency, apply measures to restore business activities for the debtor, or declare bankruptcy - Step 6: The court proceeds the meeting of creditors’ decision under the laws 6.1.2 Provisions of trustee One of the significant improvements in the LOB 2014 is the introduction of trustee asset management, liquidation enterprise, whose most important role is managing the assets, supervising the operation and liquidating the assets of the debtor These activities are principally comprising of: - Verify, collect and manage documents and evidence related to the debtor’s operation; - Make the lists of assets, creditors, debtors; - Preserve debtor’s properties, such as prevent the sale and transfer of assets without the judge's permission, dispersal of assets, maximise the assets value upon liquidation; - Supervise the debtor’s business activities per the applicable laws; - Organise the valuation and liquidation of assets; - Remit the proceeds from assets liquidation into the account opened by the court, civil enforcement agency For its role, the trustee may request the judge to proceed for: - Documents and evidence collection; - Declaration of invalid transactions and recovery of debtor’s assets which are illegally transferred or assigned; - Applying provisional measures, administrative sanctions The trustee shall report the implementation of its authorities and duties and at the request of the judge, the civil enforcement agency, and shall be liable for its implementation of authorities and duties 6.2 Vietnamese lawmaker’s argument against personal bankruptcy Vietnamese lawmakers noticed the personal bankruptcy during the drafting of the LOB 2014 According to reports prepared by the judiciary during the preparation and commenting, personal bankruptcy had shown signs of necessity for Vietnam's modern economic and social conditions Such necessity comes from a remarkable proportion of the business sector being individuals and business households (thereby resulting in the need for a legal mechanism to allow these entities to recover if unfortunately, became insolvent), ensure debt collection activities to be conducted legitimately, and avoid social disorders However, Vietnamese lawmakers have argued that allowing individuals and business households to declare bankruptcy is not urgent, while the number and quality of Vietnamese judges cannot accommodate such extension33 On the other hand, the fact of not registering business capital and implementing accounting records of individuals and business households is also mentioned as difficulty in applying for personal bankruptcy in Vietnam Finally, the personal bankruptcy was set aside in the process of drafting and adopting the LOB 2014 These arguments although somewhat reflected the Vietnam socio-economic context but have not evaluated it comprehensively and therefore underestimated the necessity of personal bankruptcy Firstly, the object of personal bankruptcy should not stop at business individuals It shall also include individuals who fall into insolvency for consumption purposes Putting aside cases of abuse (which should be mitigated and prevented by precautionary regulations), an individual participates in the credit market, whether in an active or passive manner and unfortunately becomes insolvent, still need an appropriate legal solution to settle the debt For the avoidance of doubt, such solution is beneficial, not only limited to the debtor, but also creditors and socio-economic system in general With personal bankruptcy, creditors will get back the possibly maximum amount of debt in consideration to the debtor's financial status and be freed from the psychological, responsibility burden (especially in the case of financial institutions) and debt collection costs Concurrently, when debtors have found a measure that they deem appropriate to relieve themselves from debts liability while still keeping their assets (or ensuring the ability to accumulate assets from future earnings, as the case may be), debtors’ productivity may increase significantly compared to when working to repay the debt This brings benefits to society along with avoiding negative impacts from insolvency and debt collection activities For the concern that allowing personal bankruptcy for consumer debt will result with bad consumer habit, it is necessary to distinguish the cases of filing personal bankruptcy for abuse or unfortunate purposes With legal and social consequences left to the individual declaring bankruptcy, it is difficult for a usual debtor to be willing for such action On the other hand, allowing individuals to declare bankruptcy will force the creditors, especially the financial institutions, to be more cautious in 33 The Vietnam Supreme People's Court, 2013 Explanation report on opinion collection, adjustment of draft law on bankruptcy (Amended) the credit assessment process and thereby to build a healthier credit market Secondly, the fact that individuals and business households are not registering their business capital, thus bearing unlimited liability for their debts, is instead demanding a legal relief for these entities from credit market and allow them to continue participating in business activities effectively It is undeniable that the accounting and financial activities of Vietnam individuals and business households are not transparent and administrable There will be challenging for the implementation of personal bankruptcy at the early stage However, requiring the insolvent debtor to clarify their financial status as a prerequisite for personal bankruptcy will help to improve the Vietnamese behaviours in these practices Moreover, the Vietnam government is making significant efforts in managing personal income tax and reducing cash use These factors, when viewed in an overall perspective, are mutually support each other Thus, concluding that personal bankruptcy is not applicable in Vietnam just because individuals and business households not register business capital and conduct accounting records are not suitable Thirdly, LOB 2014 introduced the concept of trustee and asset management, liquidation enterprise, who are professional practitioners being independent with the judicial authorities, thereby assigning part of activities in the process of bankruptcy procedure from the judge to them Under LOB 2014, the trustee may be the lawyer, auditor, and even the law, economic, accounting, finance or banking bachelor having 05 or more years of experience in the field of training This has shown the lawmakers' open mind on the bankruptcy legislation when distinguishing pure judicial activity to be under the jurisdiction of the court, and the liquidation of assets under the authority of those people with specific knowledge and experience According to US Federal Judicial Center34, as of September 2019, there were 350 bankruptcy judges in the US According to another statistic35, there were a total of 1,219,132 consumer bankruptcy cases in 2012 On average, a US bankruptcy judge shall undertake 3,483 cases in 2012, equivalent to more than nine consumer Federal Judicial Center “Bankruptcy Judgeships” https://www.fjc.gov/history/judges/bankruptcyjudgeships 34 Administrative Office of the U.S Courts “Just the Facts: Consumer Bankruptcy Filings, 2006-2017” http://www.uscourts.gov/news/2018/03/07/just-facts-consumer-bankruptcy-filings-2006-2017 35 bankruptcy cases each day This rough calculation may demonstrate that the US judge is not the person who conducts most of the activities in the personal bankruptcy proceedings, and the judge can handle numerous bankruptcy cases at the same time with an appropriate system Therefore, the mentioned limitation of Vietnam judges for expanding the regulated entities of bankruptcy law is possible to resolve 6.3 Proposed concept, prerequisites and recommendation for adaptation of personal bankruptcy in Vietnam law For adaption of personal bankruptcy in Vietnam law, the basics of international legislation on personal bankruptcy and Vietnam socio-economic conditions shall be carefully examined 6.3.1 Discharge The present LOB 2014 only targets the legal persons, and there is no actual discharge Though upon being declared bankruptcy and the completion of assets liquidation and distribution, no debt liability remains, but so is the debtor’s existence In other words, the debtor is not relieved from debt liability, but its entity is judicially ended together with all entitlements and liability instead This provision is not appropriate for personal bankruptcy, as the entity of natural person cannot be ended merely Besides, the primary purpose of personal bankruptcy is to allow the honest but unfortunate debtor to restart its financial life Therefore, the pure concept of discharge as introduced in international legislation on personal bankruptcy discharge shall be maintained: An honest but unfortunate debtor, after paying off a particular portion of its debt, which is as much as the creditors can reasonably and fairly recover according to the debtor’s financial conditions, shall be relieved from remaining debt liability and gained a fresh start 6.3.2 Mechanism of debt liquidation As mentioned above, there are two common mechanisms of debt liquidation for the debtor to obtain the discharge: (1) Liquidating the currently-owned assets to pay the obliged debt and protecting the future income from garnishment; and (2) Protecting the currently-owned assets from liquidation and use the future income to pay the obliged debt However, a pure deployment of either said mechanism is not applicable to Vietnam socio-economic conditions For instance, an immediate and straight discharge as provided under Chapter of the US Bankruptcy Act is not necessary, as the Vietnam credit market is not developed and open as the same as the US Therefore, the provisions of Chapter 13 of US Bankruptcy Act, taking into account relevant factors under Europe personal bankruptcy legislation, would be an appropriate starting point to determine the mechanism of debt liquidation under Vietnam personal bankruptcy laws Notably, in exchange for debt relief, the insolvent debtor shall pay its discretionary income to creditors throughout a repayment plan Therefore, the central part of this mechanism is the repayment plan that the debtor proposes to the creditors and the court The repayment plan to be regulated under the Vietnam personal bankruptcy law shall address the following issues: - Ordinary term of the repayment plan, for which all unsecured debts and certain secured debts shall be paid in full, may be up to years as commonly provided under international legislation on personal bankruptcy However, in case of the change in circumstances that cause hardship in the implementation of the confirmed repayment plan, the provisions of the grace period as similarly provided under French legislation shall be applied instead of a straight discharge or dismissal - Housing loans are taking a remarkable proportion of Vietnam current consumer credit; thus, residence mortgages should be considered in the repayment plan as same as the Norwegian legislation - The trustee shall review the repayment plan After that, the plan is to be heard by the court and the creditors, who may give objections to that Nevertheless, the confirmation of the repayment plan is not be bound to creditors’ opinion and shall be merely subject to the laws and the debtor’s financial conditions - During the repayment plan, the debtor’s assets shall be forbidden from assignment and must be put under the trustee’s supervision to reserve as an alternative of debt recovery - Discharge may be granted upon the debtor’s fulfilment of certain requirements such as (1) the debtor duly completed the repayment plan or (2) the debtor failed to complete plan payments, even with the grace period, due to circumstances beyond the debtor’s control and through no fault of the debtor and the creditors have received at least as much as they would have received in the event that the debtor’s currently-owned assets have been liquidated 6.3.3 Case administrator The introduction of trustee and asset management, liquidation enterprise in LOB 2014 is excellent preparation for the personal bankruptcy As of November 2018, it was reported to be 84 trustees and 18 asset management, liquidation enterprises licensed in Ho Chi Minh City36 Such number more or less presents a noticeable interest in this kind of professional practice, which may build up an adequate force of trustees and asset management, liquidation enterprises for the later stage of Vietnam bankruptcy legislation However, the demand for personal bankruptcy is more usual than corporation bankruptcy and will likely occur in every district of the country The practice of trustee on another hand is asset management, liquidation and proceeds distribution, which needs local knowledge and experience Therefore, one of the material matters shall be the expansion of trustee and asset management, liquidation enterprise across the country Some provisions need to be improved, such as the cooperation between the trustee and the civil enforcement agency, the payment of trustee fee to have the regulation of trustee implemented successfully The measures to supervise trustee and asset management, liquidation enterprise is urgently necessary Under the current provisions, the trustee and asset management, liquidation enterprise is supervised by the Department of Justice, however in an inactive manner For instance, an individual may accuse the trustee of violating the bankruptcy law and professional ethics of trustee, upon which the Department of Justice shall exercise its authorities in inspecting the same Aside to the yet issue of professional ethics of trustee, this system is problematic Department of Justice is a governmental authority, who can supervise the operation of trustee and asset management, liquidation enterprise in an overview and administrative manner, but should be not in appropriate position to ensure if their practice is accordant with the case conditions This needs a professional institute and program, such as UST and 36 Kim Phung, “TP.HCM có 84 quản tài viên” (Ho Chi Minh City is having 84 trustees; Translated by the author), Phap Luat HCMC, published on 27 November 2018, https://plo.vn/phap-luat/tphcm-dang-co84-quan-tai-vien-805073.html USTP On another hand, more active measures should be deployed, such as the postcase audit system 6.3.4 Protection against debt collection activities Under the LOB 2014, the judge shall temporarily suspend the claim for payment obligations upon the imitation of the bankruptcy proceeding Such action can be somewhat seen as a measure to protect the debtor against debt collection activities, but only in juridical matters This is not sufficient Besides to ability to wipe away the debts, it is believed that one of the most significant benefits of filing bankruptcy under US legislation is the automatic stay The automatic stay says to debtors’ creditors that a case has been filed, they have to stop collecting immediately, and they have to let the bankruptcy court administer the case Creditors face liability for damages to the debtor for automatic stay violation, such as actual damages, punitive damages, attorney's fees and costs In principle, the automatic stay immediately stops most civil lawsuits filed against the debtor and most collection actions being taken against the debtor's property by a creditor, collection agency, or government entity This includes garnish or attempt to garnish the debtor’s wages or bank account; continue with foreclosure or repossession proceedings; call, email or mail the debtor any correspondence in an attempt to collect a debt; contact the debtor’s friends or family for information regarding your whereabouts or financial status; publicly post or make available any information regarding debtor’s bankruptcy filing or debt obligations; file or attempt to proceed with a lawsuit pertaining to debts Not to mention another objective of the automatic stay is to put all creditors on a level playing field and prevent one creditor from seizing a debtor’s assets before others have had the opportunity to so Therefore, it is worthy to deploy the US provisions of the automatic stay in the Vietnam bankruptcy legislation, not only for the personal bankruptcy cases but also the corporate bankruptcy cases 6.3.5 Avoidance of abuse For the prevention of the abuse of personal bankruptcy, it is necessary to focus on two essential tracks of measures The first one is to detect the signs of abuse during the bankruptcy proceeding and the second one is to eliminate the benefits that have been granted for and further punished those who have committed abuse The effective combination of these two measures may prevent abuse in personal bankruptcy There shall be provisions to ensure the trustee and asset management, liquidation enterprise to have the duty of care in verifying the information contained in the bankruptcy case These persons shall also have the right and duty to refer possible bankruptcy crimes to the competent authority However, the trustees’ review may be limited because the paperwork must be reviewed manually Therefore, there shall be a post-case audit system of samples of personal bankruptcy cases to determine the accuracy, veracity, and completeness of the petitions and supporting documents The revocation of discharge is also an important measure For instance, the granted discharge may be revoked upon request of a party in interest if it is proved that the debtor obtained the discharge through fraud, and the requesting party was unaware of the fraud before the granting of the discharge The provisions of criminal bankruptcy fraud can be as well considered as an additional measure to prevent the debtor from attempting abuse CHAPTER CONCLUSION Under Vietnam law, individual liability is unlimited, and there is no legal framework to help an individual get out of the credit market and move forward when it has unfortunately become insolvent Meanwhile, Vietnam has a continually growing credit market, particularly consumer credit Such inability may lead to a domino effect influences on the creditors, the debtor’s family and productivity and potentially further result in the social unrests Based on all the benefits that personal bankruptcy can bring to the table, along with the facts and information as analysed herein, there are grounds for considering personal bankruptcy is necessary and applicable in consideration of socio-economic conditions in Vietnam It is obliviously that, as concerned by the lawmakers during the drafting of the LOB 2014, that there are challenges would occur when adopting the personal bankruptcy, especially the court’s ability to implement these provisions However, Vietnam’s court system has been being improved; the concept of trustee and asset management was introduced These would be more or less the remarkably helpful materials for the future introduction of personal bankruptcy in Vietnam Amongst the things necessary to be taken into account when considering the adaption of personal bankruptcy in Vietnam, it is believed that the below principles should be set as in priority: - A straight deployment of international legislation on personal bankruptcy to Vietnam is not appropriated - The concept of discharge, which is to relieve an individual from its liability to repay a debt in case of insolvency whether in whole or in part, is essential - The process to discharge must be drafted carefully, to be not too generous to be abused, but also not too harsh to be accessed The introduction of the mechanism of the repayment plan in the early stage is recommended - The regulation of the trustee must be improved to not only smooth the cooperation between the trustee and the judge but also expand the trustee’s involvement and authority in a bankruptcy case Nevertheless, because of the enormous cultural differences around the world, and each country's economic history and attitudes towards money and debt, there is no perfect system of personal bankruptcy Instead, a new insolvency system must reflect how the country has experienced growth in market economies and how it has philosophically viewed consumer debt They must be carefully drawn up to reflect the values of a particular culture Vietnam is not an exception to such a situation Therefore, this thesis is believed and expected to present the initial idea and demonstration of the necessity and basics of personal bankruptcy in Vietnam Nevertheless, the personal bankruptcy legislation can only be successfully adopted and implemented in Vietnam with more comprehensive, severe and official studies from the various legal researchers and practitioners across the country./ REFERENCES (1) Administrative Office of the US Courts “Just the Facts: Consumer Bankruptcy Filings, 2006-2017” http://www.uscourts.gov/news/2018/03/07/justfacts-consumer-bankruptcy-filings-2006-2017 (2) Dalie Jimenez, 2009 “The Distribution of Assets in Consumer Chapter Bankruptcy Cases” American Bankruptcy Law Journal, The 83(4) (3) Hoang Ngan, "Cho vay tiêu dùng: Bài học từ cường quốc kinh tế” (Consumer lending: Lessons from the top 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