Personal bankruptcy in vietnam the necessity and possibility

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITYHUYNH TUONG LINH PERSONAL BANKRUPTCY IN VIETNAM: THE NECESSITY AND POSSIBILITY MASTER THESIS IN LAW Ho Chi Minh

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY

HUYNH TUONG LINH

PERSONAL BANKRUPTCY IN VIETNAM: THE NECESSITY AND POSSIBILITY

MASTER THESIS IN LAW

Ho Chi Minh City - 2019

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY

HUYNH TUONG LINH

PERSONAL BANKRUPTCY IN VIETNAM: THE NECESSITY AND POSSIBILITY

Major: Economic LawsCode:8380107

MASTER THESIS IN LAW

SUPERVISOR

1 DR PHAM DUY NGHIA

Ho Chi Minh City - 2019

Thist h e s i s i s a p r e s e n t a t i o n o f m y o r i g i n a l r e s e a r c h w o r k W h e r e

v e r contributionsofothersareinvolved,everyeffortismadetoindicatethisclearly,withduereferencetotheliterature,andacknowledgementofcollaborativeresearchanddiscussions

Author

HuynhTuongLinh

NCONTENT

SCHEDULEOFABBREVIATIONSSCH

EDULEOFTABLESSCHEDULEOFPI

CTURESSUMMARY

TÓMTẮT

CHAPTER1.P R E A M B L E 1

1.1 Backgroundinformation 1

1.2 Researchissues 1

1.3 Researchquestions 4

1.4 Researchmethodology 5

CHAPTER2.THE NECESSITY TO REGULATE PERSONALBANKRUPTCYIN VIETNAM

7 2.1 Thevolatilityof consumercreditmarket 7

2.2 Insolvencyincaseofunlimitedliabilitybusiness 10

2.3 Otheradvantagesthatmaycomewiththepersonalbankruptcysystem 11

CHAPTER3.INTRODUCTIONTOINTERNATIONALEXPERIENCESINREG ULATINGPERSONALBANKRUPTCY 13

3.1 Ahumanright todeclare bankruptcy 13

3.2 Roleofcultureandeconomicinthedevelopmentofpersonalbankruptcy 15

3.3 Argumentsontheadverseimpactsofpersonalbankruptcy 16

3.4 Thehistoricalevolutionofpersonalbankruptcy 18

CHAPTER4.ANOVERVIEWOFINTERNATIONALLEGISLATIONSONPERSON ALBANKRUPTCY 25

4.1 Personalbankruptcy lawin US 25

4.2 Personalbankruptcylaw inEurope 34

4.3 Personalbankruptcy lawin Asia 38

CHAPTER5.KEY PROVISIONSO F P E R S O N A L B A N K R U P T C Y L A W S 41

5.1 Discharge 41

5.2 Mechanismof debtliquidation 42

5.3 Caseadministrator 44

5.4 Protectionagainstdebtcollectionactivities 45

5.5 Avoidanceof abuse 45

CHAPTER6.APPLICATIONOFPERSONALBANKRUPTCYINVIETNAM 49

6.1 PersonalbankruptcyinVietnamasprovidedbythecurrentlaw 49

6.2 Vietnameselawmaker’sargumentagainstpersonalbankruptcy 50

6.3 Proposedconcept,prerequisitesandrecommendationforadaptationofpersonalbankruptcyin Vietnam law 53

CHAPTER7.C O N C L U S I O N 58 REFERENCES

BAPCPA–USBankruptcyAbusePreventionandConsumerProtectionActof2005IRS–USInternalRevenueService

LOB2014–VietnamLawonBankruptcy2014

UNCITRAL-UnitedNationsCommissiononInternationalTradeLawUS–UnitedStatesofAmerica

USD–USDollarUST–

USTrustee

USTP–USTrusteeProgramVND–

VietnamDong

Table3.1.SummaryofUSPersonalBankruptcyLegislationDevelopmentTable3.2.SummaryofEuropePersonalBankruptcyLegislationDevelopment

Picture1.1.TheGrowthofConsumerCreditin2017Picture3.1.USPersonalBankruptciesin1900-

2004Picture3.2.PrivatecreditinEuropeasapercentageofGDPPicture4.1.USpersonalbankruptcycasesbychapterPicture5.1.Debtliabilityinpersonalbankruptcycase

Vietnam'sc r e d i t m a r k e t , especiallyt h e c o n s u m e r c r e d i t s e c t o r , h

a s g r o w n st ead i ly inrecentyears.However,underthecurrentVietnamlaw,anindividual’sliabilityi s u n l i m i t e d , a n d p e r s o n a l b a n k r u p t c y i s notr e c o

g n i s e d B e c a u s e o f t h e absenceofalegalframeworkforpersonalbankruptcy,economicallyanindividualcannotgetoutfromthecreditmarketandsettlehis/

herdebtsincivilisedwayswhenhe/

sheh a s u n f o r t u n a t e l y b e c o m e i n s o l v e n t V i e t n a m e s e l a w m a k

e r s i n i t i a l l y discussedthepersonalbankruptcyduringthedraftingoftheLOB2014butconcludedthatallowingindividualsandbusinesshouseholdstodeclarebankruptcyisnoturgent.Bys t u d y i n g a

n d a n a l y s i n g t h e V i e t n a m

socio-economicconditions,i n t e r n a t i o n a l experienceswithpersonalbankruptcy(ofwhichtheUSpersonalbankruptcylegislationi s m a i n l y f o c u s e d ) a n d t h e p

o t e n t i a l c h a l l e n g e s i n c a s e o f V i e t n a m personalbankruptcylawtobeadopted,thisthesisisexpectedtofindoutwhethertheper sonalb a n k r u p t c y l a w i s n e c e s s a r

y , applicablea n d i m p l e m e n t a b l e t o V i e t n a m Up o nthefindings,itisbelievedthatpersonalbankruptcyisnecessaryandapplicableinc o n s i d e r a t i o n o f socio-

economicconditionsi n V i e t n a m T h e b a s i c s a n d p r e l i m i n a r y mechanismsofpersonalbankruptcytobeadoptedinVietnamarealsoproposedinthisthesisforfutureresearch

ThịtrườngtíndụngViệtNam,đặcbiệtlàkhuvựctíndụngtiêudùng,đangtrênđàtăngtrưởngtrongnhữngnămvừaqua.Tuynhiên,theoquyđịnhphápluậthiệntạicủaViệtNam,tráchnhiệmcủamộtcánhânlàvôhạn,vàphásảncánhânvẫnchưađượcthừanhận.Xuấtpháttừsựthiếuvắngmộthànhlangpháplýchophásảncánhân,xétvềphươngdiệnkinhtếthìmộtcánhânkhôngthểthoátkhỏithịtrườngtíndụngvàgiảiquyếtnhữngmónnợcủamìnhtheoconđườngdânsựtrongtrườnghợphọkhôngmaybịvỡnợ.NhàlàmluậtViệtNamđãtừngđềcậpsơbộđếnphásảncánhântrongquátrìnhsoạnthảoLuậtPhásản2014nhưngđãkếtluậnrằngviệcchophépcánhânvàhộkinhdoanhcáthểđượctuyênbốphásảnlàkhôngcấpthiết.Quaviệc nghiêncứu và đánhgiá điều kiện kinhtế-xã hội Việt Nam,nhữngkinhnghiệmquốctếđốivớiphásảncánhân(trongđóhệthốngphápluậtphásảncánhâncủaHoaKỳđượcchútrọng)vànhữngthửtháchtiềmtàngtrongtrườnghợpluậtphásảncánhânViệtNamđượcápdụng,luậnvănnàyđượcmongđợisẽlàmrõđượcviệcliệuphásảncánhâncócầnthiết,ápdụngđượcvàcókhảnăngthựcthitạiViệtNamhaykhông.Dựatrênkếtquảnghiêncứu,ngườiviếttinrằngphásảncánhânlàcầnthiếtvàápdụngđượcđốivớiđiềukiệnkinhtế-

xãhộicủaViệtNam.NhữngyếutốcơbảnvàphươngthứcsơbộcủaphásảncánhânápdụngtạiViệtNamcũngđượcđềxuấttrongluậnvănnàynhằmphụcvụchocácnghiêncứukháctrongtươnglai

1.1 Backgroundinformation

Overthepastfewyears,accompanyingtherapidgrowthoftheeconomy,theprivatesectorgainstheleadingroleofVietnameconomicstructure,andthemarketfactorshavebeendismantlingthecommandeconomyfromdaytoday

Amongstotherthingsunderthemarketeconomy,theneedforanadequatelegalframeworkforbankruptcyactivitiesisessential.ItwasrecognisedbytheVietnamg o v er n men t , asmanyissuesinconnectiontotheformerLawonBankruptcywereadd r essed andresolvedbytheLOB2014

DuringthedraftingofLOB2014, thoughthereweresuggestionstoinclude individualasaregulatedentitythereof,theoppositeopinionmadeupthemajority,and the final draft ofLOB 2014omitted personalbankruptcy However,onthewaytoconcludingthenecessityofindividualtobecoveredbythelawsofbankruptcy,themainstreamrationalewasonlythattheindividualisnotrequiredbylawtoregisterforanycapitalwheninvolvingintheeconomicactivities,andthecivillawsshouldr eg ulat eitsinsolvency1.Suchrationaleseemsnotadequate

Article51.2ofVietnamConstitution2013alsoprovidesforthat“Participantsind

i f f e r e n t e c o n o m i c s e c t o r s a r e e q u a l , c o o p e r a t e a n d competeu n d e r t h

e l a w ” Therefore,givingtheincorporateentitytherighttodeclarebankruptcybutnotgivingthes

a m e t o t h e i n d i v i d u a l e n t i t y , a s t h e c h a n c e t o r e s t a r t n o t o n l y i t s economicactivitiesbutalsoitssociallife,isnotappropriate

Ont h e s i d e n o t e , U N C I T R A L , i n a c c o r d a n c e w i t h i t s l e g i s l a t i v

e g u i d e o n insolvencyl a w , r e c o m m e n d s t h a t i n s o l v e n c y l a w s h o u l d g o

v e r n i n s o l v e n c y proceedingsagainstalldebtorsengagedineconomicactivities,whethernaturalorleg al2

1.2 Researchissues

UnderVietnam'slaws,naturalpersonshaveunlimitedliabilityfortheirdebt.This means that ifanindividualowes anamountof money,hisorher responsibility

1 TheSupremePeople'sCourt,2013.Explanationreportonopinioncollection,adjustmentofdraftlawonbankruptcy(Amended),p.5-6.

2 UNCITRAL,2005 Legislative Guide on InsolvencyLaw, p.40.

Subsequently,theVietnamjurisdictioncanmerelyenforceorannulthedebt,totheextentpermissible bylaws,orrecognizethe agreementbetweentheparties.Thatisliterallyalloftheirpoweroveradebtcase.Theycanneitherarbitrarilyarrangeforther e p a y m e n t p l a n , c e a s e a n y p a r t o f t h e d e b t n o r a p p l y whatsoevermeasure

t o protect theentitlementofthecreditorsandthedebtor

Thishasresultedinsomesocialandlegalissuesrelatingtodebtcollectionandrelatedactivities

Firstly,thedebtrepaymentpressure.Suchpressuredoesnotrefertotheusualtypeofdebtrepayment,butrathertotheunforeseeninsolvency.Peoplewhosufferfromunforeseenoverindebtednesswillbeshockedbytheunexpectedlylargesizeoffinancialobligation,whichtheirsensibleabilitycannotafford.Insuchcircumstances,therewillbearemarkablechancethattheinsolventwillhaveadversereactions,sucha s co mmi t t i n g crimestomeet hisfinancialneedsorcommittingsuicide.Either casemayresultinaspill-overeffect

To nameafew,somefarmersin GiaLaicommittedsuicidewhentheirpepperdiedi n m a s s a n d t h e p r i c e o f t h e p r o d u c t d r o p p e d s i g n i f i c a n t l y ;

a couplek i l l e d themselves withdynamiteinNgheAnbecauseofadebtofVND5billion;orausedcarsellerinBacGiangrobbedthebanktopaythedebtofVND400million.Ifthesedebtorsandlike-

mindedpeoplehadamoreacceptableandlessstressfulrepaymentplangivenandimplementedbythecompetentauthorities,wouldtheymakenegativechoicesorspendeffortrestartingtheirlives?Secondly,themannerofdebtcollection.Whenapersonbecomesinsolventorislikelytobecomeinsolvent,itiscommonpracticeforhimorhertoseekanotherloantorepayexistingloans.Thispracticemakesthedebtscatteredandcomplicated,as doesthedebtcollection, sincethe debtor willrepayhisdebtsforsome emotionalreasonsinsteadoflogicalpriority.Thecreditors,on

theotherhand,becausetheydono t knowexactlywhetherthedebtorcanpaythedebtandwhensuchpaymentis made,mustdoeverythingpossibletoacceleratedebtcollection.Thingsmayevengetworsewhenthecreditorsknoweachother'sinvolvement

Source:VietnamNationalFinancialSupervisoryCommission2018

Inaddition,demandforconsumerloansandtrustloansinVietnamhasincreasedinbothquantityand quality.AccordingtotheNational Financial Supervisor

yC o m m i s s i o n3,c o n s u m e r c r e d i t w a s e s t i m a t e d t o i n c r e a s e b y 6 5 % i n 2017,higherthanthegrowthof50.2%in2016.Thefinancialcompaniesthatprovidesuchl o a n s h a

v e i n c r e a s i n g l y d e v e l o p e d t h e i r d e b t c o l l e c t i o n m e t h o d s , i n c l u d i n

g threatsandharassmentactivities.Itcontributedahuddleofdebtcollectionactivitiestothatchaoticpicture,suchasareportclaimingthatafinancialcompanymade17callsand20messagestoadebtor'sspouseinoneday

Lastbutnotleast,theequaltreatmentofcreditors.AccordingtoArticle42.1oftheLawsonCivilProcedures2015,thecourtmayjointwoormorecaseswhichithasseparatelyacceptedtoresolve.Thisprovisionisnotpracticalintheeventofdebtcollection,asthecreditorsshouldhaveanenormousconflictofinterest,especiallyw h e n thedebtorappearstobecomeinsolvent

Withoutas peci al p r o ce d u r e , cre di to rs wo ul d t a k e s e p a r a t e a c t i o n t o p

r o t e c t themselves,whichcouldleadtoanunfairoutcomeforcreditorswholackinformationorotherdebtcollectioncapabilitiesandlegalprocedures.Thesimilarstorycanbe foundwhereaHui(asknownasthetontine,aVietnameseschemeforsavingmoneyan d raisingcapital)get“broken”.TheHuimasterinsuchstorywillbeindebtedto

3 National Financial SupervisoryCommission,2017 Financial MarketReport, p.45.

Concerningthisimmenseneedforpersonalcreditandliability, itisstronglynecessarytoredrawamorecomprehensivepictureofthenecessityandpossibilityofpersonalbankruptcyinVietnam

Therefore,byanalyzingVietnam’ssocio-economiccontexttogetherwiththebenefitsthatthepersonalbankruptcymaygenerate,thefindingsforthisquestionisvitalforbuildingasolidfoundationofthisthesis

1.3.2 What are theinternationallegislationandexperience in regard tothe

personal bankruptcy?

Unlike corporate bankruptcy, personal bankruptcyis not acommonregulationaroundthegloballegalsystem.Althoughrecommended,personalbankruptcyisstillacontroversialregulation,whichnotallcountriesarewillingtoapply

Findingthecountriesthatapplythepersonalbankruptcyregulation,whoselegalsystemw o u l d b

e t h e v a l u a b l e r e f e r e n c e s , w i l l p r o v i d e t h e r e s e a r c h w i t h a comprehensiveperspectiveonpersonalbankruptcyregulation

Furthermore,b y a d d r e s s i n g t h e c r i t i c a l p r o v i s i o n s o f p e r s o

n a l b a n k r u p t c y regulationi n h i g h l i g h t e d c o u n t r i e s , t h e r e s e a r c h c a n f u

s e t h e e s s e n t i a l m a t t e r s o f personalb a n k r u p t c y i n t o t h e V i e t n a m l a w s , w h i

c h shouldb e m o r e e f f i c i e n t t h a n

Theprocessofansweringthisquestionwill,hopefully,alsodisclosetheadvantagesanddisadvantagesofapplicationofpersonalbankruptcy regulationin legalsystemsaroundtheworld

1.3.3 What was taken intoaccount when theVietnam legislators

considered the need for, and consequentlysetasidethepersonalbankruptcyregulation?

Asm e n t i o n e d b e f o r e , t h e p e r s o n a l b a n k r u p t c y w a s r e f e r r

e d t o d u r i n g t h e draftingofLOB2014,butfinallyexcluded.AnsweringthisquestionwillclarifytheconcernsofVietnamgovernmentbodiesabouttheapplicationofpersonalbankruptcyregulationinVietnam, therebytoestablish amoreappropriate orientationforthe r

es ea rch andconsolidatetheapplicableoutcomethereof

Finally,thefindingsareexpectedtopointoutwhataretherealproblemsthatthepersonalbankruptcyregulationissusceptibletowhenapplyinginVietnam.ItwilladdressnotonlythepresentconcernsofVietnamgovernmentbodiesbutalsothepotentialr i s k s t h a t

willbescannedtocaptureanoverviewofpersonalbankruptcyregulation.Thesel e g i s l a t i o n s w i l l b e s t u d i e d a n d a n a l y s e d t o e x t r a c t

t h e c r i t i c a l provisionsofpersonalbankruptcy

ThereportsandopinionsgivenbyVietnamgovernmentbodiesduringthedraftingofLOB2014willalsobeconsideredtorecordallconcernsofVietnamlegislatoronpersonalbankruptcy

- Legalcomparisonanalysis:Theprocessofcomparingthelegalsystemsisexpectedt o

r e v e a l t h e advantagesa n d d i s a d v a n t a g e s o f p e r s o n a l b an kr u

p tcy regulation

Nevertheless,fewsimilaranalyseswillbeappliedthroughouttheresearch,astheymaycontributecopiouseconomic,socialandevenpoliticaldatatorefinetheoutcomethereof.

CHAPTER2 THE NECESSITY TO REGULATE

PERSONALBANKRUPTCYINVIETNAM 2.1 Thevolatilityofconsumercreditmarket

2.1.1 The rise ofconsumercreditin Vietnam

Consumerlendingemergedfromtheurgentneedtosettlethepersonalspending.However,c o n s u

m e r c r e d i t h a s o v e r c o m e i t s i n i t i a l m i s s i o n a n d n o w e i t h e r h e l p s improvesocialquality,facilitatesaccesstoofficialcreditservicesratherthanusury,andpromotesdomesticproduction

Consumercreditisthereforeconsideredimportantdatatoreflectthe"health"oftheeconomy.Forexample,consumerloanscontribute70%toGDPgrowthinUS.Inthefirstquarterof2018,totalUSconsumercreditrose5.1%overthesameperiodoflastyearto3.82trillionUSD.Thisincludescreditactivitiessuchascreditcarddebt,homeloansandstudentloans.Itisalsoreportedthatthehouseholddebtisequalto94%ofGDPinUnitedKingdom,95.6%inSouthKorea,88%inMalaysia,and136%inAustralia4

InV i e t n a m , a c c o r d i n g t o t h e F i n a n c i a l M a r k e t O v e r v i e w

R e p o r t 2 0 1 7 o f VietnamNationalFinancialSupervisoryCommission,thereisover1trillionDongofoutstandingloansintheconsumerlendingsectorbytheendof2017,whichhasincreasedalmostfivetimesinthelastfiveyears.Theconsumercreditin2017hasalsogrownby65%,anditsproportionintotalcreditwentupfrom12.3%in2016to18%.SuchfigurescanmoreorlessdrawupthepictureofanactiveconsumerlendingmarketinVietnam.Thebloomingofconsumerloansisnowquiteeasytorecognise,asitappearsineverycorneroftheVietnamconsumermarket.Itwouldbeeffortlessf o r aVietnamesetoobtainaconsumerloan,evenwithoutanyrequirementtoprovehis/her earningsandabilitytopayback5.Intheseyears, theconsumerfinancemarketbegantoflourishasaresultofmajorchangesinconsumerhabitsand thehighdemand formiddle-

incomereal estatecredit.ItcomesfromthechangeofVietnamesehabit,asspendingonconsumer

họctừcáccườngquốckinhtế”(Consumerlending:Lessonsfromthetopeconomies;Translatedbytheauthor),Reatimes ,publishedon24July2018,http://reatimes.vn/cho-vay-tieu-dung-bai-hoc-tu-cac-cuong-quoc-kinh-te-27091.html

5 DoLinh,“Cẩntrọngcõngnợtừthẻ”(Becarefulincarryingdebtfromthecard;Translatedbytheauthor),SaiGonDauTu,publishedon6September2018,http://saigondautu.com.vn/tai-chinh/can-trong-cong-no-tu-the-61113.html

productf r o m l e s s t h a n t o m o r e t h a n t h e i r c u r r e n t i n c o m e ; a n d b o r r o

w i n g f r o m relativesandfriendstoborrowingfromthebanksandfinancialcompanies.Nottomentionthepopulationstructureandtheaveragegrowthinincomeinrecentyears.Underthe"goldenpopulation"period,Vietnamhasapproximately63millionpeoplebetweentheagesof20and59-

themaincustomergroupthatfinancialcomp aniesaretargeting.Thisisalsoasegmentofcustomerswhoneedtomakeloansof smallvalue,mainlyfocusedonpersonalconsumption,living,householdgoodsandtransportation

ItwasreportedthatconsumercreditgrowthinVietnamincreasedbynearly60%in2017anditisforecastedthatinthenextthreeyears,theaveragegrowthrateofthissectorwillreach29-30%peryear6.Thebloomingofconsumerloanshasapositiveimpactontheeconomyinmanyrespects,including:

-

Provideopportunitiesforlow-incomepeopletoaccessthefinancials e r v i c e s , w h o a r e o f t e n r e f u s

e d b y t h e c o m m e r c i a l b a n k d u e t o t h e difficultytoprovetheirabilitytorepay.Thereby,consumerlendinghasbeenc o n t r i b u t i n g t o

t h e r e d u c t i o n o f i n f o r m a l l e n d i n g , e s p e c i a l l y t h e usuriousloansor"blackcredit"

- Encouragec o n s u m e r d e m a n d , t h e r e b y i n c r e a s e p r o d u c t i v i t y a n d

c r e a t e moreemploymentopportunitiesatthemacrolevel,whichcontributestoeconomicgrowth

Inviewofthis,theriseofconsumercreditisnotabadsignalandshouldnotbeseverelyinterferedwithbythemedia.However,thedownsidesofconsumercreditmustbeexaminedtoensurethatitiswellmanagedandtopreventitsnegativeimpactsasmuchaspossible

2.1.2 The risky nature ofconsumer credit

potentialincreaseofpeoplewhomayb e o v e r i n d e b t e d , e s p e c i a l l y w h e n t h e r e

a r e m a n y V i e t n a m e s e w h o o b t a i n a consumerloanwithoutproperknowledgeoftheinterestrateandpaymentplan

6 ThanhTung,“Đổxôvàovaytiêudùng”(Rushonconsumerloans;Translatedbytheauthor),NhipCauDauTu,published30January2018,http://nhipcaudautu.vn/thuong-truong/do-xo-vao-vay-tieu-dung-3322393/

4percentofthebank'smanagementandoperating expenses;t h u s , t h e i n c r e a

s e o f d e p o s i t i n t e r e s t r a t e s m e a n s t h e i n c r e a s e o f loaninterestrates.Therefore,theunforeseeablespikeofinterestrate,orincidentsaffectingtheborrower’searning,foralongenoughperiod,cancausetheborrowertobecomeinsolvent

Ont h e o t h e r h a n d , b e c a u s e i t i s e a s y t o o b t a i n s m a l l l o a n s f r o m f

i n a n c i a l companiesformeansoftransport,smartphonesandotherconsumerpurposes,togetherwiththeflourishingofcreditcards,theVietnamesecanbe"trained"tohavebadspendinghabitsandloseabilitytomanagetheirfinances

Inthisregard,Japanhadalsostruggledtoaddressthesocialunrestcausedbyfinancialcompaniesthatlendmoneytolow-incomeworkersathigh-

interestrates.F o r decadesuntil2006,whenthe Japanesegovernmenttookanimportantstepinapplyingtheceilinginterestrateonconsumerloans,thefinancialcompaniesplayedavitalroleintheJapaneseeconomyasfinancingforborrowersconsideredtooriskybythebanks.In2005,JapaneseconsumersborrowedUSD292billionfromfinancialcomp ani

es

andothernon-banklenders7.Thisamountisequivalentto10%oftotaloutstandingloansofthecreditingsystem.However,financialcompaniescouldeasilybecomeblackcreditprovidersduetohigh-interestratesandsometimesharshdebtcollectionmethods,whichproducehighpressureonborrowersandcausethemtotakewrongfinancialactions.AkeyexampleisToyokiYoshida,whoborrowedasmallsumin1991tobuyacarandquicklyfellintotrouble.Duetothehigh-

interestrates,histotaldebtsfromfive financialcompaniesgrewtoUSD17,000.Hethenreliedontheblackcreditworldtopayhisdebts,butfiveyearslaterthedebtreachedUSD70,000at50differentplaces

Backt o J a p a n ' s c o n s u m e r c r e d i t c r i s i s , J a p a n ' s p e r

-c a p i t a -c o n s u m e r -c r e d i t

7 Thu

Huong,“TàichínhtiêudùngbùngnổkhôngkiểmsoátđãkhiếnNhậtBảnvàHànQuốckhốnđốnnhưthếnào?”(H owdiduncontrolledconsumerfinanceaffectJapanandSouthKorea?;Translatedbytheauthor),BizLive,published27 May2018,https://bizlive.vn/kinh-doanh-quoc-te/tai-chinh-tieu-dung-bung-no-khong-kiem-soat-da-khien-nhat- ban-va-han-quoc-khon-don-nhu-the-nao-3451815.html

reachedU S D 5 , 1 6 4 i n 1 9 9 6 a n d e x c e e d e d t h e s i m i l a r U S i n d e x T h e n u m b

e r o f personalbankruptciesinJapanthenincreasedfrom71,299casesfiledin1997tomorethan100,000in19988.Yoshidafinallyfiledbankruptcyafteracreditorthreatenedtokillh i s m o t h e r , a

n d o n c e t r i e d t o c o m m i t s u i c i d e H i s s t o r y , m o r e o r l e s s , c a n demonstrate theessentialpurpose of personal bankruptcy, which is "torestartsomeone'slife"

2.1.3 Debt collection mannerinVietnam

TheevolutionoffinancialcompaniesalsoexposesthedefectsofdebtcollectionactivitiesinVietnam,wherethereisnorealefficientandlegalmeasuretocollectbaddebt,especiallyinthenon-businesssectors

Sincetheconsumerloanisusuallyunsecureddebt,financialcompaniesmusthaveu n i q u e d e b t c o l l e c t i o n m e t h o d s I n t h e b e g i n n i n g , t h e f i n a n c i

a l c o m p a n i e s repeatedlycallandmessagethedebtor,remindingthemtopay.However,failingtocollectthedebtbystandardmethods,thefinancialcompaniesincreasepressures,tryforotherwaysandmanydebtcollectioncases,which,unfortunately,ofteninvolvedintimidation,terrorism,contacttothedebtor’scolleagues,relativestocollectdebts.Insomecases,thedebtorhastomovehisorherhome,turnoffthephonetoavoidthethreatofdebtcollection.Insomeothercases,thedebtor,despitehavingcontactedthefinancialcompaniestoproposeadebtrestructuringsolution,isstillthreatenedtorecoverthedebt

Ontheotherhand,thevictimsofthebrokenHuisystemornetworkmarketingarelikelytocontinuebeingthevictimsofthedebtcollectionactivitiesofhopelesscreditorswhohavelentmoneytothevictims’contributiontosuchHuisystemornetworkmarketing

Insuchcases,thedebtormaysurrenderorevenrefusetopaythedebt,whichnotonlyaffectsthebusinessoffinancialcompaniesbutalsothreatenstheoveralldevelopmentofthefinancialsectorinVietnam

2.2 Insolvencyincaseofunlimitedliabilitybusiness

Theconceptofunlimitedliabilityinbusinessisnecessarythattheownerofa

8 SonokoSetaishi,“PersonalBankruptciesRiseinJapan;ProcessGainsAcceptanceAmidCrisis”,TheWall Street Journal, published 22 October 1998,https://www.wsj.com/articles/SB908985917584932000

businessisliablefordebtsandotherfinancialobligationswithallofitsassetsandnotwithstandingtheregisteredchartercapitalofthatbusiness.UnderVietnamlaws,threefollowinglegalformsofdoingbusinessshallhaveunlimitedliabilitytotheirdebts:(i)t h e h o us e h o l d b us i n e ss ,

( i i ) t h e o w n e r o f t h e p r i v a t ee n t e r p r i s e , i e s o l e proprietorship,and(ii)thepartnersofthepartnership(unlimitedliablepartners)

Asidet o s e v e r a l b u s i n e s s e s t h a t l e g a l l y r e q u i r e t h e p a r a d i g m

o f u n l i m i t e d liability,manyVietnamesestillchooseoneofthetypesmentionedaboveofbusinessduetothefollowingbenefits:

- Theabilitytoraisemorecapitalthanhisorherinvestmentinthebusiness,astheliabilitylimitationismerelyestimateduponhisorherownedassets

- Theunlimitedliabilitycanhelptobuilduptrustwiththecustomersandpartners

- Inmostcases,themanagementandoperationofthesebusinessesismorest r aig h

t fo r ward thanthosewithlimitedliability

Thenumberofthesepersonsmaybeapproximately5million,asthenumberofhouseholdbusinessesasofOctober2017wasrecordedtobearound4.9million9.Thisi s s u f f i

capitalwhenengagedineconomicactivities,thereforenotentitledtothebankruptcyprocedure,seemssuperficialandinhumane

2.3 Otheradvantagesthatmaycomewiththepersonalbankruptcysystem

Amongotherthings,thepersonalbankruptcysystemalsohasapositiveimpactonsocietyandtheeconomyinthelongterm

Firstly,thepossibilityofbankruptcyintheeventofunforeseenmisfortunecanencourageindividualstoborrowmoneytoinvestintheirpersonallives,whichboost

9 Thuy

Dung,“Hộkinhdoanhkhôngmuốnlớnthànhdoanhnghiệp”(Householdbusinessesdonotwanttogrowuptoe nterprises;Translatedbytheauthor),TheSaigonTimes,publishedon3 October2017,https://

www.thesaigontimes.vn/165245/Ho-kinh-doanh-khong-muon-lon-thanh-doanh-nghiep.html

Secondly,p e r s o n a l b a n k r u p t c y h e l p s t o p r o t e c t t h e c r e d i t o r s '

r i g h t s , e v e n thoughthepersonalbankruptcysystemnormallytendstobenefitthedebtor.Althoughcreditorscannotrecoveralloftheirloansinmostcasesofbankruptcy,thebankruptcyprocedureshouldguaranteetheequalityofcreditorsindebtcollection.Inprinciple,nocreditorcanclaimthedebtindividuallyandbepaidbythedebtorwhileothercreditorshavenotbeenpaid.Allcreditorsmustwaituntilthecourtdeclaresbankruptcyand

distributes the debtor'sassets intheirrespectiveproportions(exceptforthesecuredcreditors).Furthermore,byresolvingtheinterestbetweencreditorsanddebtorsfairlyandsatisfactorily(inthemostreasonableway)andamongcreditors,thebankruptcy lawhelps toprevent conflict andtension betweenthese persons,therebyensuringtheorderlydisciplineofsociety

Finally,t h e m a n d a t o r y c o n d i t i o n s f o r p e t i t i o n s f o r p e r s o n a l b a n k r

u p t c y c a n improvet h e a b i l i t y o f t h e s t a t e t o m a n a g e p e r s o n a l f i n a n c e s a n

d assets.I n o t h e r words,adebtorwhofilesforbankruptcyshalldisclosehonestlyandcomprehensivelyallofhisfinancialsituations,includinglivingcosts,actualincome,assetsandevenproofoftaxcompliance,failingwhichhispetitionwillberejected Therefore,theimplementationofpersonalbankruptcylawcanimprovetheabilityofthestatet

om a n a g e personalfinancesandassets

CHAPTER3 INTRODUCTION TO

INTERNATIONALEXPERIENCESINREGULATINGPERSONALBANKRUPTCY 3.1 Ahumanrighttodeclarebankruptcy

Ther i g h t o f a n individualt o d e c l a r e b a n k r u p t c y w a s n o t s i m p l y a

c c e p t e d wo r ld w i d e Theword“bankruptcy”evolvedfromanItalianphrase“bancaratta”thatmeans“brokenbenchortable”.Inmedievaltimes,whenamerchantfailedtopayhisdebts,c r e

d i t o r s w o u l d c e r e m o n i o u s l y b r e a k t h e b e n c h o r t a b l e f r o m w

h i c h h e conductedhisbusiness10.TheearlyRomanshackedanddividedthebodiesofpeoplewhodidnotpaytheirdebts.InearlyEngland,peoplewhowereinovertheirheadsfinanciallyweretossedindungeons

Today,thefactthatapersoncandeclarebankruptcyifheorshehasinsufficientpr op erty andtheabilitytopayhisorherdebtshouldbeconsideredalegitimateright.Theultimategoalofallowinganindividualtodeclarebankruptcyistogivehimorhertheopportunitytofulfilhisorherdebtobligationsbyliquidatingorreorganizingthe financialsituation.Thespecificparadigms and mechanisms mayvary subjecttot h elegislativeviewsofeachcountryaroundtheworld

Inparticular, the per so nal bankruptcyprocess ca nhelpinsolvent deb to

rs nol o n g er bedisturbedbycreditors,findalegalandcompletesolutiontorepaytheird eb ts o r r e s h a p e t h e i r p e r s o n a l f i n a n c e s O n t h e o t h e r h a n d , c r e

d i t o r s s h o u l d b e guaranteedt o b e p a i d a s m u c h a s p a y a b l e b y t h e d e b t o r

a n d p e r m i t t e d b y l a w Personalbankruptcyis,inmostcases,acollectivedebtcollectionprocess.Whenapersondecidestofileforbankruptcy,thenumberofhisorhercreditorsisusuallytwoormore.Oncesummonedbythecourt,thecreditorsshallstoptheirdebtcollectionactivitiesandeitherliquidatethedebtor'sassetsor deviseaplanforthedebtortorecoveritsfinancialstabilityandgraduallypayback.Thisprocedureshouldensureequalitybetweencreditors'interests

Therearecontrastingapproachesininternationallegislationonpersonalbankruptcy,inparticulartheconceptof"freshstart"underUSpersonalbankruptcylaw,asopposedtotheconceptof"earnedstart"underEurope'spersonalbankruptcylaw.Inotherwords,the legislatorsofEurope havea different perspectiveon the fundamentalphilosophyofsupportingpersonalbankruptcylegislation.WhiletheUSpersonalb a n k r u p t c y l a

w c o n s i d e r s p e r s o n a l b a n k r u p t c y t o b e a m a r k e t f a i l u r e , Europeansbelievethatpersonalbankruptcyisduetomacroeconomicfactorssuchasrecessionandunemployment,whichcausedebtorsfinancialdistressandleadthemtopetitionforbankruptcy12.Inthisrespect,theUSpersonalbankruptcylawoffers,i n te r alia,astraightdischargetothedebtor,whileEurope'spersonalbankruptcylawgenerallyrequiresacompulsorypaymentplanasaconditionofdischarge

Developingcountriesnowusuallytakeintoaccountthecomparativeadvantagesandd i s a d v a

n t a g e s o f U S o r E u r o p e a n a p p r o a c h e s t o p e r s o n a l b a n k r u p t c y w h e

n consideringmeasurestoresolveoverindebtedness

InSingapore,aneighbouringcountryofVietnam,theindividualscanfileforbankruptcyiftheirunpayabledebtisatleast10,000SingaporeDollar.Accordingtothes t a t i s

t i c s o f t h e I n s o l v e n c y O f f i c e o f S i n g a p o r e M i n i s t r y o f L a w , t h e r e w e r e17,463undischargedinsolventpersonsasattheendofJuly2018,whichisequivalenttoapproximately0.3%ofSingaporepopulation.TheapplicationsforbankruptcyinSingaporehavecontinuouslyincreasedfromyeartoyear,reached2,932filesin2017andw i l l l i k e l y t o e x c e e d 3, 0 0 0 f i l e s i n 2 0 1 8 T h e r e a r e m a n y r e a s o n s f o r t h e Singaporeantogobankrupt,butmostofthemarespendingexcessiveamountsoftheirincomeoncreditcards,gamblingaddictions,investinginrealestate,securitiesorparticipatinginbusinessprojectsthattheycannotcontrolinwellmanner

Apparently,d u r i n g t h e b a n k r u p t c y p r o c e d u r e a n d e v e n a f t e r w a r d s, t h e insolventsshallsufferfrombothpersonalandsocialconsequences.Theycan

ThePerilsofLegalTransplantation",BostonCollegeInternationalandComparativeLawReview,published12 January 2005

12 Niemi-Kiesilainen,

Johanna."ConsumerBankruptcy inComparison:Do We CureaMarketFailure oraSocial Problem." Osgoode Hall LawJournal 37.1/2 (1999):473-503.

continuetoworkbutmustshareaportionofhisincomewiththecreditors.Theirexpendituresmustbereasonablyexplainedinareport,whichwillbeperiodicallycontrolledbythecourt’sdelegate.Forexample,theinsolventshalljustifywhyheorsheusedataxiinsteadofpublictransportationsandwhethersuchcircumstanceisanemergency.Onanotherhand,thebankruptedemployeeswillbepubliclydisclosedbytheemployer,thusshouldbemorechallengingtoadvanceintheirprofessional lives.Beforeleavingthecountry,thebankruptshallapplyforapermitfromthecourt,andthecourtusuallyapprovesforbusinesspurposesonly.However,theinsolventsstillhaveachancetorestartandcontinuetheirlife.

3.2 Roleofcultureandeconomicinthedevelopmentofpersonalbankruptcy

Thei n s o l v e n c y s y s t e m s a r e a p r o f o u n d r e f l e c t i o n o f t h e l

e g a l , h i s t o r i c a l , politicalandculturalcontextsofthecountriesthatdevelopedthem13

.Thus,therearealsosignificantdifferencesintheapproach tobothbusinessesandpersonalbankruptciesincountriesthatsharealegaltradition.Countrieswithdifferentlegaltraditions,s u c h a s t h o s e i n E u r o p e a n d J a p a n , h a v e m o r

e d i f f e r e n t s y s t e m s o f bankruptcy,althoughmanyaremovingtowardsUSmodels.Cultureissometimes usedtoexplainnationaldifferences inboththeuseofcreditandattitudestobankruptcy:theJapanesearesupposedtobeaversetoconsumercreditandregardbankruptcyashighlystigmatising,whiletheFrenchandBelgiansareaversetoborrowing.AnotherexampleistheKoreanIndividualRehabilitationProceeding.Whenitwasrevealed,criticsfocusedonitsgenerousdischargepolicyandthemoralhazardthatcouldresultfromdischarge;forexample,peopleborrowtoomuchandmakelessefforttorepaytheirdebts

Intheseaccounts,cultureseemstohaveawiderangeofpractices,a phenomenonthatisalmostnaturalandapolitical.Itwassaidthatlawisthemirrorofsociety.This description,however, overshadowsthecontingentnatureofcultural valuesandhistoricalconflictsoverculturaldevelopment.Inotherwords,ahistoricalviewiscrucial,asitcandemonstratethatcultureisanadjustmenttoconflictingideasandinterests.F o r example,theideaofa"pro-

debtor"cultureintheUSappearstobeanessentialcharacteristicinUShistory.This,however,canunderstatethehistoricalconflicto v e r t h e l a w s a n d i n s t i t u t i o n s t h a t a r e s t i l l d e

v e l o p i n g T h e e v o l u t i o n o f

13NathalieMartin,"TheRoleofHistoryandCultureinDevelopingBankruptcyandInsolvencySystems:ThePerilsofLegalTransplantation",BostonCollegeInternationalandComparativeLawReview,published12 January 2005

c t , t h e U S C o n g r e s s h a s b e e n c o n v i n c e d t h a t C h a p t e r 1 3 i s a m o r e r

TheBAPCPAhasalsoacknowledgedtheriseofsuchculture,thoughitisdifficulttopredicttheactualinfluenceofthelegislationatpresent

Japan,ontheotherhand,isoftenusedtodemonstratetheimportanceofculturalattitudes.Theargumentisthatoverindebtednessandbankruptcy are asignificant culturalstigmainJapan,leadingtosuicideinsteadofbankruptcy.However,amendmentst o

J a p a n ' s i n s o l v e n c y l a w a n d p r a c t i c e s h a v e i n c r e a s e d t h e l e v e l o f accessibilityforinsolvency,andJapanhasnowahigherrateofbankruptcyfilingsthanE

n g l a n da n d W a l e s14.T h i s m a y h a v e r e d u c e d t h e s u i c i de r a t e15.O t h e r l e g a l research inJapanshowsthatinstitutionalandlegalfactorsliebehindtheso-

calledculturalattitudesandthatchangesinthemcanconsequentlyhaveanimpactonsocialstandards

Forexample,whentheIndividualRehabilitationProceedingwasintroducedinKorea,criticismfocusedonitsgenerousdischargepolicyandassumedthatdischargecouldresultinpeopleborrowingtoomuchandcouldleaddebtorstomakelessefforttorepaytheirdebts16

Theoretically,t h e r e m a y b e m o r a l h a z a r d , b u t f o r t h e f o l l o w i n g r e a s

o n s , i t cannothaveanysignificantimpact:

- Debtorsreceivingdischargemusthaveabadcreditrating.Thedischarge

14 Kent

Anderson,2006 JapaneseInsolvency LawAfteraDecade of Reform

15 Mark D West, 2003 Dying toGet Out of Debt:ConsumerInsolvency Lawand Suicide in Japan

16 Soogeun Oh, 2006.Personal Bankruptcy in Korea: Challenges and Responses

affected,especiallyamongindividualcreditorslikefriendsandcolleagues

- Thepunishmentofthosewhoarefraudulentlydischarged,andtheaccompanyingc a n c e l l a t i o n o f t h e d i s c h a r g e a l s o d e t e r p o t e n t i a l l

y fraudulentdebtors

Thereisalsoanargumentaboutthefactthatafulldischargecouldharmthecreditors'financialsituation It shouldbe noted,however, thatcreditors'financial failurei s n o t c a u s e d b y p e r s o n a l d e b t d i s c h a r g e , b u t b y u n p a

ResearchonUSpersonalbankruptcyhasshownthatthesizeofthebankruptcyexemptio

no f t h e r e l e v a n t s t a t e h a s a s t a t i s t i c a l l y a n d e c o n o m i c a l l y s i g

n i f i c a n t positiveeffectonthelikelihoodthatpotentialborrowersinthestatewillbedeniedc r edi t o r d i s c o u r a g e d f r o m b o r r o w i n g18.I t w a s a l s o f o u n d t h a t h o u s

e h o l d s i n t h e lowerhalfofthedistributionofassetshavelessdebtandarefacinghigherinterestratesoncarloansinstateswithhighexemptionsfrombankruptcythanborrowersinlowexemptionstates.Incontrast,householdsintheupperhalfoftheassetdistributionhavemorecreditinstateswithhighbankruptcyexemptions,suggesting

17 SongHan,BenjaminJ.Keys,andGengLi,2011.CreditSupplytoPersonalBankruptcyFilers:EvidencefromCreditCardMailings.FinanceandEconomicsDiscussionSeriesDivisionsofResearch&StatisticsandMonetary Affairs Federal Reserve Board, Washington, D.C.

18ReintGropp,JohnKarlScholzandMichelleJ,1997.White.PersonalBankruptcyandCreditSupplyandDemand.The Quarterly Journal of Economics, Vol 112, 217-251.

highercreditdemandforthesehouseholdsthanlendersarewillingtoaccommodate.Thus,t h e r e s e a r c h a s m e n t i o n e d a b o v e c o n c l u d e d t h a t p e r s o n a l b a

n k r u p t c y increasest h e a m o u n t o f c r e d i t h e l d b y

high-asseth o u s e h o l d s a n d r e d u c e s c r e d i t

availabilitytolow-assethouseholds.Inotherwords,personalbankruptcydoesnotreducethesupplyofcreditbutredistributescredittohigh-assetborrowers

Theissueofthemoralhazardofthecreditorshouldalsobediscussed.Becausedebtorsl a

c k a d e q u a t e o v e r i n d e b t e d n e s s p r o t e c t i o n , c r e d i t o r s c a n g i v e thed e b

t o r excessivecreditwithoutproperassessmentofthefinancialsituationofthedebtor19.Thefallincreditsupplycan,therefore,beconcludedfromtheshort-sightedstatisticsaddressingborrowerswhomightnotmeetthefinancialcapacitytorepaythedebtatthestart.Inthelongrun,however,personalbankruptcywouldbeatooltomoreefficientlyredistributethecreditflowandimprovethebehaviourofcreditorsincreditingactivities

3.4 Thehistoricalevolutionofpersonalbankruptcy

3.4.1 The developmentof personalbankruptcylawin US

Fromdayoneofitshistories,theUSConstitutionhasgrantedtheUSCongressthepowerto

“establishauniformRuleofNaturalization,anduniformLawsonthesubjectofBankruptciesthroughouttheUnitedStates”

However,thebeginningofbankruptcylawintheUSwasnoteasy,astherewereno“actual”bankruptcylawsforthefirst120yearsoftheUS

Thoughthefirstbankruptcyactwaspassedin1800,ithadlastedforonlythreeyearsandwasrepealedin1803.Itssuccessorsthatwerepassedin1841and1867,alsosharedasimilardestinyaswererepealedafter18monthsand11yearsrespectively.T h e s h o r t l i

f e o f t h e s e a c t s i s supposedt o b e c o n t r i b u t e d b y t h e followingreasons2

0:

- Duringtheperiodof17th–

18thcenturies, thedemandforbankruptcylegislationwasnotpermanentasitwildlyfluctuatedbetweentherecession

19 Soogeun Oh, 2006.Personal Bankruptcy in Korea: Challenges and Responses

20 ThomasA.Garrett,2007.TheRiseinPersonalBankruptcies:TheEighthFederalReserveDistrictandBeyond Federal Reserve Bank of St LouisReview,89:15-37.

-

Therewerethepoliticaldividesbetweenthepro-creditorandpro-debtorpartiesintheUSCongress

- Thebankruptcyfilingprocessundertheseactswascomplicated,asitmustbedoneatthefewfederalcourtsacrossthecountrywithacostlyadministrativeprocedure.Despiteitsshortlife,theveryfirstprovisionsregardingpersonalbankruptcywereintroducedinthe1841BankruptcyAct,whichhasoriginatedtheconceptoftheindividualsthoseare“honestbutunfortunate”forthenexthundredsofyearsofUSpersonalbankruptcylegislation,whichcanbebrieflyreadinthetable3.121

1978 TheBankruptcyReformActreplacesthe1898BankruptcyAct.

TheenactmentofthefifthBankruptcyAct,namelytheBankruptcyReformActtosupersedethe1898BankruptcyAct.ThisActaddressedthetrendo f U S b a n k r u p t

c i e s i n t h e p e r i o d o f 1 9 3 0 –

1 9 7 0 , f o r w h i c h t h e corporatebankruptcieshaddecreased,andtheindividualbankruptcieshadcontinuouslyin cre ased Th is Ac ti nt ro du ced th eesse n

ti al p r o v i s i o ns o f

whatso-calledthemodernUSpersonalbankruptcylaw,ofwhichChapter7p r o v i d e s f o r l i

q u i d a t i o n a n d C h a p t e r 1 3 p r o v i d e s f o r r e p a y m e n t a n d reorganisation

1994 The1978 Bankruptcy ReformAct is amendedto expedite

theproceduresofthe bankruptcy filingand extend the debtors’assets to beexemptfromcreditors

2005 TheenactmentofBankruptcyAbusePreventionandConsumer Pr

otect Actof2005,whichisanefforttoreducethenumberofpersonalbankruptciest h a t s te a d i l y g r o w n si n c e t h e e n ac t m e n t o f t h e 1 9 7 8 BankruptcyReformAct.Generally,thisActprovidesthe“meantest”uponindividualdebtors’income,increasethecostso f filing,requiresthedebtorstohavefinancialmanagementtrainingtoobtainthedischarge

Source:USFederalJudicialCenter,2018ThecurrentUSpersonalbankruptcylegislationhasbeenformedsince1978,afterwardswasaidedin1994andthenemasculatedin2005.Thismodernlegislationwasonceconsideredasthemostgenerouspersonalbankruptcylawoftheworld,duetoitsfundamentalphilosophythatthepersonalbankruptcyshallbetreatedasthe marketfailure.Inparticular,theUSBankruptcyLawsCommissionwhiledraftingthe1978BankruptcyReformAct,hadintheirmindthat:

- Thep r i m a r y t a r g e t o f p e r s o n a l b a n k r u p t c y i s t h e c r e d i t m a r k

e t I f t h e accesstocreditmarketshouldbeopen(whichisthebestdescriptionforUScreditmarketfromtimetotime),thepersonalbankruptcy,servingasanexitfromthecreditmarket,shouldbeopenaswell;and

- Thepersonalbankruptcyshouldtaketheroleofriskallocationamongstthepartiesinvolvedinthecreditmarket

Therefore,t h e U S c u r r e n t p e r s o n a l b a n k r u p t c y l e g i s l a t i o n h a

s h a d a c l e a r intentiontoallocatetherisksarisingfromtheconsumercreditmarkettothecreditorswhoshouldbeinabetterpositiontobearsuchrisks

ThedevelopmentofUSpersonalbankruptcylegislationexplainsitsimportanceintheUSeconomyandsociety

PictureC.1.USPersonalBankruptciesin1900-2004

Source:AdministrativeOfficeoftheUSCourts2004AccordingtotheAdministrativeOfficeoftheUSCourts,thepersonalbankruptcyfilingsstartedfromapproximately0.15per1,000personsatthebeginningofthe20thcentury,begantoincreasefrom1960anddramaticallygrew

3.4.2 The development ofpersonal bankruptcy law inEurope

Europegovernmentsseepersonalbankruptcyasasocialprobleminsteadofamarketfailure22.Consequently,theywouldratherreformtheconsumerprotectionpoliciesorothermarketregulationtocuretheproblem,insteadofworryingaboutthedebtor’se n

t i t l e m e n t t o b e d i s c h a r g e d M o s t o f E u r o p e p e r s o n a l b a n k r u p t c y legislationdidnotcontaindischargeprovisionsatthebeginningofthe1980s

Itwasattributabletothefactthattheconsumercreditmarketin Europehadbeenstrictlyregulateduntilthe1980s,hencethedefaultandoverindebtednesswasrare Though atthat time,numerousindividualdebtors hadbeen overindebted,theircases werenotresolvedbyalegalprocedure,butbysomekindsofthecreditors’action,suchaswritingoffthedebts.Nevertheless,thesedebtorsweretohavepoliticalpressurefortheEuropegovernmentstochangethepersonalbankruptcylegislation

Inthe1980s,theEuropeancreditmarketswerequicklyderegulated,leadingtoanincreaseinconsumercreditsupply.Duetoanaccumulationofunsatisfieddemandduringthegovernedperiod,thecreditmarketrapidlyexpanded.Thetotaloutstandingvolume of consumercredit isestimatedtohave doubledduring the 1980sin severalEuropeancountries23

22 Niemi-Kiesilainen,Johanna."ConsumerBankruptcy inComparison:Do WeCureaMarket Failure oraSocial Problem." Osgoode Hall Law Journal 37.1/2(1999):473-503

23 Nuria Diez Guardia, 2002.Consumercredit in the European Union.ECRI Research Report, 1-39

Germany Italy Sweden

Spain Netherlands United Kingdom

Picture3.2.PrivatecreditinEuropeasapercentageofGDP

Source:NuriaDiezGuardia2002Theincreaseinunemploymentalreadyhithouseholdswithahighlevelofdebtwhentherecessionbeganattheturnofthedecade.Incontrasttothepoor,thenewmiddle-

classd e b t o r s w e r e a b l e t o c r e a t e p o l i t i c a l p r e s s u r e s f o r excessived e b

t - r eduction measures

However,asmentionedbefore,Europegovernmentsseepersonalbankruptcyasa s o c i a l p r o b l e m i n s t e a d o f a m a r k e t f a i l u r e T h e r e f o r e , t h e y w o u l

d h a v e t h e personalbankruptcylawsasapartofwelfaresocietiestohelppeoplewithexcessivedebt loads,ratherthanasameasureforquickeconomicrecoveryandre-

entrytothecreditmarket.Besides,creditmarket participationwasnotdeemednecessaryandmightnot

evenhavebeendesirable.Theeconomicrecoverywasintendedtoensurethepaymentplanforthepartialreimbursementofolddebt

Inthatrespect,allEUdebtadjustmentbillsunderlinethatthelawshouldnotunderminetheoverallmoralimperativetopaydebts.TheSwedishDebtAdjustmentLaw,forinstance,statesthattheprimaryfunctionofthelawis,inbothtermsandspirit,toupholditsdebtpaymentobligations.Otherbillsstressthatonlydebtthatthedebtorwouldneverbeabletorepaymaybedischarged

Nevertheless,duetotheneedforeconomicrehabilitation,foronlytenyears,thepersonalbankruptcylawsintheformoftheconsumerdebtadjustmenthadbeen

1994 Theconsumerdebtadjustmentlegislationwithaspecificprocedurewasal

sointroducedinAustriathisyear

1998 SwedenhasbeenthelatestScandinaviatointroducelegislationondeb

tadjustment.TheSwedesbeganpreparatoryworkveryearly,andthereportofthecommitteewaspublishedin1990.Thelaw,however,wasapprovedbylawonlyenactedandenteredintoforcein1994

PERSONAL BANKRUPTY CASES BY CHAPTER

Chapter 7 Chapter 13

CHAPTER4.

ANOVERVIEWOFINTERNATIONALLEGISLATIONSONPERSONALBANKRUPTC Y

4.1. PersonalbankruptcylawinUS

4.1.1 The modern US personal bankruptcy law

UnderthepresentUSBankruptcyAct,ifanindividualchoosestopetitionforbankruptcy,therearegenerallytwoalternativesaspetitioningforliquidationbankruptcyunderChapter7orforrepaymentbankruptcyunderChapter13

theyearoftheamendment to1978BankruptcyReform Acttoexpedite theproceduresofbankruptcyfilingandextendthedebtors’assetstobeexemptedfromcreditors,thenumberofpersonalbankruptcycasesfiledunderChapter7hasalwaysbeen2timesmorethanthosefiledunderChapter13,astheUSpeoplewouldprefertoaninstantfreshs t a r

t i n s t e a d o f a r e p a y m e n t p l a n a c r o s s t h e y e a r s T h e r a t e d r a m a t i

c a l l y fluctuatedin2005contributabletotheBankruptcyAbusePreventionandConsumerProtectAct.Duringthelastfiveyears,thetotalofpersonalbankruptcycases hasslightlydecreased,butsuchproportionbetweencasesunderChapter7andChapter13hasremained

Chapter7,entitledLiquidation,contemplatesanorderlyproceduresupervisedbythecourtthroughwhichatrusteetookover,reducedthepropertyofthedebtortocashandmadedistributionstothecreditors,subjecttotherightofthedebtortoretaincertainexemptpropertyandtherightsofsecuredcreditors.IftheinsolventfilesforbankruptcyunderChapter7,mostunsecureddebtswillbedetermined.Thecourtwillallowsuchindividualtokeepsomeofhisorherpropertiesandappointatrusteetoconfiscateandselltheremainder.Thetrusteeshalluseitsbestendeavourtorepayt he debtasmuchaspossible.

Chapter13,entitledAdjustmentofDebtsofanIndividualwithRegularIncome,isforanindividualdebtorwitharegularincomesource.Chapter13providesadebtorwiththeabilitytomaintainavaluableassetsuchasahouseandenablesthedebtortoproposeaplantorepaycreditorsovertime–usually3to5years.Chapter13differssignificantlyfromChapter

7sincedebtorusuallyremainsinpossessionofitsassetsandmakespaymentsthroughthetrusteetocreditorsbasedontheexpectedincomeofthedebtoroverthelifetimeoftheplan.UnlikeChapter7,thedebtorshall,beforethedischargeisgranted,completethenecessarypaymentsundertheplan

Allpetitionsthereunderaretowardsthe resultofabankruptcydischarg

e Abankruptcydischargereleasesthedebtorfrompersonalliabilityforcertainspecifiedtypesofdebts.Inotherwords,thedebtorisnolongerlegallyrequiredtopayanydebtsthataredischarged.Thedischargeisapermanentorderprohibitingthecreditorsfromtakinganyformofcollectionactionondischargeddebts,includinglegalactionandcommunicationswiththedebtor,suchastelephonecalls,letters,andpersonalcontacts

4.1.2 Eligibility to petition forpersonalbankruptcy

Generallyspeaking,apersoncanfileforbankruptcyifnopreviousbankruptcypetitionhasbeendismissedwithinthepreceding180dayseitherbecauseadebtorhasdeliberatelyfailedtoappearbeforethecourtorcomplywithcourtorders,orbecausethed e b t o r v o l u n t a r i l y d i s m i

s s e d t h e p r e v i o u s c a s e T h e d e b t o r m u s t alsor e c e i v e creditcounsellingfromanapprovedcreditcounsellingagencywithin180daysbeforet h e filing

Furthermore,theeligibilityrequirementswillbesubjecttowhichchapterthedebtorpetitionsunder:

- Ifa p e r s o n m a k e s b a n k r u p t c y p e t i t i o n u n d e r C ha p t e r 7 a n d i t s c u

r r e n t monthlyi n c o m e i s m o r e t h a n t h e s t a t e m e d i a n , t h e B a n k

r u p t c y C o d e