Personal bankruptcy in vietnam the necessity and possibility

Summary of Europe Personal Bankruptcy Legislation Development... In such cases, the debtor may surrender or even refuse to pay the debt, which not only affects the business of financial

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 Laws Code: 8380107

MASTER THESIS IN LAW

SUPERVISOR

1 DR PHAM DUY NGHIA

Ho Chi Minh City - 2019

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 1 PREAMBLE 1

1.1 Background information 1

1.2 Research issues 1

1.3 Research questions 4

1.4 Research methodology 5

CHAPTER 2 THE NECESSITY TO REGULATE PERSONAL BANKRUPTCY IN VIETNAM 7

2.1 The volatility of consumer credit market 7

2.2 Insolvency in case of unlimited liability business 10

2.3 Other advantages that may come with the personal bankruptcy system 11

CHAPTER 3 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 4 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 7 CONCLUSION 58 REFERENCES

SCHEDULE OF ABBREVIATIONS

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

SCHEDULE OF TABLES

Table 3.1 Summary of US Personal Bankruptcy Legislation Development Table 3.2 Summary of Europe Personal Bankruptcy Legislation Development

SCHEDULE OF PICTURES

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

TÓM TẮT

Thị trường tín dụng Việt Nam, đặc biệt là khu vực tín dụng tiêu dùng, đang trên

đà tăng trưởng trong những năm vừa qua Tuy nhiên, theo quy định pháp luật hiện tại của Việt Nam, trách nhiệm của một cá nhân là vô hạn, và phá sản cá nhân vẫn chưa được thừa nhận Xuất phát từ sự thiếu vắng một hành lang pháp lý cho phá sản cá nhân, xét về phương diện kinh tế thì một cá nhân không thể thoát khỏi thị trường tín dụng và giải quyết những món nợ của mình theo con đường dân sự trong trường hợp

họ không may bị vỡ nợ Nhà làm luật Việt Nam đã từng đề cập sơ bộ đến phá sản cá nhân trong quá trình soạn thảo Luật Phá sản 2014 nhưng đã kết luận rằng việc cho phép cá nhân và hộ kinh doanh cá thể được tuyên bố phá sản là không cấp thiết Qua việc nghiên cứu và đánh giá điều kiện kinh tế-xã hội Việt Nam, những kinh nghiệm quốc tế đối với phá sản cá nhân (trong đó hệ thống pháp luật phá sản cá nhân của Hoa

Kỳ được chú trọng) và những thử thách tiềm tàng trong trường hợp luật phá sản cá nhân Việt Nam được áp dụng, luận văn này được mong đợi sẽ làm rõ được việc liệu phá sản cá nhân có cần thiết, áp dụng được và có khả năng thực thi tại Việt Nam hay không Dựa trên kết quả nghiên cứu, người viết tin rằng phá sản cá nhân là cần thiết

và áp dụng được đối với điều kiện kinh tế-xã hội của Việt Nam Những yếu tố cơ bản

và phương thức sơ bộ của phá sản cá nhân áp dụng tại Việt Nam cũng được đề xuất trong luận văn này nhằm phục vụ cho các nghiên cứu khác trong tương lai

CHAPTER 1 PREAMBLE

1.1 Background information

Over the past few years, accompanying the rapid growth of the economy, the private sector gains the leading role of Vietnam economic structure, and the market factors have been dismantling the command economy from day to day

Amongst other things under the market economy, the need for an adequate legal framework for bankruptcy activities is essential It was recognised by the Vietnam government, as many issues in connection to the former Law on Bankruptcy were addressed and resolved by the LOB 2014

During the drafting of LOB 2014, though there were suggestions to include individual as a regulated entity thereof, the opposite opinion made up the majority, and the final draft of LOB 2014 omitted personal bankruptcy However, on the way

to concluding the necessity of individual to be covered by the laws of bankruptcy, the mainstream rationale was only that the individual is not required by law to register for any capital when involving in the economic activities, and the civil laws should regulate its insolvency1 Such rationale seems not adequate

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

On the side note, UNCITRAL, in accordance with its legislative guide on insolvency law, recommends that insolvency law should govern insolvency proceedings against all debtors engaged in economic activities, whether natural or legal2

to pay back will last until such time as the amount, together with any interest arising,

is fully paid; or the death of that person (not to mention the event of an inheritance) Due to such a debt handling mechanism, there is no "full stop" to a debt unless it is duly paid or negotiated

Subsequently, the Vietnam jurisdiction can merely enforce or annul the debt, to the extent permissible bylaws, or recognize the agreement between the parties That

is literally all of their power over a debt case They can neither arbitrarily arrange for the repayment plan, cease any part of the debt nor apply whatsoever measure to protect the entitlement of the creditors and the debtor

This has resulted in some social and legal issues relating to debt collection and related activities

Firstly, the debt repayment pressure Such pressure does not refer to the usual type of debt repayment, but rather to the unforeseen insolvency People who suffer from unforeseen overindebtedness will be shocked by the unexpectedly large size of financial obligation, which their sensible ability cannot afford In such circumstances, there will be a remarkable chance that the insolvent will have adverse reactions, such

as committing crimes to meet his financial needs or committing suicide Either case may result in a spill - over effect

To name a few, some farmers in Gia Lai committed suicide when their pepper died in mass and the price of the product dropped significantly; a couple killed themselves with dynamite in Nghe An because of a debt of VND 5 billion; or a used car seller in Bac Giang robbed the bank to pay the debt of VND 400 million If these debtors and like - minded people had a more acceptable and less stressful repayment plan given and implemented by the competent authorities, would they make negative choices or spend effort restarting their lives?

Secondly, the manner of debt collection When a person becomes insolvent or

is likely to become insolvent, it is common practice for him or her to seek another loan to repay existing loans This practice makes the debt scattered and complicated,

as does the debt collection, since the debtor will repay his debts for some emotional reasons instead of logical priority The creditors, on the other hand, because they do not know exactly whether the debtor can pay the debt and when such payment is made, must do everything possible to accelerate debt collection Things may even get worse when the creditors know each other's involvement

Picture 1.1 The Growth of Consumer Credit in 2017

Source: Vietnam National Financial Supervisory Commission 2018

In addition, demand for consumer loans and trust loans in Vietnam has increased in both quantity and quality According to the National Financial Supervisory Commission3, consumer credit was estimated to increase by 65% in

2017, higher than the growth of 50.2% in 2016 The financial companies that provide such loans have increasingly developed their debt collection methods, including threats and harassment activities It contributed a huddle of debt collection activities

to that chaotic picture, such as a report claiming that a financial company made 17 calls and 20 messages to a debtor's spouse in one day

Last but not least, the equal treatment of creditors According to Article 42.1 of the Laws on Civil Procedures 2015, the court may join two or more cases which it has separately accepted to resolve This provision is not practical in the event of debt collection, as the creditors should have an enormous conflict of interest, especially when the debtor appears to become insolvent

Without a special procedure, creditors would take separate action to protect themselves, which could lead to an unfair outcome for creditors who lack information

or other debt collection capabilities and legal procedures The similar story can be found where a Hui (as known as the tontine, a Vietnamese scheme for saving money and raising capital) get “broken” The Hui master in such story will be indebted to

3 National Financial Supervisory Commission, 2017 Financial Market Report, p.45

numerous persons In most cases, those unexpected creditors are helpless and suing the Hui master under an ordinary civil proceeding seems not suitable

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

1.3 Research questions

The principal purpose of this thesis is to draw up a comprehensive picture of, and based on the obtained study, to demonstrate the necessity and possibility of personal bankruptcy in Vietnam

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 recognized and allowed the corporate’s possibility

to become insolvent, and therefore its ability to declare bankruptcy for a while However, the adoption of personal bankruptcy may be viewed as a different perspective

Therefore, by analyzing Vietnam’s socio-economic context together with the benefits that the personal bankruptcy may generate, the findings for this question is vital for building a solid foundation of this thesis

1.3.2 What are the international legislation and experience in regard to the

personal bankruptcy?

Unlike corporate bankruptcy, personal bankruptcy is not a common regulation around the global legal system Although recommended, personal bankruptcy is still

a controversial regulation, which not all countries are willing to apply

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

Furthermore, by addressing the critical provisions of personal bankruptcy regulation in highlighted countries, the research can fuse the essential matters of personal bankruptcy into the Vietnam laws, which should be more efficient than

merging the terminologies obtained 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?

As mentioned before, the personal bankruptcy was referred to during the drafting of LOB 2014, but finally excluded Answering this question will clarify the concerns of Vietnam government bodies about the application of personal bankruptcy regulation in Vietnam, thereby to establish a more appropriate orientation for the research and consolidate the applicable outcome thereof

Finally, the findings are expected to point out what are the real problems that the personal bankruptcy regulation is susceptible to when applying in Vietnam It will address not only the present concerns of Vietnam government bodies but also the potential risks that the competent executives may suffer when solving respective cases

1.4 Research methodology

Based on and to adequately address the research questions, this thesis will be applied with the following methods for researching activities

- Analysis of written laws: At the very beginning of the research, the laws

of the countries who are applying personal bankruptcy regulation and the relevant legal articles will be scanned to capture an overview of personal bankruptcy regulation

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

CHAPTER 2 THE NECESSITY TO REGULATE PERSONAL BANKRUPTCY IN VIETNAM

2.1 The volatility of consumer credit market

2.1.1 The rise of consumer credit in Vietnam

Consumer lending emerged from the urgent need to settle the personal spending However, consumer credit has overcome its initial mission and now either helps improve social quality, facilitates access to official credit services rather than usury, and promotes domestic production

Consumer credit is therefore considered important data to reflect the "health" of the economy For example, consumer loans contribute 70% to GDP growth in US In the first quarter of 2018, total US consumer credit rose 5.1% over the same period of last year to 3.82 trillion USD This includes credit activities such as credit card debt, home loans and student loans It is also reported that the household debt is equal to 94% of GDP in United Kingdom, 95.6% in South Korea, 88% in Malaysia, and 136%

as it appears in every corner of the Vietnam consumer market It would be effortless for a Vietnamese to obtain a consumer loan, even without any requirement to prove his/her earnings and ability to payback5

In these years, the consumer finance market began to flourish as a result of major changes in consumer habits and the high demand for middle - income real estate credit It comes from the change of Vietnamese habit, as spending on consumer

4 Hoang Ngan, “Cho vay tiêu dùng: Bài học từ các cường quốc kinh tế” (Consumer lending: Lessons from the top economies; Translated by the author), Reatimes, published on 24 July 2018, http://reatimes.vn/cho- vay-tieu-dung-bai-hoc-tu-cac-cuong-quoc-kinh-te-27091.html

5 Do Linh, “Cẩn trọng cõng nợ từ thẻ” (Be careful in carrying debt from the card; Translated by the author), Sai Gon Dau Tu, published on 6 September 2018, http://saigondautu.com.vn/tai-chinh/can-trong-cong-no-tu- the-61113.html

product from less than to more than their current income; and borrowing from relatives and friends to borrowing from the banks and financial companies

Not to mention the population structure and the average growth in income in recent years Under the "golden population" period, Vietnam has approximately 63 million people between the ages of 20 and 59 - the main customer group that financial companies are targeting This is also a segment of customers who need to make loans

of small value, mainly focused on personal consumption, living, household goods and transportation

It was reported that consumer credit growth in Vietnam increased by nearly 60%

in 2017 and it is forecasted that in the next three years, the average growth rate of this sector will reach 29-30% per year6

The blooming of consumer loans has a positive impact on the economy in many respects, including:

- Provide opportunities for low-income people to access the financial services, who are often refused by the commercial bank due to the difficulty to prove their ability to repay Thereby, consumer lending has been contributing to the reduction of informal lending, especially the usurious loans or "black credit"

- Encourage consumer demand, thereby increase productivity and create more employment opportunities at the macro level, which contributes to economic growth

In view of this, the rise of consumer credit is not a bad signal and should not be severely interfered with by the media However, the downsides of consumer credit must be examined to ensure that it is well managed and to prevent its negative impacts

as much as possible

2.1.2 The risky nature of consumer credit

The flourishing of consumer loans means the potential increase of people who may be overindebted, especially when there are many Vietnamese who obtain a consumer loan without proper knowledge of the interest rate and payment plan

6 Thanh Tung, “Đổ xô vào vay tiêu dùng” (Rush on consumer loans; Translated by the author), Nhip Cau Dau Tu, published 30 January 2018, http://nhipcaudautu.vn/thuong-truong/do-xo-vao-vay-tieu-dung-3322393/

In recent times, interest rate programs have become one of the indispensable elements in almost all off - the – plan real estate projects, including the high - end, middle - income or low - income projects, which usually offer loans up to 70 per cent

of the value of the property However, real estate loans are not as affordable as advertised The low-interest rates are only available in short, and then the remainder

of the loan is subject to the market interest rate That rate includes typically the deposit interest rate plus 3.5 – 4 percent of the bank's management and operating expenses; thus, the increase of deposit interest rates means the increase of loan interest rates Therefore, the unforeseeable spike of interest rate, or incidents affecting the borrower’s earning, for a long enough period, can cause the borrower to become insolvent

On the other hand, because it is easy to obtain small loans from financial companies for means of transport, smartphones and other consumer purposes, together with the flourishing of credit cards, the Vietnamese can be "trained" to have bad spending habits and lose ability to manage their finances

In this regard, Japan had also struggled to address the social unrest caused by financial companies that lend money to low-income workers at high-interest rates For decades until 2006, when the Japanese government took an important step in applying the ceiling interest rate on consumer loans, the financial companies played

a vital role in the Japanese economy as financing for borrowers considered too risky

by the banks In 2005, Japanese consumers borrowed USD 292 billion from financial companies and other non - bank lenders7 This amount is equivalent to 10% of total outstanding loans of the crediting system However, financial companies could easily become black credit providers due to high-interest rates and sometimes harsh debt collection methods, which produce high pressure on borrowers and cause them to take wrong financial actions A key example is Toyoki Yoshida, who borrowed a small sum in 1991 to buy a car and quickly fell into trouble Due to the high-interest rates, his total debts from five financial companies grew to USD 17,000 He then relied on the black credit world to pay his debts, but five years later the debt reached USD 70,000 at 50 different places

Back to Japan's consumer credit crisis, Japan's per - capita consumer credit

7 Thu Huong, “Tài chính tiêu dùng bùng nổ không kiểm soát đã khiến Nhật Bản và Hàn Quốc khốn đốn như thế nào?” (How did uncontrolled consumer finance affect Japan and South Korea?; Translated by the author), Biz Live, published 27 May 2018, 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

reached USD 5,164 in 1996 and exceeded the similar US index The number of personal bankruptcies in Japan then increased from 71,299 cases filed in 1997 to more than 100,000 in 19988 Yoshida finally filed bankruptcy after a creditor threatened to kill his mother, and once tried to commit suicide His story, more or less, can demonstrate the essential purpose of personal bankruptcy, which is "to restart someone's life"

2.1.3 Debt collection manner in Vietnam

The evolution of financial companies also exposes the defects of debt collection activities in Vietnam, where there is no real efficient and legal measure to collect bad debt, especially in the non-business sectors

Since the consumer loan is usually unsecured debt, financial companies must have unique debt collection methods In the beginning, the financial companies repeatedly call and message the debtor, reminding them to pay However, failing to collect the debt by standard methods, the financial companies increase pressures, try for other ways and many debt collection cases, which, unfortunately, often involved intimidation, terrorism, contact to the debtor’s colleagues, relatives to collect debts

In some cases, the debtor has to move his or her home, turn off the phone to avoid the threat of debt collection In some other cases, the debtor, despite having contacted the financial companies to propose a debt restructuring solution, is still threatened to recover the debt

On the other hand, the victims of the broken Hui system or network marketing are likely to continue being the victims of the debt collection activities of hopeless creditors who have lent money to the victims’ contribution to such Hui system or network marketing

In such cases, the debtor may surrender or even refuse to pay the debt, which not only affects the business of financial companies but also threatens the overall development of the financial sector in Vietnam

2.2 Insolvency in case of unlimited liability business

The concept of unlimited liability in business is necessary that the owner of a

8 Sonoko Setaishi, “Personal Bankruptcies Rise in Japan; Process Gains Acceptance Amid Crisis”, The Wall Street Journal, published 22 October 1998, https://www.wsj.com/articles/SB908985917584932000

business is liable for debts and other financial obligations with all of its assets and notwithstanding the registered charter capital of that business Under Vietnam laws, three following legal forms of doing business shall have unlimited liability to their debts:(i) the household business, (ii) the owner of the private enterprise, i.e sole proprietorship, and (ii) the partners of the partnership (unlimited liable partners) 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

The number of these persons may be approximately 5 million, as the number of household businesses as of October 2017 was recorded to be around 4.9 million 9 This is sufficient not to be overlooked when assessing the necessary personal bankruptcy law Vietnam's laws currently stop to the extent that the persons mentioned above are indefinitely responsible for their business operations, which only take into account the business aspect, but there is no comprehensive solution if they, unfortunately, become insolvent as a natural person In this respect, the opinion

of the legislators that the individual is not required by law to register for any capital when engaged in economic activities, therefore not entitled to the bankruptcy procedure, seems superficial and inhumane

2.3 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

9 Thuy Dung, “Hộ kinh doanh không muốn lớn thành doanh nghiệp” (Household businesses do not want

to grow up to enterprises; Translated by the author), The Saigon Times, published on 3 October 2017, https://www.thesaigontimes.vn/165245/Ho-kinh-doanh-khong-muon-lon-thanh-doanh-nghiep.html

not only the trading market but also the country's development

Secondly, personal bankruptcy helps to protect the creditors ' rights, even though the personal bankruptcy system normally tends to benefit the debtor Although creditors cannot recover all of their loans in most cases of bankruptcy, the bankruptcy procedure should guarantee the equality of creditors in debt collection In principle, no creditor can claim the debt individually and be paid by the debtor while other creditors have not been paid All creditors must wait until the court declares bankruptcy and distributes the debtor's assets in their respective proportions (except for the secured creditors) Furthermore, by resolving the interest between creditors and debtors fairly and satisfactorily (in the most reasonable way) and among creditors, the bankruptcy law helps to prevent conflict and tension between these persons, thereby ensuring the orderly discipline of society

Finally, the mandatory conditions for petitions for personal bankruptcy can improve the ability of the state to manage personal finances and assets In other words, a debtor who files for bankruptcy shall disclose honestly and comprehensively all of his financial situations, including living costs, actual income, assets and even proof of tax compliance, failing which his petition will be rejected Therefore, the implementation of personal bankruptcy law can improve the ability of the state to manage personal finances and assets

CHAPTER 3 INTRODUCTION TO INTERNATIONAL EXPERIENCES IN REGULATING PERSONAL BANKRUPTCY

3.1 A human right to declare bankruptcy

The right of an individual to declare bankruptcy was not simply accepted worldwide The word “bankruptcy” evolved from an Italian phrase “banca ratta” that means “broken bench or table” In medieval times, when a merchant failed to pay his debts, creditors would ceremoniously break the bench or table from which he conducted his business10 The early Romans hacked and divided the bodies of people who did not pay their debts In early England, people who were in over their heads financially were tossed in dungeons

Today, the fact that a person can declare bankruptcy if he or she has insufficient property and the ability to pay his or her debt should be considered a legitimate right The ultimate goal of allowing an individual to declare bankruptcy is to give him or her the opportunity to fulfil his or her debt obligations by liquidating or reorganizing the financial situation The specific paradigms and mechanisms may vary subject to the legislative views of each country around the world

In particular, the personal bankruptcy process can help insolvent debtors no longer be disturbed by creditors, find a legal and complete solution to repay their debts or reshape their personal finances On the other hand, creditors should be guaranteed to be paid as much as payable by the debtor and permitted by law Personal bankruptcy is, in most cases, a collective debt collection process When a person decides to file for bankruptcy, the number of his or her creditors is usually two

or more Once summoned by the court, the creditors shall stop their debt collection activities and either liquidate the debtor's assets or devise a plan for the debtor to recover its financial stability and gradually pay back This procedure should ensure equality between creditors ' interests

The US personal bankruptcy law is, without a doubt, the most forgiving system, which strongly encourages people who have failed financially to return to the economy In many stages, the exemption is extremely generous and may allow debtors an unlimited amount of equity in a house11

The rest of the world is less generous than the US about debt forgiveness In some parts of the world, it is ultimate disgrace not to pay the debts Today, however, many countries are moving towards an American model of corporate bankruptcy and some are replicating US personal bankruptcy laws

There are contrasting approaches in international legislation on personal bankruptcy, in particular the concept of "fresh start" under US personal bankruptcy law, as opposed to the concept of "earned start" under Europe's personal bankruptcy law In other words, the legislators of Europe have a different perspective on the fundamental philosophy of supporting personal bankruptcy legislation While the US personal bankruptcy law considers personal bankruptcy to be a market failure, Europeans believe that personal bankruptcy is due to macroeconomic factors such as recession and unemployment, which cause debtors financial distress and lead them

to petition for bankruptcy12 In this respect, the US personal bankruptcy law offers, inter alia, a straight discharge to the debtor, while Europe's personal bankruptcy law generally requires a compulsory payment plan as a condition of discharge

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, a neighbouring country of Vietnam, the individuals can file for bankruptcy if their unpayable debt is at least 10,000 Singapore Dollar According to the statistics of the Insolvency Office of Singapore Ministry of Law, there were 17,463 undischarged insolvent persons as at the end of July 2018, which is equivalent

to approximately 0.3% of Singapore population The applications for bankruptcy in Singapore have continuously increased from year to year, reached 2,932 files in 2017 and will likely to exceed 3,000 files in 2018 There are many reasons for the Singaporean to go bankrupt, but most of them are spending excessive amounts of their income on credit cards, gambling addictions, investing in real estate, securities

or participating in business projects that they cannot control in well manner

Apparently, during the bankruptcy procedure and even afterwards, the insolvents shall suffer from both personal and social consequences They can

continue to work but must share a portion of his income with the creditors Their expenditures must be reasonably explained in a report, which will be periodically controlled by the court’s delegate For example, the insolvent shall justify why he or she used a taxi instead of public transportations and whether such circumstance is an emergency On another hand, the bankrupted employees will be publicly disclosed

by the employer, thus should be more challenging to advance in their professional lives Before leaving the country, the bankrupt shall apply for a permit from the court, and the court usually approves for business purposes only However, the insolvents still have a chance to restart and continue their life

3.2 Role of culture and economic in the development of personal bankruptcy

The insolvency systems are a profound reflection of the legal, historical, political and cultural contexts of the countries that developed them13 Thus, there are also significant differences in the approach to both businesses and personal bankruptcies in countries that share a legal tradition Countries with different legal traditions, such as those in Europe and Japan, have more different systems of bankruptcy, although many are moving towards US models

Culture is sometimes used to explain national differences in both the use of credit and attitudes to bankruptcy: the Japanese are supposed to be averse to consumer credit and regard bankruptcy as highly stigmatising, while the French and Belgians are averse to borrowing Another example is the Korean Individual Rehabilitation Proceeding When it was revealed, critics focused on its generous discharge policy and the moral hazard that could result from discharge; for example, people borrow too much and make less effort to repay their debts

In these accounts, culture seems to have a wide range of practices, a phenomenon that is almost natural and apolitical It was said that law is the mirror of society This description, however, overshadows the contingent nature of cultural values and historical conflicts over cultural development In other words, a historical view is crucial, as it can demonstrate that culture is an adjustment to conflicting ideas and interests For example, the idea of a "pro-debtor" culture in the US appears to be

an essential characteristic in US history This, however, can understate the historical conflict over the laws and institutions that are still developing The evolution of

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

12 January 2005

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, on the other hand, is often used to demonstrate the importance of cultural attitudes The argument is that overindebtedness and bankruptcy are a significant cultural stigma in Japan, leading to suicide instead of bankruptcy However, amendments to Japan's insolvency law and practices have increased the level of accessibility for insolvency, and Japan has now a higher rate of bankruptcy filings than England and Wales14 This may have reduced the suicide rate15 Other legal research in Japan shows that institutional and legal factors lie behind the so-called cultural attitudes and that changes in them can consequently have an impact on social standards

3.3 Arguments on the adverse impacts of personal bankruptcy

Personal bankruptcy, whether under US or European approaches, can be seen

as a mechanism that interferes with mutual, legal and enforceable agreements between the debtor and creditors In most cases, personal bankruptcy results in a discharge that offers more remarkable benefits 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

For example, when the Individual Rehabilitation Proceeding was introduced in Korea, criticism focused on its generous discharge policy and assumed that discharge could result in people borrowing too much and could lead debtors to make less effort

to repay their debts16

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

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

removes only legal liability and does not prevent creditors from refusing

to deal with discharged debtors Even lenders who extend credit to certain bankruptcy borrower may choose to offer minimum credit amounts and charge high-interest rates and fees to mitigate their default losses 17

- 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

There is also an argument about the fact that a full discharge could harm the creditors' financial situation It should be noted, however, that creditors' financial failure is not caused by personal debt discharge, but by unpaid claims or non-performing loans Discharge is merely the process of wiping out uncollectible claims after they have been proven to be uncollectible If reimbursement of claims is possible, the creditor may appeal the adjudication of bankruptcy or a discharge decision by proving such a possibility

However, such failure can lead to another concern that creditors, mostly financial institutions, will adjust the credit supply to respond to debt relief Indeed, creditors may increase interest rates, set higher minimum standards to qualify for loans, increase collateral requirements, or screen loan applicants more vigorously in response to the bankruptcy phenomenon

Research on US personal bankruptcy has shown that the size of the bankruptcy exemption of the relevant state has a statistically and economically significant positive effect on the likelihood that potential borrowers in the state will be denied credit or discouraged from borrowing18 It was also found that households in the lower half of the distribution of assets have less debt and are facing higher interest rates on car loans in states with high exemptions from bankruptcy than borrowers in low exemption states In contrast, households in the upper half of the asset distribution have more credit in states with high bankruptcy exemptions, suggesting

17 Song Han, Benjamin J Keys, and Geng Li, 2011 Credit Supply to Personal Bankruptcy Filers: Evidence from Credit Card Mailings Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C

18 Reint Gropp, John Karl Scholz and Michelle J, 1997 White Personal Bankruptcy and Credit Supply and Demand The Quarterly Journal of Economics, Vol 112, 217-251

higher credit demand for these households than lenders are willing to accommodate Thus, the research as mentioned above concluded that personal bankruptcy increases the amount of credit held by high-asset households and reduces credit availability to low-asset households In other words, personal bankruptcy does not reduce the supply of credit but redistributes credit to high-asset borrowers

The issue of the moral hazard of the creditor should also be discussed Because debtors lack adequate overindebtedness protection, creditors can give the debtor excessive credit without proper assessment of the financial situation of the debtor19 The fall in credit supply can, therefore, be concluded from the short-sighted statistics addressing borrowers who might not meet the financial capacity to repay the debt at the start In the long run, however, personal bankruptcy would be a tool to more efficiently redistribute the credit flow and improve the behaviour of creditors

in crediting activities

3.4 The historical evolution of personal bankruptcy

3.4.1 The development of personal bankruptcy law in US

From day one of its histories, the US Constitution has granted the US Congress the power to “establish a uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States”

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

Though the first bankruptcy act was passed in 1800, it had lasted for only three years and was repealed in 1803 Its successors that were passed in 1841 and 1867, also shared a similar destiny as were repealed after 18 months and 11 years respectively The short life of these acts is supposed to be contributed by the following reasons20:

- 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

Despite its short life, the very first provisions regarding personal bankruptcy were introduced in the 1841 Bankruptcy Act, which has originated the concept of the individuals those are “honest but unfortunate” for the next hundreds of years of US personal bankruptcy legislation, which can be briefly read in the table 3.121

Table 3.1 Summary of US Personal Bankruptcy Legislation Development

Event

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 oriented as narrowing the exceptions for discharge

debtor-1933 The 1898 Bankruptcy Act is amended to include railroad reorganisation,

corporate reorganisation, and individual debtor arrangements

1938 The Chandler Act amends the 1898 Bankruptcy Act to allow

reorganisation for both corporation and individual debtor There was an earlier amendment to 1898 Bankruptcy Act in the period of 1933 – 1934, but such amendment was shortly repealed in 1936

1978 The Bankruptcy Reform Act replaces the 1898 Bankruptcy Act

The enactment of the fifth Bankruptcy Act, namely the Bankruptcy Reform Act to supersede the 1898 Bankruptcy Act This Act addressed the trend of US bankruptcies in the period of 1930 – 1970, for which the corporate bankruptcies had decreased, and the individual bankruptcies had continuously increased This Act introduced the essential provisions of what so-called the modern US personal bankruptcy law, of which Chapter

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

Act of 2005, which is an effort to reduce the number of personal bankruptcies that steadily grown since the enactment of the 1978 Bankruptcy Reform Act Generally, this Act provides the “mean test” upon individual debtors’ income, increase the costs of filing, requires the debtors to have financial management training to obtain the discharge

Source: US Federal Judicial Center, 2018 The current US personal bankruptcy legislation has been formed since 1978, afterwards was aided in 1994 and then emasculated in 2005 This modern legislation was once considered as the most generous personal bankruptcy law of the world, due

to its fundamental philosophy that the personal bankruptcy shall be treated as the market failure In particular, the US Bankruptcy Laws Commission while drafting the 1978 Bankruptcy Reform Act, had in their mind that:

- 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

Therefore, the US current personal bankruptcy legislation has had a clear intention to allocate the risks arising from the consumer credit market to the creditors who should be in a better position to bear such 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 According to the Administrative Office of the US Courts, the personal bankruptcy filings started from approximately 0.15 per 1,000 persons at the beginning of the 20th century, began to increase from 1960 and dramatically grew

from 1980 As of 2004, the bankruptcy filings rate was 5.3 per 1,000 persons, which

is four times more than the rate as of 1980 and 35 times more than the rate as of 1900 3.4.2 The development of personal bankruptcy law in Europe

Europe governments see personal bankruptcy as a social problem instead of a market failure22 Consequently, they would rather reform the consumer protection policies or other market regulation to cure the problem, instead of worrying about the debtor’s entitlement to be discharged Most of Europe personal bankruptcy legislation did not contain discharge provisions at the beginning of the 1980s

It was attributable to the fact that the consumer credit market in Europe had been strictly regulated until the 1980s, hence the default and overindebtedness was rare Though at that time, numerous individual debtors had been overindebted, their cases were not resolved by a legal procedure, but by some kinds of the creditors’ action, such as writing off the debts Nevertheless, these debtors were to have political pressure for the Europe governments to change the personal bankruptcy legislation

In the 1980s, the European credit markets were quickly deregulated, leading to

an increase in consumer credit supply Due to an accumulation of unsatisfied demand during the governed period, the credit market rapidly expanded The total outstanding volume of consumer credit is estimated to have doubled during the 1980s in several European countries23

Picture 3.2 Private credit in Europe as a percentage of GDP

Source: Nuria Diez Guardia 2002 The increase in unemployment already hit households with a high level of debt when the recession began at the turn of the decade In contrast to the poor, the new middle-class debtors were able to create political pressures for excessive debt - reduction measures

However, as mentioned before, Europe governments see personal bankruptcy

as a social problem instead of a market failure Therefore, they would have the personal bankruptcy laws as a part of welfare societies to help people with excessive debt loads, rather than as a measure for quick economic recovery and re-entry to the credit market Besides, credit market participation was not deemed necessary and might not even have been desirable The economic recovery was intended to ensure the payment plan for the partial reimbursement of old debt

In that respect, all EU debt adjustment bills underline that the law should not undermine the overall moral imperative to pay debts The Swedish Debt Adjustment Law, for instance, states that the primary function of the law is, in both terms and spirit, to uphold its debt payment obligations Other bills stress that only debt that the debtor would never be able to repay may be discharged

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

produced and quickly expanded across Europe as demonstrated in the table 3.224

Table 3.2 Summary of Europe Personal Bankruptcy Legislation

Development

Event

1984 Denmark has taken the lead as the first European country to introduce a

specific process for adjusting consumer debt and discharging the debt

1989 The French law on individual and household debt prevention and

regulation were implemented This law provides primarily for the repayment of debts, together with the limited discharge provisions that only apply after a grace period

1993 The rapidly deregulated credit market and recession in the early 1990s

following the collapse of the Soviet Union led to substantial increases in Finland and Norway's unemployment and bankruptcy filings Consequently, the laws on consumer debt adjustment in these countries were drafted quickly and came into effect

1994 The consumer debt adjustment legislation with a specific procedure was

also introduced in Austria this year

1998 Sweden has been the latest Scandinavia to introduce legislation on debt

adjustment The Swedes began preparatory work very early, and the report

of the committee was published in 1990 The law, however, was approved

by law only enacted and entered into force in 1994

1999 French legislation aided its limited provisions on discharge

Source: Johanna Niemi-Kiesilainen, 2003

24 Johanna Niemi-Kiesilainen, 2003 Consumer Bankruptcy in Global Perspective Hart Publishing

CHAPTER 4 AN OVERVIEW OF INTERNATIONAL LEGISLATIONS

ON PERSONAL BANKRUPTCY

4.1 Personal bankruptcy law in US

4.1.1 The modern US personal bankruptcy law

Under the present US Bankruptcy Act, if an individual chooses to petition for bankruptcy, there are generally two alternatives as petitioning for liquidation bankruptcy under Chapter 7 or for repayment bankruptcy under Chapter 13

Picture 4.1 US personal bankruptcy cases by chapter

Source: American Bankruptcy Institute 2018 According to the data from American Bankruptcy Institute, since 1994- the year

of the amendment to 1978 Bankruptcy Reform Act to expedite the procedures of bankruptcy filing and extend the debtors’ assets to be exempted from creditors, the number of personal bankruptcy cases filed under Chapter 7 has always been 2 times more than those filed under Chapter 13, as the US people would prefer to an instant fresh start instead of a repayment plan across the years The rate dramatically fluctuated in 2005 contributable to the Bankruptcy Abuse Prevention and Consumer Protect Act During the last five years, the total of personal bankruptcy cases has slightly decreased, but such proportion between cases under Chapter 7 and Chapter

Chapter 7, entitled Liquidation, contemplates an orderly procedure supervised

by the court through which a trustee took over, reduced the property of the debtor to cash and made distributions to the creditors, subject to the right of the debtor to retain certain exempt property and the rights of secured creditors If the insolvent files for bankruptcy under Chapter 7, most unsecured debts will be determined The court will allow such individual to keep some of his or her properties and appoint a trustee to confiscate and sell the remainder The trustee shall use its best endeavour to repay the debt as much as possible

Chapter 13, entitled Adjustment of Debts of an Individual with Regular Income,

is for an individual debtor with a regular income source Chapter 13 provides a debtor with the ability to maintain a valuable asset such as a house and enables the debtor to propose a plan to repay creditors over time – usually 3 to 5 years Chapter 13 differs significantly from Chapter 7 since debtor usually remains in possession of its assets and makes payments through the trustee to creditors based on the expected income

of the debtor over the lifetime of the plan Unlike Chapter 7, the debtor shall, before the discharge is granted, complete the necessary payments under the plan

All petitions thereunder are towards the result of a bankruptcy discharge A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts In other words, the debtor is no longer legally required to pay any debts that are discharged The discharge is a permanent order prohibiting the creditors from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts

4.1.2 Eligibility to petition for personal bankruptcy

Generally speaking, a person can file for bankruptcy if no previous bankruptcy petition has been dismissed within the preceding 180 days either because a debtor has deliberately failed to appear before the court or comply with court orders, or because the debtor voluntarily dismissed the previous case The debtor must also receive credit counselling from an approved credit counselling agency within 180 days before the filing

Furthermore, the eligibility requirements will be subject to which chapter the debtor petitions under:

- If a person makes bankruptcy petition under Chapter 7 and its current monthly income is more than the state median, the Bankruptcy Code