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Consumer Insolvency: The Linkage Between the Fresh Start, Collective Proceedings, and the Access to Debt Adjustment

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Abstract

The term “fresh start” is widely used. This article asks how fresh the start needs to be in order to offer real rehabilitation to the debtor. A fresh start where the debtor does not restore the control of his or her economic situation has not achieved the objective of debt adjustment. Sometimes, however, the poor economic situation of the debtor after debt adjustment is not a sign of unsuccessful insolvency legislation but a consequence of more general social policy problems in society. In this paper, the hypothesis is set that the fresh start requires quite extensive and simultaneous discharge of debts in collective proceedings. The collectivity of the proceedings is the procedural side of the coverage of the debts. A high coverage of debts means usually a strict entry control by the court as a gatekeeper. The court investigates the reasons behind the indebtedness. The downside of strict control is the drastic sorting out of the debtors. A relatively open assess to debt adjustment is possible in systems where plenty of debts have been excluded from debt adjustment by the legislator (protected debts). The weak point of these systems is that the fresh start is not achieved because the debtor has not enough disposable income to pay the protected debts. In this paper, a debt adjustment model is suggested that has high coverage of debts where rescheduling is used as a means of debt arrangement concerning the protected debts.

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Notes

  1. The World Bank. Report on the Treatment of the Insolvency of Natural Persons. Drafting committee: Kilborn, J., Booth, C., Niemi, J., Ramsay, I. and Garrido, J. See also Kilborn 2014.

  2. Recommendation CM/Rec (2007)8.

  3. For example, in Sweden, the competent authority is the enforcement officer (Skuldsaneringslagen, 2006, p. 548, Sects. 2 and 10). In Norway, the application has to be filed with the enforcement authority in the first place, but the district court is competent concerning the obligatory form of the debt adjustment (Lov om frivillig og tvungen gjeldsordning for privatpersoner, gjeldsordningsloven, 1992-07-17-99, Sects. 2–1, 5–1). In France, the debtor files for bankruptcy in the first place before an administrative authority, the “commission de surendettement” (CSUR).

  4. For choosing between the payment plan version and straight discharge, there may be so-called best-interest test: the creditors shall receive an amount no less than what they would receive if the debtor’s assets were liquidated. Problems may arise when the expected future income of the debtor is high, but the current assets are petty (Matsushita 2007, pp. 770–771).

  5. Debts from a ceased business activity are private debts.

  6. The term Scandinavia is used here in the meaning of “Fennoscandia” (Norway, Sweden and Finland).

  7. Also in Sweden, where the first instance is the enforcement authority, it is possible to challenge the decision in the court (appeal to district court, Skuldsaneringslagen, Sects. 29 and 30).

  8. Margaret Howard stated in 1987 (p. 1088) that the policy goal of debt adjustment is the principle of the renewed economic vigour of the debtor. This is still true.

  9. In this paper, the term system refers to concrete debt adjustment systems and the term model to abstract (theoretical) constructions.

  10. The same idea is clearly expressed in the Norwegian Gjeldsordningsloven, Sect. 1: “Loven skal gi personer med alvorlige gjeldsproblemer en mulighet til å få kontroll over sin økonomi” (The purpose of this Law is to offer control over the private economy for persons with serious financial problems). The purpose of the Swedish Skuldsaneringslagen (Sect. 1) is a total or partial discharge. According to the Finnish Debt Adjustment Act (Sect. 1), the purpose of the Law is to remedy the financial situation of an insolvent private individual.

  11. Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings.

  12. Furthermore, according to Art. 2(a) for the purposes of the Regulation “insolvency proceedings” shall mean the collective proceedings referred to in Article 1(1). These proceedings are listed in Annex A of the EIR.

  13. Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters/Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast).

  14. Council of the European Union, 20 November 2014. 15414/14 ADD 1 (Proposal for the Recast of the EIR). Probably, the Recast shall apply from 2017. See also COM(2012) 744 final, Proposal for a regulation of the European parliament and of the Council amending Council Regulation (EC) No 1346/2000 on insolvency proceedings (Linna 2014a, p. 31).

  15. It is interesting that the article text refers to “creditors” but the recital refers to debts. These are not the same things: one debtor may own a substantial part of the debts. Certainly, decisive should be the amount of the debts and not the creditors.

  16. The proceedings which do not include all the creditors should be proceedings aimed at rescuing the debtor, whereas the liquidation proceedings should include all creditors (Recital 13).

  17. Recital 15. This exception probably refers to the Debt Relief Orders (DROs) in the English system. A debtor is eligible for DRO if he owes less than £15,000, has less than £50 a month spare income, has less than £300 worth of assets, lived or worked in England and Wales within the last 3 years and has not applied for a DRO within the last 6 years. The DRO includes a waiting period of 12 months. https://www.gov.uk/options-for-paying-off-your-debts/debt-relief-orders. See for DROs, for example, Morgan et al. 2013, pp. 15–6, 518–526.

  18. One question is whether the criterion of a significant part of the debts refers to a concrete situation or to the coverage of proceedings on a general level. The latter interpretation is justified. The combination of debts varies from debtor to debtor and the access to debt adjustment should not depend on such incidental circumstances. So, the demands of a significant part of the debts refer to the special waivers laid down in the law.

  19. Additionally, individual states may have their specific differences (van Apeldoorn 2008, pp. 58, 72).

  20. Procedure under Chap. 7 US Bankruptcy Code means that for payments to the creditors the bankruptcy trustee sells the debtor's nonexempt assets, and the debtor loses his or her property. The grounds for the denial of the discharge are very limited in a Chap. 7 case. No payment plan is confirmed. The situation is different in Chap. 13 cases: the court conforms for a debtor a payment plan (3 or 5 years according to the debtor’s current monthly income). In comparison to Chap. 7, Chap. 13 offers the debtor a major advantage: the possibility to save his or her home from foreclosure. Creditors shall receive at least as much as if the debtor’s assets were liquidated under Chap. 7. Secured creditors are protected according to both chapters.

  21. Secured creditors retain either the right to seize the property which secures the underlying debt (Chap. 7) or the payment plan shall provide that the holder of the secured claim receives at least the value of the collateral (Chap. 13, the rescheduling of the secured debt is allowed).

  22. The Act on the Adjustment of the Debts of a Private Individual (Debt Adjustment Act, 57/1993).

  23. The secured debts fall outside debt adjustment in Sweden (Sect. 7, Skuldsaneringslagen). In Norway (Sects. 4–6, 4–8, 7–2, Gjeldsordningsloven) and in Finland (Sects. 25–26, Debt Adjustment Act), they are well-protected. In Finland, the rescheduling of a secured debt is allowed, as is adjustment to a certain degree of its interest, but the capital is protected.

  24. The other thing is that the security may be lost if the debtor is not able to handle the repayments of the secured debt.

  25. The German Insolvenzordnung (InsO, 05.10.1994) Sect. 294 (Gleichbehandlung der Gläubiger) aggregates the criteria for the equal treatment of the creditors in the following way: (1) single enforcement is prohibited, (2) any such agreement between the debtor and an individual creditor which provides the creditor’s advantage is void, and (3) rules for set off are provided.

  26. Singular enforcement is usually forbidden by a stay. A stay means the freezing of the situation in order to preserve time for the clearing and arranging of the debts and ensuring equality among the creditors. During the payment plan, the enforcement is not allowed as long as the debtor pays the scheduled payments.

  27. The Finnish Act of Debt Adjustment (Sect. 31), for example, enacts that available funds shall first be allocated for the payment of privileged maintenance debt (maintenance which has become due within one year before the opening of debt adjustment), and after that, they may be allocated for the payment of debts connected with the basic necessities of the debtor and debts from his or her essential living expenses.

  28. It is important that the creditor will be aware of the opening of the proceedings. There may be a public announcement and after that a lodgment procedure follows, or the debtor or a special administrator works out the creditors. If some of the creditors remain unknown, the legal security demands that the rights of the creditors are not infringed upon in cases where no announcement has been published. The legislator has many practical ways to resolve questions of this kind.

  29. It should be noted, however, that this is not the only possibility. If the fresh start and rehabilitation are understood in the point of time dimension in a more flexible way, also systems where writing off takes place debt by debt lead to the same outcome. I refer here to the Finnish system of final limitation of debts (15 or 20 years for each, the Finnish Enforcement Act, 705/2007, 2:24–27).

  30. ECHR, Judgment 20 July 2004, Bäck v. Finland, Application no. 37598/97.

  31. For example, the German law includes provisions on the debt adjustment estate and administration of it. InsO, Part two, Chap. three (Insolvenzverwalter. Organe der Gläubiger) Sect. 35: Das Insolvenzverfahren erfaßt das gesamte Vermögen, das dem Schuldner zur Zeit der Eröffnung des Verfahrens gehört und das er während des Verfahrens erlangt (Insolvenzmasse).

  32. The US system has, however, been modified with The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) which restricted the number of debtors that can file for Chap. 7 bankruptcy. The BAPCPA includes a sorting mechanism based on the income of the debtor (the means test). The Act has been very controversial from the beginning. See for the legislative history of the BAPCPA, Jensen (2005) and for the early critical comments, e.g., Sommer (2005). There is plenty of legal literature available on the pros and cons concerning this Act (e.g., Littwin 2011).

  33. In Chap. 13 cases, the denial of discharge is not possible if the debtor has implemented the payment plan.

  34. There are also other grounds than disloyalty, such as the debtor has been granted a discharge in a case commenced within 8 years before the date of the filing of the petition.

  35. See Sects. 1–4 (Norway); Sects. 4 (Sweden) and 10 (Finland). In the Swedish provision, both categories of reasons are clearly visible in a short form: the court shall consider especially the circumstances when the debts incurred and the efforts the debtor has taken for repayment (“– – omständigheterna vid skuldernas tillkomst, de ansträngningar gäldenären har gjort för att fullgöra sina förpliktelser – –”).

  36. Sections 5-2. Særlige regler om innholdet av en tvungen gjeldsordning.

  37. Sections 10, 10a, 30, 31a.

  38. Empirical verification of how many debtors are rejected for strict entry control reasons, is, however, not easy to carry out. It would not be enough only to look at the dismissal percentages without analysing all the factors which have an impact on the quality of the applications and discretion of the court. There are also other reasons as to why the application for debt adjustment is not accepted. In many laws, there is a condition that the indebtedness of the debtor shall be deep and stable enough, or some information may be missing. Additionally, the debt advisory system has a certain impact: if the advisory estimates that there are no chances for the application to succeed, they probably recommend the debtor not to apply or perhaps try later. In Finland, it has been noted that there is an impediment for debt adjustment concerning over 40 % of the clients applying debt adjustment with the help of the municipal debt advisory (Valkama 2011a).

  39. The term protected is used here also with regard to the desire of society to maintain the effect of a punishment, e.g., by exclusion of fine.

  40. This has been noted also on the US Courts’ official Website: “Because a Chap. 7 discharge is subject to many exceptions, debtors should consult competent legal counsel before filing to discuss the scope of the discharge.” <http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter7.aspx>

  41. Additionally, other lenient ways of arranging a protected debt may be possible, for example, by lowering the interest rate or paying the capital before the interests.

  42. The amount of the debtors left outside may be so high that some kind of mass solution is needed. After thorough consideration, Finland decided to enact a complementary system with a final limitation of debts. This means discharge of debts without any entry control by using the final limitation. The time limits are quite long (15/20 years calculated from the enforcement title, Enforcement Act 2:24–27). Sweden is considering the same system. In Sweden, the amount of those debtors who have remained outside the debt adjustment system and been in enforcement proceedings for over 20 years is estimated to be over 95,000 individuals (SOU 2013:78, p. 250, see also SOU 2013:72 and SOU 2008:82).

  43. In Finland, over 100,000 citizens (population of 5.45 million) have been applied debt adjustment in the district courts since 1993 when the Debt Adjustment Act came in to force.

  44. Quite surprisingly, they observed that those in the worse-off group were least likely to have reaffirmed a debt. The authors caution against drawing anything other than a tentative conclusion because only a small number of debtors (18 %) reaffirmed any debt. The authors wish that future studies on debt reaffirmation should consider tracking debtors longitudinally to assess more rigorously if and how reaffirmations influence families’ financial situations (pp. 98–99).

  45. The debtor is obliged to pay additional payments if his or her income increases during the payment plan. Due to the lack of control, the additional payments are often neglected.

  46. In reality, no fewer than a fifth of debtors are in a situation where some of the debts had remained outside the debt adjustment and discharge. Typically, these are ordinary private debts as health care costs, rent, maintenance, and consumption credits. The amount of the remaining debts varies from small amounts to 30,000 euros (Valkama 2011b). The reason for this problem is that in the Finnish system, there is no lodgment of claims. Thus, there is a risk, which is realised quite often, that not all debts are found and arranged.

  47. Some supportive means should be considered such as allowing studies during the payment plan.

  48. In Sweden, it has been noted, the risk for early death is considerably higher than among the population on average (SOU 2013:72, p. 82).

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    Tuula Linna

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Linna, T. Consumer Insolvency: The Linkage Between the Fresh Start, Collective Proceedings, and the Access to Debt Adjustment. J Consum Policy 38, 357–374 (2015). https://doi.org/10.1007/s10603-015-9287-3

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