As soon as European states had overcome their hesitations about offering relief to insolvent individuals, another problem arose:  how to extend that relief to individuals who were so over a barrel that they couldnt’ even pay filing and/or administrative fees.  So-called "NINA debtors," with "no income, no assets" susceptible to seizure by creditors, represent 70%-80% of individual debtors in most of the non-U.S. systems I’ve surveyed (and apparently many that I haven’t).  Note that the relative generosity of wage exemptions in Europe exacerbates this problem, as all of these debtors have some income–it just can’t be seized for creditors, either in or outside of the insolvency system.  Germany in particular has struggled with this problem.  Though individuals there don’t face the U.S. lawyer expense problem (most European debtors seeking formal insolvency relief are represented by free or low-cost credit counselors, not lawyers), significant administrative expenses attend a system that requires every debtor to be monitored by a trusee for six years.

A particularly intriguing policy issue pushes the envelope even further.  Many (most?) "NINA debtors" are not expected to remain totally impecunious forever.  Indeed, one of the main purposes of insolvency relief is to reinvigorate these debtors’ incentive to produce more future income for the benefit of debtors, creditors, and ultimately society.  But what of debtors who are chronically destitute?  A not insignificant portion of NINA debtors have very little if any hope of increasing their income production (as a result of disability, age, or other impediments to remunerative work–I represented several such debtors pro bono when I was in practice).  Businesses in this situation are liquidated, but we can’t liquidate people, so what to do for them? 

If these people are really absolutely and irremediably "judgment proof" (granted, making this determination is no mean feat), do they "need" relief enough to warrant the expenditure of public funds and other scarce resources to offer them emotional repose from toothless creditor harrassment (this question is not rhetorical, and I dont’ mean to suggest an answer–I agree that incessant barking can be just as bad as a bite)?  An intriguing new paper by Stephanie Ben-Ishai and Saul Schwartz (Osgoode Hall Law School and Carleton University School of Public Policy and Administration) takes up this question and surveys the responses of several countries, including the United States.  The paper is interesting and worth a read from a comparative perspective.

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One of the implicit assumptions behind the new pre-bankruptcy credit counseling requirement seems to be that many individuals could convince their creditors to work something out if they were just routed in that direction and supported by trained, relatively neutral counselors (read:  negotiators).  I must admit that I had often felt that creditors, acting in an economically rational way, could be expected to accept a disinterested third-party mediator’s evaluation of the debtor’s circumstances and abilities and agree to voluntary workouts if only they were asked.  I felt this way before I started looking at how pre-bankruptcy negotiations work out in Europe.

In France, for example, for the longest time, renegotiation was the only option for individuals.  It took years of prodding and concerted pressure from the the primary administrator of this system, the central bank (the Banque de France), to get creditors in more than a majority of cases to agree to quite modest concessions (e.g., short payment extensions or deferrals, reduction of accruing interest, to say nothing of minor remission of accrued principal and interest).  Even after coercive relief was introduced in 1999 and then strengthened in 2004, many creditors continued to resist the most basic of concessions—even after a neutral administrative commission had assured them that these minor concessions were the debtor’s and creditors’ only reasonable alternative.  To this day in France, in about 33% of the cases in which some form of coercive relief is offered (either a Chapter 13-type payment plan or a Chapter 7-type immediate discharge), creditors have seemingly irrationally refused the recommendation of the neutral administrator for a workout plan with minor concessions—knowing full well that the recommendation will almost inevitably be “crammed down” on them by the court in the next step of the process.

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Katie’s post reminds me of an interesting discussion of financial risk and bankruptcy reform in another recent post by Alex Tabarrok over at Marginal Revolution.  Tabarrok takes issue with the neo-Victorian reaction of “credit snobs” to the subprime mortgage default crisis (“credit is something that only the rich can handle”) and defends the democratization of credit.  One of Tabarrok’s remarks runs smack into a stark difference between U.S. and European reactions to widespread default crises and bankruptcy reform.  He notes that, in the new world of financial innovation, “defaults are to be expected,” explaining that “the whole point of recent financial innovation (and reformed bankruptcy law [emphasis added]) has been to reallocate risk [a]way from borrowers and toward those lenders in the world wide market for capital who are in the best position to handle the risk.”  The parenthetical comment glosses over major differences between recent U.S. and European reforms.  These differences illustrate even more vividly the lopsided (misguided?) U.S. reaction to the subprime lending crisis.

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The debate about the relationship between declining stigma in the United States and increased personal bankruptcy filings has always confused me for at least two reasons.  First, if stigma was on the decline in the late 1990s and early 2000s among us shameless Americans, a glance around the world reveals that we were (and are) not alone.  For example, one would think that Japan might represent a highly traditional, honor-focused society where stigma would powerfully inhibit sloughing off responsibility.  Yet, from 1998 to 2003, the number of filings for personal bankruptcy in Japan (roughly equivalent to U.S. Chapter 7) rose from just over 100,000 to just over 240,000.  The filing rate thus grew from just over 0.8 filing per 1000 residents in Japan to 1.90 filings per 1000 (falling back to about 1.45 per 1000 by 2005).  This is far behind the 5+ “non-business” filings per 1000 residents in the U.S. at the height of the pre-BAPCPA era, but to see the 2.4 X growth rate in Japanese filings in the six years from 1998 to 2004, one must look more than twice as far back in time in the United States (1990 to 2003, from 660,796 to 1.6 million).  I’m sure there’s something statistically misleading about my amateurish attempt at comparison here, but the Japanese figures offer a rather surprising perspective on the decline of stigma, in my view.

The same can be said of comparable Asian and European countries, by the way.  The personal bankruptcy rate in Hong Kong spiked dramatically from 0.66/1000 in 2000 to over 3.5/1000 in 2002 and 2003 before settling back to just under 1.5/1000 in 2006.  Total individual filings in Germany have risen steadily by about 25%-30% per year through the 2000s to a rate of just over 1.5/1000 in 2006.  Austria, the Netherlands, and Belgium have seen slightly smaller but sustained growth in filings in recent years, settling in at roughly 0.8 to 0.9 filings per 1000 residents.  The French system is more complex than the others, so the number of total filings is a bit misleading, but the rate in France exceeds 3.0/1000, with about one-third of these ultimately receiving some sort of formal, coercive relief (including something very similar to U.S. Chapter 7).  On the one hand, these rates are far below the stratospheric U.S. rates of the mid-2000s.  But on the other hand, we have had personal bankruptcy for over 100 years, while Europe and Asia have adopted similar systems only in the past 10-20 years (not to mention a host of other economic and cultural differences).  Given time, the filing trajectories in these countries seem to be headed inexorably in our direction.  Is there a worldwide dearth of personal shame?

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To my dismay, I have just read yet another recent publication that mischaracterizes European personal insolvency law.  Published in 2006 by an author and a press whom I respect a great deal, this book reports that individuals in Germany are not allowed to file for bankruptcy voluntarily, their debts are not discharged in bankruptcy at all, and they must repay their debts from future earnings.  To be fair, these comments in a footnote were not the thrust of the otherwise quite fine contribution.  Nonetheless, since 1999, the first two statements are false, and the last one is at least misleading.  For support, the note refers to two authorities, both published in the late-1990s.  Apparently both of these authorities missed the fact that Germany (along with many other European countries) revised its bankruptcy law in 1994 (effective 1999) to introduce a discharge for voluntary individual filers.  In fact, they made up a new word for this new discharge:  Restschuldbefreiung (literally, the “freeing [of the debtor] from the remainder of [his or her] debt”).  Technically, debtors must turn over to a trustee all non-exempt income for a six-year “good behavior period” (Wohlverhaltensperiode), theoretically to be paid to creditors, though the Justice Ministry recently observed that debtors in 80% of cases have barely enough non-exempt income during this period to cover the administrative fees, so creditors often receive nothing.

Warning!  Shameless self-promotion material following the jump . . .

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Thanks to Bob for the very kind introduction, and thanks to the entire Credit Slips group for inviting me to be a guest on their great blog!  I am thrilled to have been invited to share my thoughts on the topics that interest me most:  why and how consumers worldwide are running into trouble with too much debt, and how more and more countries are implementing legal responses to this problem.

Though the most recent issue of U.S. News has gotten all the attention, the March 26 issue ran under a cover story that sums up my academic agenda:  Making America Better.  It presented 30 examples of "How They Do It Better"; that is, initiatives from outside the United States that countries had undertaken to make their societies more efficient, more productive, more humane, or just more comfortable.  While differences among our societies might make U.S. soil less fertile for similar initiatives–an issue that sensitive comparison always must bear in mind–recent years have seen a variety of parallel developments in consumer credit and debt relief in particular from which the United States and other countries can learn from mutual experience (both good and bad).

I really look forward to sharing some thoughts this week on a few areas where the United States might draw from the well of international ideas to make our consumer credit and debt relief systems–or at least our thinking about these systems–better.