Category: Comparative & Int’l Perspectives

  • Contract Ambiguity: Paying Versus Still Owing a Debt

    Posted by

    Jason Kilborn

    I've been meaning for some time to tell this brain-candy story involving an amazing ambiguity in a Chinese debt-related contract. Now that my career-first research semester is drawing to a close and the holiday break is upon us, I thought now's the time to tell it.

    To set up the story, the equivalent of the legal-cultural Latin phrase pacta sunt servanda (debts are to be paid) in Chinese is 欠债还钱 (qiàn zhài huán qián) [the phrase continues, but this is the key bit]. It means "If you owe a debt, return the money." Here's where the craziness comes in: Most Chinese characters have one and only one single-syllable pronunciation. That syllable might have many diverse meanings, but how that character sounds is consistent.

    Not so with the key character in the above phrase. The character 还 can convey the sound huán, in which case it means "return," or more frequently, it carries the sound hái, which means "still" (that is, carrying on, as in "I still love him despite his sometimes beastly behavior").

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  • Personal Insolvency in Asia and Currency Comparison

    Posted by

    Jason Kilborn

    While Shenzhen has gotten all the good press since its March launch of the first personal bankruptcy regime in Mainland China, a number of other Asian regimes have also been on the move. I recently examined the rapidly developing personal insolvency system in Singapore, and others have done great work on the unique processes in Japan and Korea. As an outsider, I struggle to capture the real feeling of life under these procedures. The challenge is expressed brilliantly by my favorite article on the difficulty of examining legal phenomena that are utterly foreign to the examiner, a paper that sought to answer the question "what was it like to try a rat?" This struggle is particularly acute in a new paper I've just posted on the fascinating evolution of Shenzhen's new law from its roots in a little-known 2008 consumer insolvency law in Taiwan. The Taiwan law is still in effect, of course (as amended in important respects), and the rocky experience of its first decade offers important lessons for personal insolvency policymakers in Asia and beyond. In both Taiwan and Shenzhen, a potential continuing challenge that intrigues me is among the most important and impactful in any such law–the measure of "necessary" household expenses to be budgeted to debtors for the purgatory period of three years (in Taiwan, it's six!) preceding a discharge. Both Taiwan and Shenzhen chose the social assistance minimum income; basically, the poverty level. Taiwan recently increased this by 20% after years of criticism of forcing bankrupt debtors into the extreme austerity of living within these tight budgets. Shenzhen has decided not to go beyond the poverty level, at least for now.

    Expressing the strictures of these poverty levels in useful comparative terms is really difficult for me. Official exchange rates are quite misleading when the question is "what is it like to try to make do on X [local currency units] for three years in [X country]?" Purchasing power parity exchange rates likely get closer to the mark, but with China, I'm not even sure that approach captures the pain (or ease) that debtors in the "discharge examination period" must endure. The figures I'm wrestling with are 1950 yuan in Shenzhen and about 18,000 new Taiwan dollars (15,000 x 1.2) in Taipei (less in the outlying areas). I vaguely understand these to correspond to about US$465 and US$600, respectively, per month, but this just seems untenable to me. How could anyone survive on these amounts for 36 months in Shenzhen or 72 months in Taipei? Granted, both sets of figures are per person, so a debtor caring for parents and/or children might end up with several multiples of these figures per month, but even then, supporting a family of four on US$1860 per month for three years in a major city like Shenzhen still strikes me as so austere as to dissuade people from seeking relief. Am I just out of touch with the reality of modern financial struggles generally (I know some low-income Americans also strain to make ends meet on somewhat similar budgets), or am I not understanding something about life in big-city China, or are the figures just not reflecting the feeling of life within these limits? Any insight would be greatly appreciated.

  • Human Rights Watch on Imprisonment for Debt

    Posted by

    Jason Kilborn

    What happens in countries where no consumer bankruptcy regime exists as a safety valve to assuage the worst consequences of unpayable debt? A report this week from Human Rights Watch ("We Lost Everything": Debt Imprisonment in Jordan) offers one heart-wrenching answer. The following excerpt captures the essence:

    Jordan is one of the few countries in the world that still allows debt imprisonment. Failure to repay even small debts is a crime that carries a penalty of up to 90 days in prison per debt, and up to one year for a bounced check; courts routinely sentence people without even holding a hearing. The law does not make an exception for lack of income, or other factors that impede borrowers’ ability to repay, and the debt remains even after serving the sentence. Over a quarter-million Jordanians face complaints of debt delinquency and around 2,630 people, about 16 percent of Jordan’s prison population, were locked up for nonpayment of loans and bounced checks in 2019.

    The response from the Jordanian Ministry of Justice is well worth reading, and it concludes by offering some hope: "A committee is reviewing the Execution Law in such a way to ensure justice and account for the interests of both parties (borrower and creditor)." Let us hope that this review concludes as it has in many, many countries around the world in recent years–with a proposal for the adoption of a personal bankruptcy law, following the guidance of the World Bank and other international organizations.

  • Greensill “Secured” Lending

    Posted by

    Stephen Lubben

    Slips readers will be interested in Matt Levine's column today, which takes a deep dive into the recently failed Greensill's lending against “prospective receivables,” which is kind of like lending against my prospective estate in Scotland. Both look a lot like unsecured lending.

  • Personal Bankruptcy Arrives in China in March 2021

    Posted by

    Jason Kilborn

    The process I noted in an earlier post has come to fruition, and the Shenzhen special economic zone will introduce the first personal bankruptcy law in China, effective March 1, 2021. It will apply to a quite limited number of people (a total of about 12.5 million residents in Shenzhen three years ago, as of 2017, and one must have been a Shenzhen resident for three years to qualify for the new bankruptcy procedure), though by people, I mean real people, as it is not restricted to merchants or even business-related debts. This is a really powerful and bold step forward, and many have expressed concern about the payment-morality effects of such a liberal procedure for escaping from one's debts (the common phrase "lao lai" 老赖 means "debt dodger" or someone who evades responsibility).

    That's why a discovery in the final text of the new law really struck me today. I was comparing the language from an early 2015 draft, the June 2020 draft, and the final version, adopted on August 26, 2020. The new word for "discharge" used for years in the earlier drafts was "mian ze" (免责), loosely, "free/excuse from responsibility." But between June and August, that term was replaced in over a dozen instances by a slightly different term, "mian chu" (免除), again loosely, "exemption/remission." In the couplet forming this new term, the character for "responsibility/duty" (ze 责) was replaced by a much less morally laden character carrying the meaning "get rid of, remove" (chu 除), which is more or less redundant with the meaning of the common first character (mian 免, excuse/waive). Neutralizing the concept of a discharge of debt to remove connotations of excusing someone from duty and replacing this with a sterile, redundant notion of simply removing (technical) liability struck me as an interesting rhetorical move.

    I don't know if any ordinary Chinese person would perceive a difference here, but the US played this rhetorical game in the Bankruptcy Code by replacing the judgmental term "bankrupt" with the neutral term "debtor." This latest move to re-coin the new Chinese word for discharge seems to me to follow along those same lines. [Incidentally, I checked the Enterprise Bankruptcy Law, and neither term figures prominently in that law, which doesn't confer any discharge at all, so the Shenzhen authorities had to come up with a more or less new term.]

    If you have a better sense of the potential emotional/rhetorical impact of this change, let me know what you think (I'm probably making too much of it, but it was an interesting twist).

  • New Greek Bankruptcy Code

    Posted by

    Jason Kilborn

    Responding to an EU Directive and what was likely already a long-simmering plan to revise a not entirely satisfactory patchwork of constantly shifting bankruptcy and insolvency laws, the Greek government recently released a draft of a new Code for Debt Settlement and Second Chance. A webinar earlier this week hosted by Capital Link offered a rare insight into this developing legislation, introduced by the architects of the new law. If all goes as planned in the legislature, the new Code will become effective in 2021. Watch for much more of this type of activity in other European countries in the months ahead.

  • What’s in a Word: New Immigration Public Charge Rule and “Bankruptcy”?

    Posted by

    Jason Kilborn

    I was surprised to find that the explosive new US immigration "public charge" rule has some interesting bankruptcy angles. The rule is a thinly veiled attempt to reduce immigration to the US by non-wealthy individuals (i.e., the vast majority of applicants) by expanding the legal basis for "inadmissibility" based on the likelihood that the immigrant might at some point become a "public charge" drain on the US public welfare system (such as it is). The indirect bankruptcy angle is how similar this is to the BAPCPA means testing fiasco of 2005. Want to reduce access to a public benefit on the pretextual basis that it's being "abused"? Simply ramp up the formalistic application requirements! The new rule imposes a ridiculous and substantial paperwork burden on immigrants to demonstrate that they're not "inadmissible" as potential public charges, requiring completion of a means-test like questionnaire (with often only vaguely relevant questions) supported by a thick sheaf of evidence. The direct bankruptcy angle is … one of the questions is about bankruptcy! Item 14 (!) asks "Have you EVER filed for bankruptcy, either in the United States or in a foreign country?" (emphasis in original). The thing that struck me about this question is that, of the small but growing number of non-Anglo "foreign countries" that have a system for providing debt relief to individuals, few call this system "bankruptcy." That word is reserved for business cases, creditor-initiated cases, a traditional liquidation not involving a multi-year payment plan, or some other distinction. Individual debt-relief procedures are often intentionally called something other than bankruptcy to signal these differences, reduce the stigma of seeking relief, and emphasize the rehabilitative function of the procedure. The public charge form (and instructions) betray no familiarity with this reality, even in the context of a follow-up question, "Type of Bankruptcy," with check-boxes for "Chapter 7," "Chapter 11," and "Chapter 13." Chauvinism, anyone? I guess I should be relieved that the ignorance of the drafters of this silly and odious new rule might have undermined the "bankruptcy" question, but that leaves honest immigration attorneys in a bit of a bind: do I prompt my client to answer "yes" and explain that her country doesn't have three "Chapters" or even "bankruptcy," but that her gjeldsordning procedure was the functional equivalent? Oh, I forgot–immigration from Norway is actually encouraged!

  • Debt Limits … and Poison Pills

    Posted by

    Jason Kilborn

    The Russian Duma last week adopted on first reading a bill that attempts to solve the biggest problem with the new Russian personal insolvency law, but the bill contains a poison pill provision that will all but kill its effectiveness if the bill makes it past the second and third readings and becomes law.  The problem lawmakers are trying to solve is that far fewer than the anticipated (and desired) number of overindebted individuals are seeking relief. While policymakers estimate a stock of nearly 800,000 potential debtor-beneficiaries of the new bankruptcy relief, only a small fraction have applied, mostly due to the prohibitive cost of the procedure. The obvious solution? Make it less expensive by cutting out the needless and counterproductive formalism, especially the court process. Well, while that message is clearly reflected in the new bill and its proposed solution, the poison pill is in a different and easy-to-miss access restriction: The proposed out-of-court procedure (run and financed by self-regulating organizations of insolvency trustees, a clever and unique approach) is available only to debtors with no seizable income or assets and less than 50,000 rubles (US$2000 PPP) in all bank accounts over the past three months … and with a total debt burden of no more than 500,000 rubles (US$20,000 PPP, or about $10,000 using official exchange rates). The estimate of 800,000 expected debtors, by the way, includes only individuals with more than 500,000 rubles in debt, so this new bill will not make any headway at all toward solving the existing problem. The English bankruptcy system has struggled with a similar problem of overly complex and therefore expensive access, too, and the English have "solved" this problem in a similar way, by making light-admin Debt Relief Orders available only to debtors with debts below £20,000. English analysts have estimated that more than 75% of bankruptcy debtors meet the "no income, no asset" DRO restriction, like that in the new Russian law, but the debt ceiling excludes them from the cheaper and more efficient form of DRO relief. This is pernicious and counterproductive, as Joseph Spooner argues in his terrific new book (see pp. 122-30). What is the purpose of excluding no-income, no-asset debtors from an efficient bankruptcy procedure because they have too much debt? It is extremely disheartening that the otherwise very clever and progressive new Russian NINA procedure contains the seeds of its own undoing. The new clinic will not treat patients with anything more than a common cold.

  • Small Borrowers Continue to Struggle Without Relief

    Posted by

    Jason Kilborn

    Several recent stories remind us that many, many ordinary people around the world continue to struggle with crushing debt with no access to legal relief, and when relief is introduced, it is vehemently opposed by lenders and often limited to the most destitute of debtors.  These stories also reveal the dark underside of the much-heralded micro-finance industry.

    In Cambodia, micro-finance debt has driven millions of borrowers to the the brink of family disaster, as micro-lenders have commonly taken homes and land as collateral for loans averaging only US$3370. When many of these loans inevitably tip into default, borrowers face deprivation of family land, at best, and homelessness at worst. Actually, in the absence of a personal bankruptcy law (which Cambodia still lacks), things can get much worse. If a firesale of the collateral leaves a deficiency, borrowers might be coerced into selling their children's labor or even migrating away to try to escape lender pursuit. In the past decade, the MFI loan portfolio in Cambodia has grown from US$300 million to US$8 billion, about one-third of the entire Cambodian GDP! People around the world have turned to micro-finance to sustain their lifestyles (or just to survive) in an era of increasing government austerity, with disastrous results for many borrowers.

    In India, the government continues to delay the introduction of effective personal insolvency relief, and it seems concerned with the interests of only the lending sector in formulating a path to relief for "small distressed borrowers." In a story that fills only half a page, consideration of individual or national economic concerns is not mentioned, but it is noted four times that discussion/negotiation with the "microfinance industry" has occurred, whose satisfaction seems paramount to law reformers. Among the "safeguards" put in place to prevent "abuse" of this new relief are (1) the debtor's gross annual income must not exceed about US$450 ($70 per month), (2) the debtor's total debt must not exceed about US$500, and (3) the debtor's total assets must not exceed US$280. While this may well encompass many poor Indian borrowers in serious distress, it offers no relief to what are doubtless many, many "middle-class" Indians similarly pressed to the brink and straining to cope in a volatile economy.

    In South Africa, a decades-long fight to implement effective discharge relief for individual debtors has culminated in a half-hearted revision of the National Credit Act (Bloomberg subscription likely required). The long-awaited revision still promises relief only to a small subset of severely distressed borrowers. The bill offers debt discharge only to "critically indebted" debtors with monthly income below US$500 and unsecured debts below US$3400. A step to be applauded, this still leaves many, many South Africans to contend with a complex web of insolvency-related laws that offers little or no relief to many if not most debtors. And still, banks engaged in the typical gnashing of teeth and shedding of crocodile tears, terribly worried that this new dispensation will "drive up the cost of loans for low-income earners, restrict lending and encourage bad behavior from borrowers." Where have we heard this before? To their credit, South African policymakers apparently "made no attempt to interact with the [lending] industry," though the compromise solution here still leaves much to be desired.

    On a brighter note, the country of Georgia is on the verge of adopting major reforms to its laws on enforcement and business insolvency (story available only in the really neat Georgian language, check it out!). In an address to parliamentary committees, the Minister of Justice remarked that a new system of personal insolvency is also in development. Georgia suffers from many of the same problems of micro-finance as Cambodia, so perhaps Cambodia and other similarly situated countries will be able to learn from Georgia's example. We'll see what they come up with.

  • Trump, Denmark and Greenland:  What Next?

    Posted by

    Mitu Gulati

    (This post draws directly from ideas from co authored work with Joseph Blocher; and particularly the numerous discussions we have had about the incentives that a market for sovereign control might create for nations to take better care of their minority populations in outlying areas (e.g., the US and Puerto Rico).  Mistakes in the discussion below, however, are solely mine).

    It seems like forever ago, but it has only been a few weeks since the news came out that our esteemed chief executive wanted the US to purchase Greenland.  The notion was widely ridiculed in the press and provided wonderful fodder for comics around the globe.  But as people looked beneath the surface, it quickly became apparent that there was nothing in international law that prohibited the purchase and sale of sovereign control over a territory.  Where Trump was wrong was in his assumption that he needed to purchase Greenland from the Danes.  Under post World War II international law, however, a former colony such as Greenland has the right of self determination.  To quote the Danish prime minister, responding to Trump, “Greenland is not Danish. Greenland belongs to Greenland.”

    The Danish PM also said “I strongly hope that this is not meant seriously.”  And, from her perspective of apparently wanting to keep the status quo of Greenland being part of Denmark, it makes sense that that’s what she hopes.  But let us focus on the words “Greenland is not Danish. Greenland belongs to Greenland.” If one thinks about those words just a little, they mean that Trump’s purchase (and maybe he should start calling this a “merger”, since that seems more polite) is perhaps a lot easier to execute than he initially thought.

    Trump and any other suitors that Greenland might have (Canada, China, Iceland, Russia, etc.) need to only focus their attention on making the Greenlanders happy; they don’t need to worry about the Danes. No need for Trump to do diplomatic trips to Copenhagen. Trips should be to Nuuk instead. After all, it is the approval of the 55,000 Greenlanders that he needs.

    How many Greenlander votes, specifically? (assuming that there would need to be a referendum first). International law doesn’t clearly say; but surely more than a majority – and ideally with a voting mechanism designed in such a way that the rights of the minority that might not want to be part of the merger being appropriately protected.

    The point is that if DJT and his supporters remain committed to the Greenland strategy – and it appears they do (see here) – the next step is will be to persuade the people of Greenland that this merger is in their interest. That way, the next time Trump offers a merger deal to the roughly 55,000 Greenlanders, they will react with enthusiasm rather than horror.  One would expect, therefore, to see the US taking steps to mount the charm offensive in Greenland. And, as it turns out, preliminary steps in this direction have already been announced with the US planning to open a consulate in Greenland and engage in various outreach programs as part of its broader arctic charm strategy (here).

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