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Bankruptcy for the Chronically Destitute?

posted by Jason Kilborn

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.

This is yet another issue that starkly illustrates the U.S.-European divide (Canada and the other Commonwealth states fit somewhere in the middle, largely in light of their privately administered systems, as opposed to the almost totally public systems in Europe).  Ben-Ishai and Schwartz propose a solution, by the way, that looks almost exactly like the Swedish model (though the authors seem unaware of this) of a publicly administered system with very low administrative costs for NINA debtors.  The French model also offers quick and free relief to such people--these chronically poor "irremediably compromised" debtors are the only debtors eligible (technically) for the new Chapter 7-style system implemented in France in February 2004.  The solution in Germany since 2001 has been to reduce and defer administrative costs for NINA debtors (making the deferred debt nondischargeable, of course), but the Justice Ministry has recently returned with another proposal to require ongoing payment of at least a few Euros per month by every debtor seeking formal relief.  Why we offer such people relief and, more importantly, how we do so and how we pay for it, really says a lot about our societies and our systems.  I'm glad to see that Ben-Ishai and Schwartz have taken up this issue, and I look forward to writing on this understudied (and undertheorized) topic myself in the near future.


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