US or European Model for Consumer Bankruptcy?

This post will be the last one. I want to thank Bob for his invitation. I felt really happy when he asked me and although the responsibility of writing here was a bit overwhelming, it has been a real honor for me. I hope the readers have found these posts as interesting as I always find the other ones of Credit Slips.

In this final post, I would like to offer my own point of view about both models of consumer bankruptcy. We could speak about two different models, even though the US has served as an inspiration for many of the European laws. The reason is that in European law, it seems that debtors must fulfill more conditions in order to get the discharge of the precedent obligations. It is clear that the transfer of the future income for a few years puts him (or her) in a worse position than the one achieved by debtors filing for Chapter 7 of US Bankruptcy Law. Although the debtor can keep several incomes (something that varies form one country to another and that is tied to the protection in garnishment), the fresh start seems to be more demanding here. A second question is the requirement of honesty in a debtor to be eligible for discharge. Here the contrast is really clear for any reader. Just make a comparison between the sec 707 of US Bankruptcy Code (if I am not wrong, the purpose seems to be avoiding the abuse of discharge) with §290 of the german InsO, art. 238 of the Portuguese Insolvency Code or art. 142 of Italian Legge Fallimentare. Of course, the aim of these provisions is not exactly the same. Honesty of the debtor and avoid of abuse are different things, but we could compare them as they are intended to achieve the same goal: limit the access to discharge to the debtors that deserve it. European rules are much clearer and reading the whole sec. 707 is a kind of torture that should be banned by doctors. I do not know if our rules will work better when we analyze their effect in a few years, but honestly, I prefer them. They cover more situations, they are more flexible and they are easier to understand. The proposed reform in Germany (there is a Bill of January 2007) may be used as an example that they are doing their job. The Bill focuses on the specific problems of debtors who cannot even bear the cost of the proceeding and changes only a few lines in the § 290 InsO to improve its performance in avoiding non honest debtors to get the discharge. I should say, anyway, that the Bill imposes some costs to the debtor, even if it is the case of a "Nullplanverfahren," that is to say No-assets-at-all to offer a payment plan to the creditors. It seems that the gratuity of the procedure has lead to some abuse of this proceeding.

The last part of the previous paragraph leads us to the next question I would like to mention. It is the characteristically European requirement of some payment to the creditors to be eligible for consumer insolvency's discharge. In some form of another, it is common in the European countries' insolvency law. The discharge is clearly more costly here than it seems to be at the other side of the Atlantic. I think that it is the right position considering the whole protection mechanisms of consumers that we have in Europe. If we empowers the consumer by the way of a very strict obligation of disclosure in credit market or even giving the chance to withdraw from the contract of credit already signed (as already seen in my second post), if the social policies offer the citizen a wide range of support (something considered in the German Bill already mentioned, to set up a cost that the consumer should bear, even if there seems to be no assets at all), I think that the access to discharge should be somehow restricted. If it is not a free meal, let's say, some cost (Germans say that it would be around 13€ a month) should be beared by the consumer and an effort to pay should be made in the next few years, probably consumers will less likely to abuse the system. And if not, it will be the time of the rules against abuse and, of course, the time of the courts. Discharge should be banned to very reckless or fraudulent debtors, as the discharge clearly breaks the balance between creditors' and debtors' interests that should always be present in the insolvency procedure. I do not think that very detailed rules like the ones of sec. 707 US Bankruptcy Code might achieve that goal better than the ones present in German Law, for instance.