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Earlier discharge for German debtors ... but not many

posted by Jason Kilborn

PiggybankemptyAfter years of wrangling about the details, the German legislature has finally approved a reform of the consumer provisions of the Insolvency Act (InsO). The only notable change is a reduction in the so-called "good behavior period"--that is, the time during which the debtor is supposed to be devoting all disposable income to creditors (or looking for work). It started in 1999 at 7 years, reduced in 2001 to 6 years, and as of 1 July 2014, it will be halved in some cases to 3 years.

But not so fast! The only debtors who can get out of jail in three years are those who can (i) pay all of the adminstrative costs of their insolvency case, and (ii) pay creditors a minimum dividend of 35% of their claims. This minimum dividend was 25% for most of the discussion period of the reform bill, but it was increased to 35% at the eleventh hour.

What a fantasy! My bet is that no more than 1-2% of debtors will get a discharge in 3 years, based on experience in Germany and neighboring countries. It is frequently reported that more than 80% of German consumer debtors are unable to pay even the administrative costs of the process (see, e.g., here), much less a 35% dividend to creditors. By the way, for the some 20% of debtors who can pay the admin costs but not the 35% payout to creditors, the discharge period will be reduced to 5 years.

An interesting aspect of the new law is a satellite regulation moving through the process now that would require an evaluation of the number of new 3-year discharges granted through 30 June 2018. I will look forward to that sad report.

When will legislators learn that spending time haggling over pie-in-the-sky reforms like this is a waste of effort. It took years to get this reform through, and for what? I will be shocked if even 2% of cases are affected by this reform, but they retained the ridiculously wasteful requirement of forcing the overwhelming majority of debtors to seek a clearly doomed consensual, negotiated arrangement with creditors, supported by one of the already over-extended counseling services (not surprisingly, these efforts produce an agreed workout plan rarely, to put it mildly).

Politics and reality--never the twain shall meet!

Empty piggy bank photo courtesy of Shutterstock

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