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The Curious Persistence of Plan B (Bankruptcy Lite)

posted by Jason Kilborn

I've come across a phenomenon numerous times over the years, again recently, that reveals the purpose of and resistance to discharge as the ultimate solution/relief for bankruptcy. In a discussion of the Chinese Supreme People's Court's struggles with "the enforcement difficulty" (执行难), the writers observe that, if a judgment debtor is found by the court enforcement division to have no available assets against which to collect a judgment, the enforcement action is terminated ... but "the court will automatically check every six months whether the involved judgment debtors have new property." On the one hand, the termination of fruitless enforcement actions sounds something like bankruptcy relief. Assuming the process actually works like this, and assuming the court enforcement division is not overly aggressive in pursuing "new property," this seems to me to take some of the pressure off of the Chinese system to adopt a proper bankruptcy discharge to alleviate the suffering of insolvent judgment debtors. On the other hand, without a discharge, the "checking for new property" part ensures that debtors' incentives to be productive will remain perpetually depressed, and official resources will be perpetually wasted in interminable pursuit of phantom new assets. These debtors' productivity and entrepreneurialism is forever lost to Chinese society in an era in which global competition continues to heat up.

This temporary-respite-in-anticipation-of-new-wealth approach to insolvency is also the "plan B" approach in another country that lacks a bankruptcy discharge: Switzerland. Here again we see the half-solution of giving creditors a "Konkursverlustschein"--a  certificate of debt remaining unpaid after bankruptcy proceedings--that becomes enforceable only if the debtor is shown to have obtained non-exempt "new wealth" in a (widely varying) amount deemed sufficient by various courts. A great article (in German) explains the many, many shortcomings of this system and advocates for the adoption of a Swiss discharge provision. But again, it occurs to me that the existence of this bankruptcy-lite of a temporary--and often quasi permanent--prohibition on further enforcement until creditors demonstrate the debtor's acquisition of "new wealth" neatly explains why Switzerland remains a no-discharge island in a sea of European countries, all but one of which have adopted discharge laws in the past few decades (and that last one, Bulgaria, is seriously considering this now, perhaps in light of the imminent adoption of an EC Directive on Second Chance forcing the issue).

It also reflects a very long history of this plan-B approach to individual financial distress, long predating the discharge eventually introduced in English and American law. The Roman and medieval European cessio bonorum also is generally thought not to have offered debtors a discharge in exchange for relinquishing their property to creditors. Likewise, the classical Islamic law of bankruptcy (iflaas) recognized a respite for overextended debtors only "until ease," not a discharge (without creditor consent), as creditors were allowed to continue their pursuit of repayment once the debtor acquired assets beyond the bare essentials.

The persistence and gradual extinction of the plan-B temporary respite reveals both the long history of compassionate attitudes toward overextended debtors and a backstop that seems to support modern reluctance to go the whole nine yards to a full discharge. It also allows us to contrast the types of societies who have and have not accepted the utility/necessity of a discharge, as the former recognize that every debtor's productivity is vital for local societies' global economic competitiveness. When the focus shifts from micro to macro, only then is plan B revealed to be an insufficient substitute for discharge.

Comments

This isn't "bankruptcy lite". This is being locked into the supplemental proceedings sweatbox for the rest of your life.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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