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.

Consumer Bankruptcy in Europe (II): Spain is Different!

Two or three examples of EU national laws on consumer bankruptcy were given in the previous post. Now is the time for Spain: what’s the situation here? The title of the post suggests that we are out of the main trend in EU in this subject. That is why I put that "Spain is different" slogan that has been widely used to describe my country in tourism ads, that fits perfectly here: we have no consumer bankruptcy provisions in our Insolvency law, dating from 2003. This could sound surprising, taking into account that all the recent reforms of insolvency laws in the countries surrounding us have implemented them (Portugal's reform is less than one year younger and, as already seen, the discharge for individuals is part of its content).

The reasons for this are not clear, but in my opinion, two facts were relevant. The first one is that consumers' indebtedness is much lower than in other European countries and mainly in mortgages. Data collected by EU in 2002 showed that average use of credit per household were as low as 942€ (it is almost 18.000€ in UK) and consumer credit per disposable income rate was just 10% (28% in the UK). Figures are increasing, but even now, the main part of credit in every household is mortgage (Spanish national statistics show different results, but all of them ranges from 84% to 93% of the whole household indebtedness in 2006). The second relevant fact (and this view is personal) could be the huge impact that the reform of 2003 was intented to have in our insolvency law. After almost 50 years trying to update our legislation (with rules dating back to the middle nineteenth century in their original form), without success, it was very important to pass this law and probably the discharge was a secondary issue opposite to the most relevant things to be discussed. You should take into account, for instance, that our typical insolvency proceedings (quiebra and suspension de pagos) were just for businesses and to make the new proceeding accessible to individuals were already a dramatic change. In fact, media paid a lot of attention to the first case of a familiy filing for bankruptcy and discharge was not even mentioned (well, they were not very technical in their appreciations, anyway).

Consumer Bankruptcy in Europe (I)

This post, regarding consumer bankruptcy in Europe, was initially intended to be just one, but its length made it better to divide it in two parts. I will deal here with some European countries and leave the second part to explain Spanish present situation. It is impossible to go in depth on this subject in a blog post and I will focus, like in the previous posts, on the main lines. I should be clear that I will not deal with the need of a shorter proceeding. In fact, in my opinion, that is not a consumer issue because it is the same for small debtors, whether consumer or small businesses or professionals. The complexity of the proceeding is not tied to the personal characteristics of the debtor, but to the amount of debts and creditors, something sometimes forgotten, even if the need of a simpler proceeding is much clearer for individuals. As is well known for the readers of Credit Slips, when we talk about consumer bankruptcy we are thinking mainly about fresh start or similar relief mechanisms. That is what this post is going to be about. Part of its content follows the Report on legal solutions to debt problem in credit societies, by Johanna Niemi-Kiesiläinen and Ann-Sofie Henrikson, already mentioned here by Jason Kilborn.

Consumer bankruptcy and fresh start is recent in Europe. It is usually said that it expanded in the continent as late as in the nineties of the past century (the first country to introduce a law for this purpose was Denmark in 1984). The reason was the economic crisis of the middle nineties, which showed the problems faced by middle class consumers in a more indebted society. From this starting point, most of the countries in the EU have already passed a law that faces in one form or another the problem of consumer insolvency. After the esdebitazione was introduced in the latest reform of insolvency law in Italy (arts. 142 ff. Legge Fallimentare), the most prominent country without a fresh start Spain (at least, in the traditional EU countries, I do not know the situation for the newest EU members, sorry for that). I will use the example of the countries that we usually use in Spain for comparative purposes, i.e., Germany, France and Italy, (we use the UK and the USA too, but the situation in those two countries is better known for the readers of this post than for its writer, so he won't take the risk of writing about them).

Spanish Usury Law

This post is going to be a Spanish one. A while back, Angie Littwin reminded us about the importance of the U.S. Supreme Court decision in Marquette vs. First Omaha Service Corp. on usury law, a decision Bob told me before when he was in Madrid. I thought it would be interesting to show how our Spanish usury law works. I should confess that this is the part of the course I typically skip in my classes, thinking that our law, dating from 1908 (here it is usually known as "Ley Azcárate") was one of those useless ancient rules. I was very reckless as I found later. Contrary to what I thought, it is frequently applied in our courts, and every year there are several cases involving its application in the appellate courts (Audiencias Provinciales) and in our Supreme Court. Our Spanish example could be of interest, mainly for how the scope of application is defined, in a very broad way that makes it a powerful instrument in the hands of the courts. I would change the quiz today, for a spoonful of sugar to help this medicine of my own country's situation go down.

The purpose of the law is crystal clear: avoid usury. And the solution is very powerful: the nullity of the contract and the loss of any interest for the creditor, as the debtor must only give back what was received (as a natural consequence of the nullity of the contract, of course, see an alternative solution in France, here, article L313-4). To get to that result, the contract should be usurious or "leonino" (i.e. onerous in such a manner that the debtor agreed just because of the distressing circumstances, lack of expertise or limited mental capacities).

EU and Consumer Protection in the Credit Market

Consumer protection in the credit market is not a new trend in EU law, as we have seen in the previous post. The main goal to be achieved was to offer a proper protection in this kind of contract to the consumer. This starting point posits different main questions: (1) what do we mean when talking about "consumer" (which is not an easy question, in fact) and (2) how extensively do we use the term "credit market." But I will not focus on these two issues right now. Rather, I will focus on the main innovations in consumer credit regulation in the EU. First, I will outline the present situation. Once again, there is a new quiz available for anybody feeling already bored.

The Directive 87/102/EEC of 22 December 1986 had, in theory, several goals (avoiding distortions of competition between grantors of credit in the common market, deriving different mandatory rules in this field in the Member States, and setting up a common market of consumer credit, among others), but it is obvious that the primary one was to grant an appropriate protection to the consumers in the credit market. The main rules were dedicated to mandatory information in advertising (art. 3), the obligation of contract disclosure and form with minimum content requirements (art. 4), the right for the consumer to discharge his obligations with a reduction on the amount of the credit already pending to be paid (art. 8), and specific rules for the (very common) cases of a financing agreement tied to another contract (mainly, acquisition of goods, art. 11). It could be said that the goals were more or less achieved, but as it often happens with EU Directives, the Member States retained the right to adopt more stringent rules, as the Directive was intended to set only a minimum level of protection. The consequence has been a different protections for consumers in the different countries.

Consumer Bankruptcy and Consumer Credit in Europe: An Introduction.

In the next posts, I will try to give an overview of several issues that I hope American readers will find useful. It is difficult to find a proper balance in these posts, making them interesting for both (us) the geeks and the people without this kind of mental disease. That is why this first post will be dedicated to give an overview of how I see the way we deal with consumer credit in Europe, advancing some ideas that I will develop later. Those versed in this topic will probably find nothing new in it and can have a rest relaxing doing a very special quiz.

The first point to be noted is quite obvious: the difference between consumer bankruptcy and consumer overindebtedness. Also obvious is that a difference does not mean absence of a connection. In fact, at least in Europe, the need of an adequate instrument for consumer bankruptcies, similar or equivalent to the American fresh start, is strictly connected to the massive recourse of consumers to credit. Historically, the natural environment of insolvency proceedings was an activity for merchants due to their usual access to credit. Individuals (i.e., people having no professional or business activity) did not use it until very recent times. In Spain, for example, a few years ago it was really uncommon to ask for credit, and now, it´s an everyday practice. It is not very scientific to use personal anecdote, but I could say that my grandparents didn't even ask for credit to buy their own house, my parents used a mortgage to buy their house and a personal credit for the car, and a few weeks ago my brother decided to change his TV for a flat one that will be paid in 10 months via credit card, needing nothing to get it but to show his ID.

As soon as individuals became indebted, the problem of overindebtedness appeared, and a proper solution for the hard cases (bankruptcies) was needed. But, should that justify a unified legal treatment? Answering in a "Gershwinish" way: no, it ain't necessarily so. This connection does not mean that both subjects should be afforded by the legislators as one. In Europe, in fact, they are not. And, in my opinion, it is the right way to do it. The law faces different problems that need different solutions and, probably, different policies, even if we think that consumer bankruptcy is the final stage for overindebtedness and consumers should receive blanket protection, stretching from the legal mechanisms of protection for consumers in the market of credit to the specific provisions for those debtors in case of insolvency.