188 posts categorized "Comparative & Int'l Perspectives"

Contracts in Crisis: Variations in Z and S

posted by Anna Gelpern

Luigi Zingales of Chicago GSB put out a mortgage modification proposal about a month ago that got a bit of attention, but deserves more even if it has no political prayer.  It is one of a genre -- advocating across-the-board contract change in response to a macro shock -- that has at least two other prominent exponents, Randall Kroszner and Joseph Stiglitz.  I am noodling this literature for a U. Conn. symposium paper.

Zingales proposes legislation to allow homeowners to reduce the loan principal in line with the drop in home prices in their zip code from the time of purchase (as measured by Case-Shiller).  Creditors would get an equity kicker TBD.

Continue reading "Contracts in Crisis: Variations in Z and S" »

T.A.R.P. R.I.P.: Illiquency Watch

posted by Anna Gelpern

TARP's third incarnation as a consumer lending catalyst goes straight to my pet crisis peeve.  I am endlessly flummoxed at the authorities' insistence on throwing liquidity at a solvency problem -- with TARP I, AIG, and now, the consumers.

I have ranted elsewhere about the perils of drawing a sharp line between illiquidity and insolvency in a financial and macroeconomic crisis.  While the bankruptcy world has moved beyond the distinction in important ways, it still dominates the crisis policy response.

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International Financial Architecture: Dumb Chills and Opportunities

posted by Anna Gelpern

I am grateful to Adam, Bob and Credit Slips for scheduling this guest stint on the eve of what is billed as the Grand Global Rethink of All Things Finance. This Saturday, November 15, the leaders of the Group of Twenty rich and developing economies will meet in Washington to talk about crisis and reform. Regrettably, the organizers’ absurd pretensions to the legacy of Bretton Woods have diverted public attention away from the substance of what is surely an important international effort at coordinating economic, financial and regulatory policy.

Why should legal academics and debtor-creditor folk care?

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Super-Priority for Canadian Workers

posted by John Pottow

After years of kerfuffle that at times made BAPCPA's debates seem easy, the Canadians finally passed their revisions to the Bankruptcy and Insolvency Act (and, for junkies, the CCAA) this summer.  Here's a link to the Superintendent's site for the curious to get started.

What I thought was one of the more interesting amendments was the elevation of priority for employee wages to super-priority above secured liens (up to cap of $2K per employee, and, interestingly, not on equipment liens).  There is also an unlimited super-priority for unpaid or unremitted pension obligations (but not for the traditional "underfunded" pension plan).  Finally, to add a good ol' socialist kicker, an administrative beast called the Wage Earner Protection Program will come into being to ensure, among other things, payment of workers'  claims and then enjoy subrogation to the bankruptcy claims (thus taking the risk of debtor-employer inability to pay the super-claim).

The interesting lobbying game is the lender lobby: yes, they've been rending some garments, begrudging the "unfairness" of not giving secured lenders their bargained-for rights through the danger of such an unexpected ex post lien (although, ironically, one law-firm communique I saw gave its lender-clients advice on how to prepare, including encouraging oversight of debtors to have competent payroll services that remit pension obligations -- which looks like signs of an adjusting market to me).  But they haven't wanted to make too big a stink ("No, we're against workers' priorities!").  The rearguard grumbling they've had is how it would have been better to have such employees covered by the general taxpayers.

Will secured credit dry up in Canada as we know it?  Seems to have done pretty well notwithstanding the insolvency horror of a priming lien down here.  I reckon it'll chug along just fine north of the border too.  We'll see!

What Would a Fannie/Freddie Conservatorship Look Like?

posted by Adam Levitin
[Updated 9.8.08. Since I wrote this post, federal law has changed, as a banking law practitioner was kind enough to point out to me. Section 1367 of the Housing and Economic Recovery Act of 2008, Pub. L. 110-289, which became law on July 30, 2008, changes the GSE conservatorship provisions to ones that very closely track the bank conservatorship provisions of the Federal Deposit Insurance Act. In light of these (very needed) changes, the concerns I expressed in the post are no longer an issue.]

One of the possible rescue options for Fannie Mae and Freddie Mac is a conservatorship.  But what would this look like?  The New York Times relates that "Officials said that [Treasury Secretary] Paulson wanted to convey the message that...a conservator would have to prepare a plan to restore the company to financial health, much like a company in Chapter 11 bankruptcy proceedings." 

That's the general idea, but the devil is very much in the details, as explained below the break.

Continue reading "What Would a Fannie/Freddie Conservatorship Look Like?" »

Quadruple Filers

posted by John Pottow

I thought in light of the recent long weekend (by which I mean Canada Day), readers with an interest in international matters might enjoy this article from some friends at a respected Canadian law firm on Mr. Thomas Bouvin, who found himself recently filing for his fourth bankruptcy.   Perhaps my homeland needs BAPCPA to settle out these abusive debtors?  After all, with a colorful anecdote like this, what further data would one need to justify legislative intervention?

Where Do All the Corporate Debtors Go During Reform Time?

posted by Mechele Dickerson

Dr. Terrence Halliday, a sociologist at the American Bar Foundation, shifted us back to corporate insolvencies. His paper, Missing Debtors: National Lawmaking and Global Norm-Making of Corporate Bankruptcy Regimes, discusses the systems that are created to regulate corporate debt and corporate debtors. He notes that some debtors who have a keen interest in corporate bankruptcy regimes are missing from the table when those regimes are being discussed at UNCITRAL meetings, in World Bank or IMF discussions. Why are they absent?

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The Very Big Men Who Sort Out Debt

posted by Mechele Dickerson

During the last session this morning, Professor Stephen Lea (University of Exeter) provided a psychological perspective on debt in poor households in Britain. He initially listed the people he believes to be the cast of characters involved in debt. First, there are consumers, and their friends and families. On the creditor side, he made a distinction between business creditors (like utilities) and credit businesses (banks, debt collection agencies – whom he labels "the very big men who are left to sort out the mess"). Because of England’s long tradition of credit counseling, he also included credit counselors in the cast.

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Online International Bankruptcy Course

posted by Bob Lawless

My friend, Professor David Epstein at Southern Methodist University, was telling me about an innovative course in International Bankruptcy. The course is offered at NYU, but through distance learning technology, law students at other schools can participate. I asked David if he would write up a few paragraphs about his experience with the course that I could share with Credit Slips readers. Here is what David wrote back.

I have often thought that students who are considering a transaction practice would benefit from a course in International Bankruptcy. The problem always has been that very few law schools have faculty members (or adjuncts) willing and/or prepared to teach such a course. I have been working with the American College of Bankruptcy (ACB) to address this need.

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Payment Cards Continue Global Growth

posted by Katie Porter

While Americans continue to lead the world in credit card spending, other forms of plastic payment such as debit cards continue to have an edge in other nations. Overall, Ronald Mann reports that global spending on credit and debit cards has quadrupled in the last ten years to $5.2 billion. In 2006, card spending represented 11 percent of global GDP. In a new piece for Foreign Policy, Mann provides a quick look at the available data on trends in plastic payment around the world, updating the findings on global card spending that he presents in his book, Charging Ahead. As additional encouragement to check it out, let me report that the Foreign Policy piece is loaded with really fun graphics; my favorite is the little figure carrying a huge credit card on his back in Atlas-like fashion.

Prof. Mann's piece reminded me of an interesting story on NPR's Marketplace a few months ago about the role of credit cards in China. Scott Tong reported that many younger Chinese consumers are eager to get a credit card; like their American counterparts on college campuses they like the T-shirts, toasters, or other freebies that are offered in return for signing up for a card. But the growth in actual card use remains slower than banks are used to seeing in American customers. While credit cards are increasingly a global phenomenon, there remain important differences in their use that reflect historical trends in payment systems, the cultural norms of consumers, and macroeconomic conditions.

Forget Credit Cards: Blame Hookers, Strippers, and Porn

posted by John Pottow

The UK Insolvency Helpline recently reported that a quarter of its users admitted to having paid money for sex/porn in getting into financial distress.  Here's a British article on the report here.  I'm just going to let that sink in on its own.  It does, however, make me wonder about the applicability of the adjective "sub-prime" in this context.

Treatment and the European Perspective: Why Don't We Ask Whether US Debtors in Bankruptcy Have Other Social Problems?

posted by Jean Braucher

European debt adjustment systems have built in an assumption that people with debt problems also have higher incidence of other social problems—substance abuse, family dysfunction, weak impulse control, and perhaps also mental health problems such as depression and anxiety.  Social work has long been part of their systems for addressing problems of debtors, before and after European countries adopted laws beginning in the late 1980s to give debtors a discharge, generally after completion of rather long repayment plans (to show rehabilitation into more moral ways of behaving, while living at a subsistence level).  The European view has been that other problems drive overindebtedness, which in turn makes those problems worse.

In the US, we don’t seem to be giving much attention to these questions.  Is anyone aware of studies of US debtors in bankruptcy to see if they have higher incidence of other social problems such as those listed above?   And have Europeans empirically studied their theory that deviance drives debt?

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Credit Card Rewards Down Under

posted by Adam Levitin

The Sydney Morning Herald (Australia) was kind enough to feature my article about the social costs of credit card merchant restraints. (Sorry for the shameless self-plug...)

It's worth noting that when the Reserve Bank of Australia forced credit card networks to lower interchange rates and allow merchants to surcharge, the card networks had to cut back on their rewards programs (which are funded from merchant fees). That reduces the incentive to use cards simply for transacting, which means that fewer Australians are likely to end up paying interest and fees because of overestimating the likelihood that they'll make their card payments on time (because of everything from carelessness to changed financial circumstances).

Good Government (Under Threat) Down Under

posted by Jean Braucher

Australia has a bankruptcy system worth studying. Among other merits, it collects and publishes more facts about its system on line than any other.  http://www.itsa.gov.au/dir228/itsaweb.nsf/docindex/about+us-%3Epublications-%3Epublications?opendocument

Prior to 1996, Australia probably had the most sensible bankruptcy system in the world. Bankruptcy is simple enough there that people can file without paid professionals to help them. Rather than means testing that adds costs and thus bars destitute debtors at the threshold, Australia imposes a "surplus income" payment requirement on debtors who file in bankruptcy and have income above a relatively low threshold. Last year, just over 15 percent of Australian debtors had to pay something to get a discharge, while the rest of debtors weren’t burdened with a complicated "means test" to get into bankruptcy.

There is only one problem with this story; it was too good to be true. In 1996, Australia amended its law to create a "debt agreement" option. It sounded great; family members and neighbors would pitch in to help debtors negotiate with creditors to work out their debts and avoid the "stigma" of bankruptcy. But commercial debt administrators revved up operations to promote this option, and within a few years, they were charging hefty fees and getting a lot of poor people to use it. Well over half of those who proposed debt agreements failed either to get their proposals approved or to complete their plans. Sound familiar?

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Buce Is the World

posted by Bob Lawless

Our correspondent, Buce over at Underbelly, wonders exactly how does one say "adjustable-rate mortgage" in Czech. Don't kid yourself that consumer indebtedness is uniquely American.

On a different note, Buce also describes the similarities he sees between today's mortgage crisis and the fraud fandango of the early 1970s. It's not that Buce was around to see that, but he's heard others talk of it. Buce's post is worth reading. It reminds us that the fundamentals of our problems are not new, just the same dynamic with with different labels. Everything old is new again, especially when we're talking about creative ways used to convince someone to part with his money.

Fargo (No, not North Dakota -- Argentina)

posted by John Pottow

Just a heads up for another interesting international decision out of the Southern District of New York. Here, Chief Judge (Stuart, not Stan) Bernstein booted an involuntary petition opened against Fargo by some creditors who were unhappy with how things were unfolding in the Argentine "concurso" of Fargo, which is Argentina's largest commercial producer of bread and bread products. It's a fun story, involving an Argentine appellate court that may have been out in left field ("Indeed, Fargo has conceded certain procedural irregularities, and its own expert has acknowledged that the appellate ruling suffers from 'flaws.'") Basically, the aggrieved parties who want to move things Stateside are bondholders who were surprised to find that the Argentine appellate court, in ostensibly resolving the question whether the face value or market value of their notes should determine their claims and voting purposes, decided to value their claims based on neither and instead, adopting a position advocated by neither party, set their voting rights based on only the unpaid interest of the notes(!).

Anyway, there was a two-year back and forth with the Argentine Supreme Court and it appears that the noteholders basically got fed up and filed an involuntary 11 in SDNY. In exercising rights to dismiss the petition under § 305(a)(1), Chief Judge Bernstein  noted that other than the bondholders, all the players were in Argentina, that all the property save a trademark or two was held in Argentina, and that a hypothetically confirmed chapter 11 plan would have little effect, other than reddening the face of an Argentine judge when asked for recognition, and that the creditors were all participants (albeit unhappy ones) in the Argentine proceeding. As for the suggestions that the Argentine commercial judiciary is corrupt and that the peculiarities of Argentine insolvency law were public-policy-offensively different, he (rightly) brushed them aside. (I'm not even getting into the greenmailing sub-plot.)

Seeing the writing on the wall, the creditors asked that rather than dismiss the petition, the court should only suspend it, which would leave in place the U.S. stay and allow, in effect, Judge Bernstein to "take another look at the the progress in Argentina in the future. In other words, they want me to oversee the Argentine bankruptcy. []I decline the invitation. The automatic stay is not an end unto itself,  but a protection a debtor gets to allow it to reorganize." (He also noted the irony that the stay-favoring creditors had violated the Argentine stay by filing the involuntary 11!)

I see this as another good opinion taking a pragmatic and principled approach to cross-border insolvency. Perhaps a more technically literate reader will post a link to the opinion...

UPDATE (11/28): A copy of the opinion is now available here.

We owe you what!!?!!? The Federal-Mogul Story

posted by Katie Porter

I'm currently attending the National Conference of Bankruptcy Judges' Annual Meeting. One of the most interesting educational presentations was coordinated by Jay Westbrook, an expert in international insolvency law. Instead of being a collection of disparate cases and a summary of general trends, the presentation focused on a single case, the bankruptcy of Federal-Mogul, a huge company that manufactures and supplies parts to transportation companies, including U.S. automakers. The example was chosen to illustrate what happens when things DON'T go as planned. It wasn't a self-congratulatory success story, which made listening to the lawyers and judges who were actually involved in the case--and who represented opposing parties--very fun. The key point was that working out nifty international bankruptcy laws doesn't completely smooth the way for these cases. The differences in core principles of legal regimes and differences in applicable non-bankruptcy law make it hard for even the most cooperatively-minded parties to bridge the gaps. Here, a major problem was the difference between the U.S. and the U.K. tort system.

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European Restructurings This Time Round

posted by John Armour

The private equity buyout boom of the past few years, followed by the credit crunch of the past couple of months, have been just as strong phenomena in Europe as they have been in the US. Buyouts took on greater and greater levels of leverage, fuelled by debt that was increasingly ending up in the hands of non-bank financial institutions-- hedge funds, insurance companies and pension funds-- rather than banks. Now it looks like these types of investors have, for the time being at least, lost much of their appetite for credit risk. Not only have the deals dried up, but the medium-term prospects for the more optimistically leveraged buyouts -- facing risks of covenant blowout and refinancing imperatives -- are not looking so great. So far, this is a familiar story for US readers. However, in the European context, the restructurings in this round are likely to take place against a background that is quite different in many ways, a few of which I'll try to explain after the break.

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Personal Bankruptcy Law and Entrepreneurship

posted by John Armour

An issue that's been at the forefront of recent personal (i.e. non-corporate) bankruptcy reforms in Europe has been the notion that an unforgiving bankruptcy regime may act as a deterrent to starting a business. There's a strong perception in European policy circles that US bankruptcy law is more forgiving of overindebtedness, and that this in turn is linked to a more entrepreneurial business culture. Thinking of this sort (see, e.g., the Insolvency Service' Consultation Paper) underpinned the UK's recent relaxation of its personal bankruptcy laws (effective 1 April 2004), to permit individual bankrupts to obtain a discharge from prebankrupty indebtedness after only one year, as opposed to the three years it previously took. Similar policy initiatives, encouraged by the European Commission, have also been taking place in other European countries. There's a certain irony, however, that at the very time this has been going on in Europe, in the US-- the country offering the inspiration for reform-- access to a fresh start for individual debtors has been made more difficult. One of the important questions this raises is whether there really is a link between bankruptcy law and entrepreneurship.

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A High Grade for High-Grade

posted by John Pottow

Apologies in advance for this post.  When my co-bloggers and I brainstormed this site, we talked about trying to merge scholarly issues with accessibility.  This post woefully shortchanges the latter.  But I can't help myself -- I'm just too excited about the recent High-Grade opinion out of Judge Lifland's chambers.

One of the quiet successes of BAPCPA was finally getting Chapter 15 passed into law, which pertains to cross-border insolvency proceedings, an area that I write about a bit.  Yet there have been fits and starts in some early opinions by courts who, how shall I put this in a politic manner -- seem to be struggling.

One of the big deals from the theoretical side is Chapter 15's embrace of an idea that goes by the label "universalism," which basically means we would be better off with a coordinated system of choice of law in cross-border proceedings following some jurisdiction-selecting rule, as opposed to reverting to the choice of law "state of nature" of territorial sovereignty.  (Our European cousins are off and running with the centre of main interests test ("COMI") under their Regulation.)  One of the necessary foundations of a universalist approach to regulating transnational bankruptcies is what I dub "jurisdictional hierarchy," recognizing that some jurisdictions are going to have to bite the bullet and bow to the laws of other jurisdictions in any given case.

Chapter 15 imposes such a jurisdictional hierarchy by requiring U.S. courts to distinguish between a "main" and "non-main" foreign bankruptcy proceeding when a U.S. Chapter 15 proceeding is opened.  (A Chapter 15 is opened by a foreign representative, like a trustee, in a bankruptcy proceeding taking place abroad.)  And yes, the COMI test is used: if the foreign proceeding is being conducted in the country that houses the debtor's COMI, then it is a foreign "main" proceeding.  One reason it is important to get this distinction (i.e., is it a request from a main or a non-main (or possibly neither!) proceeding?) is because it signals the jurisdictional hierarchy.  If the proceeding is recognized as a foreign main proceeding, that means the U.S. court will be mindful of its necessarily inferior legitimacy to legislative (and maybe adjudicative) jurisdiction over the dispute.  If the proceeding is recognized as a non-main proceeding, the assistance offered to the foreign representative is curtailed, on the theory that he's not really the person who should be travelling abroad asking for help.

An ominous early case, SPhinX, tried to pooh-pooh the relevance of main vs. non-main, cavalierly implying it doesn't really matter because U.S. bankruptcy judges have such wide discretion they can shape and fashion almost any sort of remedy (and so get a non-main proceeding representative the sort of relief generally intended for a main proceeding representative).  In addition to stumbling a bit doctrinally, the SPhinX case was worrisome for trying to scuttle the very foundation of jurisdictional hierarchy so central to universalism -- and so importantly advanced, albeit gingerly, in Chapter 15.

Enter High-Grade.  In that case, the actual holding denied the (Cayman) foreign representative's request for assistance because it was found not only was the Cayman proceeding not a main proceeding (COMI of Bear Stearn's investment fund was, unsurprisingly, in New York), it wasn't even a non-main proceeding, because the connection to the Cayman Islands was purely a legal formalism devoid of economic substance (incorporating offshore for tax advantage).  Yet what is so important about the case is that (arguably in obiter dicta) it goes through a thoughtful and careful analysis of the centrality of the distinction between foreign main and non-main proceedings and hence of the importance of jurisdictional hierarchy in a Chapter 15 world.

SPhinX's retirement will be welcome; I predict it is High-Grade that will get the cites.  I just couldn't help but give it a "shout out" as it rolled hot off the presses.

Apologies again for readers who are now utterly bored.  You were warned.

US or European Model for Consumer Bankruptcy?

posted by F. Javier Arias Varona

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.

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

posted by F. Javier Arias Varona

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).

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Consumer Bankruptcy in Europe (I)

posted by F. Javier Arias Varona

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).

Continue reading "Consumer Bankruptcy in Europe (I)" »

Spanish Usury Law

posted by F. Javier Arias Varona

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).

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EU and Consumer Protection in the Credit Market

posted by F. Javier Arias Varona

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.

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Consumer Bankruptcy and Consumer Credit in Europe: An Introduction.

posted by F. Javier Arias Varona

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.

Continue reading "Consumer Bankruptcy and Consumer Credit in Europe: An Introduction." »

Spanish Bankruptcy Conference

posted by Bob Lawless

Hola! from Madrid. I am at the 1 Congress de Derecho Concursal, a conference offering comparative perspectives on the two-year anniversary of the adoption of the Spanish bankruptcy law. Professors at the University of King Juan Carlos and the University of Almeria organized this wonderful event. I would especially like to thank Professor Juana Pulgar Ezquerra for inviting me to speak, and Professor Francisco Javier Arias Varona for his kind hospitality and patience with my complete lack of Spanish language ability.

The Spanish bankruptcy law is primarily for businesses. This morning, we heard that of the 900 bankruptcy proceedings filed in Spain in 2006, only nine fifty-three were for individuals. As Professor Arias explained to me, the wonder was that there were even nine fifty-three. Spanish bankruptcy law offers no discharge and does not prevent or even stay a lender from retaking a personal residence when the home loan is in default. Consider that the home loan is the principal indebtedness for most Spainards, meaning that most individuals will be indebted to only one creditor or at least only one main creditor. For an individual, the Spanish bankruptcy law offers very little other than the chance to reach an agreement with one's creditors, a result that can be achieved outside bankruptcy court. Under these circumstances, it is not surprising that the filing rate is basically nonexistent.

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Merci, Danke, Thanks to Kilborn

posted by John Pottow

While I don't generally think of Easter as a snowy holiday -- and I grew up in Canada -- I was brought some cheer from this cold snap by reading Jason Kilborn's wonderful Credit Slips posts this week.  He remains one of the most interesting and diligent U.S. scholars of comparative consumer insolvency; we were lucky to have him join us.

Consumer Debt Relief, Harmonization, and Human Rights

posted by Jason Kilborn

As numerous countries in Europe have adopted widely divergent consumer insolvency laws, the topic of harmonization has been on the near horizon for some time.  While the EU Commission seems to have considered and abandoned any effort at harmonization in this area, a particularly intriguing body has engaged the issue recently:  the Council of Europe.  The dizzying array of acronyms, commissions, and councils in Europe often conceals the significance of the generically named bodies involved.  The Council of Europe is the body charged with implementing the European Convention on Human Rights, to which 46 European states are signatories (far more than the 25 member states of the EU).

Doesn’t this add an interesting twist!  The Justice Ministers of the 46 member states have identified consumer debt problems as a source of significant human rights concern.  They asked the Committee of Ministers (the decision-making body) of the Council of Europe to explore possibilities for harmonizing approaches to avoiding and dealing with such problems.  After reviewing a survey of current practice (drafted by one of my academic heroes, Johanna Niemi-Kiesiläinen), the relevant Group of Specialists issued its report in December 2006, and it looks like a draft recommendation should be ready for Council action in the very near future.

Continue reading "Consumer Debt Relief, Harmonization, and Human Rights" »

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.

Continue reading "Bankruptcy for the Chronically Destitute?" »

Why Can't We All Just Agree?

posted by Jason Kilborn

One of the implicit assumptions behind the new pre-bankruptcy credit counseling requirement seems to be that many individuals could convince their creditors to work something out if they were just routed in that direction and supported by trained, relatively neutral counselors (read:  negotiators).  I must admit that I had often felt that creditors, acting in an economically rational way, could be expected to accept a disinterested third-party mediator’s evaluation of the debtor’s circumstances and abilities and agree to voluntary workouts if only they were asked.  I felt this way before I started looking at how pre-bankruptcy negotiations work out in Europe.

In France, for example, for the longest time, renegotiation was the only option for individuals.  It took years of prodding and concerted pressure from the the primary administrator of this system, the central bank (the Banque de France), to get creditors in more than a majority of cases to agree to quite modest concessions (e.g., short payment extensions or deferrals, reduction of accruing interest, to say nothing of minor remission of accrued principal and interest).  Even after coercive relief was introduced in 1999 and then strengthened in 2004, many creditors continued to resist the most basic of concessions—even after a neutral administrative commission had assured them that these minor concessions were the debtor’s and creditors’ only reasonable alternative.  To this day in France, in about 33% of the cases in which some form of coercive relief is offered (either a Chapter 13-type payment plan or a Chapter 7-type immediate discharge), creditors have seemingly irrationally refused the recommendation of the neutral administrator for a workout plan with minor concessions—knowing full well that the recommendation will almost inevitably be “crammed down” on them by the court in the next step of the process.

Continue reading "Why Can't We All Just Agree?" »

Subprime Lending, Default Risk, and Personal Bankruptcy Reform

posted by Jason Kilborn

Katie’s post reminds me of an interesting discussion of financial risk and bankruptcy reform in another recent post by Alex Tabarrok over at Marginal Revolution.  Tabarrok takes issue with the neo-Victorian reaction of “credit snobs” to the subprime mortgage default crisis (“credit is something that only the rich can handle”) and defends the democratization of credit.  One of Tabarrok’s remarks runs smack into a stark difference between U.S. and European reactions to widespread default crises and bankruptcy reform.  He notes that, in the new world of financial innovation, “defaults are to be expected,” explaining that “the whole point of recent financial innovation (and reformed bankruptcy law [emphasis added]) has been to reallocate risk [a]way from borrowers and toward those lenders in the world wide market for capital who are in the best position to handle the risk.”  The parenthetical comment glosses over major differences between recent U.S. and European reforms.  These differences illustrate even more vividly the lopsided (misguided?) U.S. reaction to the subprime lending crisis.

Continue reading "Subprime Lending, Default Risk, and Personal Bankruptcy Reform" »

Shameless Americans?

posted by Jason Kilborn

The debate about the relationship between declining stigma in the United States and increased personal bankruptcy filings has always confused me for at least two reasons.  First, if stigma was on the decline in the late 1990s and early 2000s among us shameless Americans, a glance around the world reveals that we were (and are) not alone.  For example, one would think that Japan might represent a highly traditional, honor-focused society where stigma would powerfully inhibit sloughing off responsibility.  Yet, from 1998 to 2003, the number of filings for personal bankruptcy in Japan (roughly equivalent to U.S. Chapter 7) rose from just over 100,000 to just over 240,000.  The filing rate thus grew from just over 0.8 filing per 1000 residents in Japan to 1.90 filings per 1000 (falling back to about 1.45 per 1000 by 2005).  This is far behind the 5+ “non-business” filings per 1000 residents in the U.S. at the height of the pre-BAPCPA era, but to see the 2.4 X growth rate in Japanese filings in the six years from 1998 to 2004, one must look more than twice as far back in time in the United States (1990 to 2003, from 660,796 to 1.6 million).  I’m sure there’s something statistically misleading about my amateurish attempt at comparison here, but the Japanese figures offer a rather surprising perspective on the decline of stigma, in my view.

The same can be said of comparable Asian and European countries, by the way.  The personal bankruptcy rate in Hong Kong spiked dramatically from 0.66/1000 in 2000 to over 3.5/1000 in 2002 and 2003 before settling back to just under 1.5/1000 in 2006.  Total individual filings in Germany have risen steadily by about 25%-30% per year through the 2000s to a rate of just over 1.5/1000 in 2006.  Austria, the Netherlands, and Belgium have seen slightly smaller but sustained growth in filings in recent years, settling in at roughly 0.8 to 0.9 filings per 1000 residents.  The French system is more complex than the others, so the number of total filings is a bit misleading, but the rate in France exceeds 3.0/1000, with about one-third of these ultimately receiving some sort of formal, coercive relief (including something very similar to U.S. Chapter 7).  On the one hand, these rates are far below the stratospheric U.S. rates of the mid-2000s.  But on the other hand, we have had personal bankruptcy for over 100 years, while Europe and Asia have adopted similar systems only in the past 10-20 years (not to mention a host of other economic and cultural differences).  Given time, the filing trajectories in these countries seem to be headed inexorably in our direction.  Is there a worldwide dearth of personal shame?

Continue reading "Shameless Americans?" »

Setting the Comparative Record Straight

posted by Jason Kilborn

To my dismay, I have just read yet another recent publication that mischaracterizes European personal insolvency law.  Published in 2006 by an author and a press whom I respect a great deal, this book reports that individuals in Germany are not allowed to file for bankruptcy voluntarily, their debts are not discharged in bankruptcy at all, and they must repay their debts from future earnings.  To be fair, these comments in a footnote were not the thrust of the otherwise quite fine contribution.  Nonetheless, since 1999, the first two statements are false, and the last one is at least misleading.  For support, the note refers to two authorities, both published in the late-1990s.  Apparently both of these authorities missed the fact that Germany (along with many other European countries) revised its bankruptcy law in 1994 (effective 1999) to introduce a discharge for voluntary individual filers.  In fact, they made up a new word for this new discharge:  Restschuldbefreiung (literally, the “freeing [of the debtor] from the remainder of [his or her] debt”).  Technically, debtors must turn over to a trustee all non-exempt income for a six-year “good behavior period” (Wohlverhaltensperiode), theoretically to be paid to creditors, though the Justice Ministry recently observed that debtors in 80% of cases have barely enough non-exempt income during this period to cover the administrative fees, so creditors often receive nothing.

Warning!  Shameless self-promotion material following the jump . . .

Continue reading "Setting the Comparative Record Straight" »

Making America Better

posted by Jason Kilborn

Thanks to Bob for the very kind introduction, and thanks to the entire Credit Slips group for inviting me to be a guest on their great blog!  I am thrilled to have been invited to share my thoughts on the topics that interest me most:  why and how consumers worldwide are running into trouble with too much debt, and how more and more countries are implementing legal responses to this problem.

Though the most recent issue of U.S. News has gotten all the attention, the March 26 issue ran under a cover story that sums up my academic agenda:  Making America Better.  It presented 30 examples of "How They Do It Better"; that is, initiatives from outside the United States that countries had undertaken to make their societies more efficient, more productive, more humane, or just more comfortable.  While differences among our societies might make U.S. soil less fertile for similar initiatives--an issue that sensitive comparison always must bear in mind--recent years have seen a variety of parallel developments in consumer credit and debt relief in particular from which the United States and other countries can learn from mutual experience (both good and bad).

I really look forward to sharing some thoughts this week on a few areas where the United States might draw from the well of international ideas to make our consumer credit and debt relief systems--or at least our thinking about these systems--better.

Sound Familiar?

posted by Bob Lawless

From a recent newspaper story:

Thousands of women who are in desperate debt are shying away from bankruptcy because of the social stigma.

Refusal to take this difficult decision is piling on misery and creating even greater debt problems, according to a study from the Consumer Credit Counselling Service.(CCCS)

The CCCS says that 61 per cent of the people it recommends to go bankrupt are women - three quarters of these are single.

Yeah, yeah . . . you've heard it before. But, this is from the UK's Evening Standard about problems in the UK. The full story is worth a read and is further evidence that booming consumer credit and bankruptcy filings is becoming more than just a U.S. issue.

Another hat tip to Buce for pointing out the story.

Wall Street Journal Calls for Japanese Regulation!

posted by John Pottow

Thanks to Bankruptcy Listserv reader David Yen for pointing out the Wall Street Journal's recent (December 15) editorial calling for more regulation of consumer lending in Japan.  Strictly speaking, the Journal's editors complain about the persistence of usury ceilings in Japan, but in so doing they  recognize the need for government regulation of a consumer lending market that is not functioning properly.  It looks like this is a policy area that will be heating up as the new Congress opens up its new session in 2007.

UK Conservatives Speak Out Against Consumer Debt

posted by Bob Lawless

Ukandusdebtlevels_1 Last week, the UK's Conservative Party held a Debt Summit in London to tout its new measures aimed to curb consumer spending. Shadow chancellor George Osborne advocated for restrictions on Individual Voluntary Arrangements (IVAs), which are roughly the UK equivalent of a U.S.-style chapter 13 bankruptcy, and for increased money-management education for 11- to 18-year olds. So far, that will all sound familiar to those of who suffered through the 2005 amendments in the US, but the next proposal will not. Osborne also suggested that there be a seven-day cooling off period on retail cards. In other words, a consumer would be prohibited from using a new retail card for seven days after issuance. Not surprisingly, the  British Chamber of Commerce thinks the cooling-off period is a bad idea, which the London Daily Telegraph quoted as saying "People have got to take responsibility for managing their own affairs." There is one thing that merchants fear more than consumers running up massive debts on their credit cards and that is consumers not running up massive debts on their credit cards.

The UK is one of several countries where consumer debt has been increasing. We here in the U.S. tend to think of ourselves as Consumer Debt Central, but that is becoming increasingly less true. The Daily Telegraph story made me curious to go dig up statistics on UK consumer debt to compare them to the United States. The graph to the right is the result with the top line representing the US and the bottom line the UK. As the graph shows, the UK has caught up to the US when considering the amount of consumer credit outstanding expressed as a percentage of gross domestic product. Outstanding consumer credit represents 16.6% of the total annual GDP for both countries. Stated differently, either country would have to devote one-sixth of all its goods and services produced in one year to pay off its outstanding consumer debt.

Continue reading "UK Conservatives Speak Out Against Consumer Debt" »

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