Facts on the ground and reconciliation of divergent consumer insolvency philosophies

Theoretical Inquiries in Law

Volumn 7, Issue 2, 2006, Pages

  Ziegel, Jacob ^a  

^a UNIVERSITY OF TORONTO   (Canada)

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EID: 33751031056     PISSN: 15653404     EISSN: 15653404     Source Type: Journal    
DOI: 10.2202/1565-3404.1127     Document Type: Review

References (88)

1. See Jacob Ziegel, The Challenges of Comparative Consumer Insolvencies, 23 Pa. St. lnt'l L. Rev. 839 (2005);
2. Sefa M. Franken, Book Review, 68 Mod. L. Rev. 169 (2005);
3. Kent Anderson, Book Review, 42 Osgoode Hall L.J. 661 (2004).
4. Jacob Ziegel, Comparative Consumer Insolvency Regimes: A Canadian Perspective, ch. 7(1) (2003) (especially page 135);
5. Cf. Nick Huls, American Influences on European Consumer Bankruptcy Law, 15 J. Consumer Pol'y 125 (1992).
6. For the details see Ziegel, supra note 2, at 137-43 (ch. 7(2) and ch. 7(3)).
7. See Mark D. West, Dying to Get Out of Debt: Consumer Insolvency Law and Suicide in Japan, in Law in Everyday Japan: Sumo, Sex, Suicides and Statutes 215 (2005);
8. Kent Anderson & Stacey Steele, Insolvency, in Japan Business Law Guide 15-001 to -312 (Veronica Taylor ed., 2003);
9. Kent Anderson & Makoto Ito, Insolvency Law for a New Century: Japan's New Framework for Economic Failures, in Law in Japan: Into the 21st Century (Dan Foote ed., 2006).
10. See also Kent Anderson, Japanese Insolvency Law After a Decade of Reform, 43 Can. Bus. L.J. (forthcoming 2006) (especially pt. Ill, graph 2 (Growth of Japanese Consumer Insolvencies as Ratio of Population) and graph 6 (Comparative Individual Bankruptcy/Liquidation Ratios 1980-2004)).
11. For the details see Ziegel, supra note 2, ch. 2(2) (Canada), ch. 4 (Australia), and ch. 5 (England and Wales). With respect to England,
12. see also the important recent report, The Insolvency Service, Relief for the Indebted An Alternative to Bankruptcy?, available at http://www.insolvency. gov.uk/insolvencyprofessionandlegislation/con_doc_register/ relieffortheindebtedanalternativetobankruptcyresponse.pdf (Mar. 2005) (advancing a proposal for a fast track non-judicial debt relief procedure for low-income no-asset debtors to augment the existing administration order debt relief regime under the County Courts Act and to provide a realistic alternative to the high cost personal insolvency procedures under the Insolvency Act, 1986, c. 45, as amended). On the role of administration orders,
13. see Ziegel, supra note 2, at 122-24 (ch. 5(4)(c)).
14. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, §102, Pub. L. No. 109-8, 119 Stat. 23 (2005). For a summary of the principal consumer provisions, see Am. Bankr. Inst., 25 Changes to Personal Bankruptcy Law, at http://abiworld.net/bankbill/changes.html (last visited Mar. 1, 2006).
15. Here are some figures. Between 1985 and 1997 the number of Canadian personal insolvencies increased from 19,752 to 90,034, and increased further to 102,539 in 2001. ("Personal insolvencies" include business-related insolvencies.) In the US, the number of consumer insolvencies reached 1.596 million in 2004. The number of insolvencies in England and Wales grew from 6,776 in 1985 to 24,441 in 1997 and reached 46,650 in 2004. The number of Australian personal insolvencies grew from 8,761 in 1986-87 to 24,109 in 2001-02. In Germany, where bankruptcy relief for consumers only became available in 1999, 20,000 personal bankruptcy and small business petitions were filed in the first full year of operation of the 1994 law; 44,000 petitions were filed in 2002 after the 2001 amendments to the Insolvenz Ordnung (Insolvency Law). In 2004, the figure reached 48,000. Ziegel, supra note 1, text accompanying note 16. In Japan, the number of individual bankruptcies increased from 160,457 in 2001 to 214,633 in 2002.
16. Cf. Japan Information Centre, at http://www.jicc.co.jp/f/index.html (2005). According to a New York Times report, as many as 2 million Japanese were effectively bankrupt in 2002.
17. Ken Belson, Struggling in Debt, Sacrificing Pride, N.Y. Times, Dec. 28, 2002,
18. at Cl. West, supra note 4, at 3, compares a similar estimate by a Japanese bankruptcy attorney.
19. This author was among those who reached this conclusion.
20. Jason Kilborn, La Responsabilisation de l'Economie: What the U.S. Can Learn from the New French Law on Consumer Indebtedness, 26 Mich. J. Int'l L. 619 (2005) [hereinafter Kilborn, La Responsabilisation];
21. Jason Kilborn, Continuity, Change, and Innovation in Emerging Consumer Bankruptcy Systems: Belgium and Luxembourg, 14 Am. Bankr. Inst. L. Rev. (forthcoming 2006) [hereinafter Kilborn, Belgium and Luxembourg];
22. Jason Kilborn, The Innovative German Approach to Consumer Debt Relief: Revolutionary Changes in German Law, and Surprising Lessons for the United States, 24 New J. Int. L. & Bus. 257 (2004) [hereinafter Kilborn, Innovative German Approach].
23. Johanna Niemi-Kiesilainen, Consumer Bankruptcy in Comparison: Do We Cure a Market Failure or a Social Problem?, 37 Osgoode Hall L.J. 473 (1999);
24. Johanna Niemi-Kiesilainen, Collective or Individual? Construction of Debtors and Creditors in Consumer Bankruptcy, in Consumer Bankruptcy in Global Perspective 41 (Johanna Niemi-Kiesilainen et al. eds., 2003) [hereinafter Niemi-Kiesilainen, Collective or Individual?].
25. Cf. V. Markham Lester, Victorian Insolvency: Bankruptcy, Imprisonment for Debt, and Company Winding-up in Nineteenth-Century England (1995) (especially ch. 3).
26. Cf. Niemi-Kiesilainen, Collective or Individual?, supra note 10, at 41, 43.
27. Cf. Elizabeth Warren & Amelia Warren Tyagi, The Two-Income Trap: Why MiddleClass Mothers and Fathers are Going Broke (2003).
28. Professor Jackson was the first insolvency scholar to apply the behaviorists' findings to rationalize the US fresh start doctrine (although he also invoked other grounds). See Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 232-41 (1986) (ch. 10).
29. His example has since been followed by others. See, e.g., Saul Schwartz, Personal Bankruptcy Law: A Behavioural Perspective, in Consumer Bankruptcy in Global Perspective, supra note 10, at 61;
30. Jason Kilborn, Behavioral Economics, Overindebtedness and Comparative Consumer Bankruptcy: Searching for Causes and Evaluating Solutions (June 2005) (Cegla Center conference paper), available at http://ssrn.com/abstract=690826;
31. See also Ron Harris & Einat Albin, Bankruptcy Policy in Light of Manipulation in Credit Advertising, 1 Theoretical Inquiries L. 431 (2006).
32. Two simple examples must suffice. The first is the familiar "come on" used by North American credit card companies to attract new card subscribers by offering low interest rates during the first three or six months' life of the credit card, only to be followed at the end of the introductory period by much higher rates. The second example is the common form of credit advertising used by merchants informing the consumer that the first payment will only become due twelve months or some other long period after the purchase (and incidentally without alerting the consumer to the fact that interest liability will still accrue during this period or is incorporated into the price; it is only the obligation to start paying that is postponed). Another common form of impulsive behavior (to which this author has also frequently fallen victim) is to visit a store to make one credit card purchase and to end up making more purchases because the merchandise looked attractive and the purchases seemed so "convenient." 1 do not mean to suggest the card companies are responsible for this infectious type of behavior though they must surely know of and rely on it in making their calculations of prospective credit card use.
33. Credit card rates in Canada currently run from 18-20% per annum in advertised rates. The cost of department store revolving credit may be as high as 30%. The cost of "pay day" loans may be over 500% depending on how one calculates the various items and on whether the debtor has missed one or more payments. Credit card advertising often also underplays the impact of high interest charges and delinquency penalties and the danger of putting the consumer on a treadmill from which he cannot extricate himself. See also National Consumer Credit Centre, Hearings on Improved Credit Card Disclosure Before the U.S. Senate Subcommittee, Am. Bankr. Inst. Update, May 19, 2005.
34. Cf. Ronald J. Mann, Optimizing Consumer Credit Markets and Bankruptcy Policy, 1 Theoretical Inquiries L. 395 (2006) (especially pt. 1).
35. The German and French laws and the recently adopted Swiss Federal Law on Consumer Credit of March 2001 require creditors to exercise prudence in extending credit and to report defaults to a central credit bureau. However, there is no available data on the impact these requirements have had on actual credit practices. The British government also introduced extensive amendments in a December 2004 bill to the Consumer Credit Act 1974. See the Consumer Credit Bill, H.L. Bill 34 54/1 (2004), available at http://www.publications.parliament. uk/pa/ld200506/ldbills/042/2006042.pdf.
36. These too were mainly designed to improve disclosure of the cost of consumer credit and amounts owed by consumers under existing agreements, and to improve policing of usurious interest rates. Additional steps for improving responsible credit extension practices are considered in The Griffiths Commission on Personal Debt, What Price Credit?, available at http://www.niace.org.uk/news/Docs/Griffiths-report-on-personal-debt.pdf 91, 107 (chs. 10, 12, and especially Recommendation 28). In the US, BAPCPA contains no restrictions on credit agreements and imposes no sanctions for credit grantors' abusive practices; nor does the Canadian insolvency legislation.
37. See also Ziegel, supra note 2, at 150-51 (ch. 8(2)(c)).
38. Professor Jackson gives this as a reason in support of the US style fresh start rule. See Jackson, supra note 14.
39. See Am. Bankr. Inst., supra note 6, items 2 and 4.
40. Ziegel, supra note 2, at 50-52. See Bankruptcy and Insolvency Act, R.S.C., ch. B-3, § 157.1 (1985) (Can.); Office of the Superintendent of Bankr., Directive No. 1R2 (December 21, 1994).
41. See Johanna Niemi-Kiesilainen, The Role of Consumer Counselling as Part of the Bankruptcy Process in Europe, 37 Osgoode Hall L.J. 409 (1999).
42. See Jean Braucher, An Empirical Study of Debtor Education in Bankruptcy: Impact on Chapter 13 Completion Not Shown, 9 Am. Bankr. Inst. L. Rev. 557 (2001);
43. Cf. Saul Schwartz, Effect of Bankruptcy Counseling on Future Creditworthiness: Evidence from a Natural Experiment, 77 Am. Bankr. L.J. 257 (2003) (comparison of Canadian consumer bankrupts pre-1993 who had not received counseling with post-1993 bankrupts who had received counseling showed no statistically significant differences in their credit ratings).
44. See Jean Braucher, Debtor Education in Bankruptcy: The Perspectives of Interest Analysis, in Consumer Bankruptcy in Global Perspective, supra note 10, at 319 (ch. 16).
45. Professor Kilborn commends the German 2001 amendments allowing the debtor to retain a progressively higher percentage of his income in the later years of the repayment period. One may question, however, whether this is enough of an incentive and whether a shorter repayment period -say, of three years -would not be a better trade off. Presumably, economists and social workers have much to contribute to the design of efficient and reality-oriented repayment plans, though there is not much evidence of their expertise being used for this purpose. (Debt adjustment arrangements in France under the loi Neiertz, Law No. 89-1010 of Dec. 31, 1989, J.O., Jan. 2, 1990, may be an exception to this observation.)
46. Kilborn, La Responsabilisation, supra note 9, text accompanying notes 151-52.
47. Law No. 89-1010 of Dec. 31, 1989, J.O., Jan. 2, 1990 (relating to consumer overindebtedness).
48. Ziegel, supra note 2, at 27-37 (ch. 2.7).
49. Statistics Canada is the official Canadian government agency, located in Ottawa, for the collection and analysis of data relating to the national economy and other facets of the nation's life.
50. See Ziegel, supra note 2, at 29 n.91.
51. Id. at 31. For Australian experience under the Australian income contribution requirements, see id. at 100-03. For the British income payment requirements and income payment agreements under the Insolvency Act, 1986, c. 45 (as amended by the Enterprise Act, 2002, c. 40), see id. at 117-18. For details of the Australian provisions, see Rosalind Mason, Consumer Bankruptcies, An Australian Perspective, 37 Osgoode Hall L.J. 449 (1999).
52. For the small minority of cases, see Ziegel, supra note 2, at 38-39. The position has changed significantly now that Bill C-55, 53-54 Eliz. II, 2004-2005, a major bankruptcy and insolvency amending bill, was adopted by the Canadian Parliament on November 25th, 2005. The amendments are not effective until proclaimed into force, and the federal government has given the Canadian Senate a written undertaking that proclamation will not occur before June 30, 2006, and that before this date the government will refer the Act to the Senate for detailed study and, if appropriate, recommendations for changes. Section 100 of the Act replaces section 168.1(1) of the Bankruptcy and Insolvency Act, R.S.C., ch. B-3 (1985) (Can.), and will postpone the automatic discharge of first time bankrupts from 9 months to 21 months where the debtor has been required to make surplus income payments under section 68. The change was requested by Canadian trustees for several reasons. Sections 170-170.1 of the Bankruptcy and Insolvency Act require the trustee of a bankrupt to file a report with the court and the Superintendent of Bankruptcy indicating, among other things, whether in the trustee's opinion the bankrupt could have made a viable proposal to creditors under Part III, Division 2 of the Act but chose instead to file for bankruptcy. Trustees complained that debtors would often want to know in advance, before engaging the services of a trustee, what the trustee's practice was with respect to the section 170 report, and that this triggered unfair competition among trustees. See Personal Insolvency Task Force, Office of the Superintendent of Bankruptcy, Final Report 44-45 (Aug. 2002). This author, who was a member of the Task Force, opposed the amendment, and continues to do so. Trustees were strongly represented on the Task Force; consumers very poorly so. The Task Force gave no consideration to the impact of an automatic extension of the nine month automatic discharge period. The majority of its members assumed that debtors with surplus income would have no difficulty maintaining their surplus income payments for an extra twelve months even though experience with consumer proposals showed that as many as 38.2% of debtors failed to maintain their payments, resulting in cancellation of the proposal.
53. See also infra text accompanying note 32; Jacob Ziegel, A Rough Deal for Bankrupt Consumers, Toronto Globe & Mail, Aug. 29, 2005, at A21;
54. Jacob Ziegel, The Travails of Bill C-55, 42 Can. Bus. L.J. 440 (2005).
55. Bankruptcy and Insolvency Act, R.S.C., ch. B-3, § 1 (1985) (Can.).
56. Tabular information provided by the Office of the Superintendent of Bankruptcy, Ottawa (April 2005) (on file with the author). Precise figures for non-completion rates under the Australian Bankruptcy Act, 1966, pt. IX, were not available to the author but appear to be similar to the Canadian rate for consumer proposals. See Ziegel, supra note 2, at 106 tbl.4.2.
57. Cf. Charles Jordan Tabb, The Death of Consumer Bankruptcy in the United States?, 18 Bankr. Dev. J. 1 (2001) (commenting on Bill S256's substantially identical predecessors).
58. In fact, an amending bill, H.R. 1860, 107th Cong. (2005) was introduced in Congress on April 26, 2005 by congresspersons Dana Rohrabacher and Walter Jones. A number of members of Congress also gave notice, on September 2, 2005, of their intention to present an amending bill in light of the impact on their personal and economic lives of tropical storm Katrina. In the US Congressional system, where the members are not bound by party discipline, it is much easier for a Senator or congressperson to introduce legislation and to garner support for it from other members of Congress than it is for members of Parliament in the British-style Parliamentary system. Much US legislation is initiated this way and is often enacted into law.
59. Peter J. Coleman, Debtors and Creditors in America: Insolvency, Imprisonment for Debt, and Bankruptcy, 1607-1900 (1974) (especially pages 270-74).
60. For a more nuanced explanation of the various factors influencing the final outcome, see David A. Skeel, Jr., The Genius of the 1898 Bankruptcy Act, 15 Bankr. Dev. J. 321 (1998/99).
61. The total number of bankruptcy cases filed in the US was 45,641 in 1925, 62,845 in 1930, and 50, 997 in 1939. In 1952, the number was 34,873, and it grew to 62,086 in 1956. The numbers continued to grow rapidly during the balance of the 1950s. See United States Statistical Abstracts, Tables of Bankruptcy Statistics tbls.642-643 (2005), available at http://www.census.gov (last visited Mar. 1, 2006); Compare Report of the Commission of the Bankruptcy Laws of the United States, pt. 1, ch. 2 (July 1973) [hereinafter NC Report], with respect to the postwar consumer bankruptcy figures. I am very grateful to Professor Robert Lawless of the University of Utah Law School for assisting me in tracking down this source.
62. Leo Calder offers a different explanation. He points out that householders were very conscientious during the Great Depression to maintain installment payments on durable goods and this may explain why the bankruptcy figures remained remarkably stable throughout the 1930s. See Leo Calder, Financing the American Dream: A Cultural History of Consumer Credit 262-90 (1999).
63. Compare the number of US bankruptcies cited in supra note 38.
64. 292 U.S. 234, 244 (1934).
65. Colder, supra note 39, at 232-41 (pt. I, ch. 6).
66. Note, however, Professor Tabb's statement that the US consumer credit industry began its reform efforts to qualify the fresh start rule in the mid-1960s and that they have continued since then. Tabb, supra note 34, at 9. The earlier industry efforts do not appear to have left much of an impact, since they are not referred to in the NBC Report,
67. supra note 38.
68. See Tabb, supra note 34, §2.14 (especially pages 121-22).
69. It escalated from 341,233 in 1985 to 1,350,118 in 1997. OSB, International Statistics 7 (June 1999).
70. An early exception of a US scholar taking a close look at the British bankruptcy and discharge law and practice is Professor Douglass George Boshkoff, Limited, Conditional, and Suspended Discharges in Anglo-American Bankruptcy Proceedings, 131 U. Pa. L. Rev. 69 (1982). The article is frequently referred to by subsequent US commentators on the fresh start policy as a cautionary tale of the British hostility to individual bankruptcies. Professor Boshkoff's article was written long before the major changes adopted in the English legislation of 1986 and 2002 and no longer reflects current English law and practice.
71. Ziegel, supra note 2, at 65 (ch. 3.5).
72. Id. at 120-23;
73. Jean Braucher, Lawyers and Consumer Bankruptcy: One Code, Many Cultures, 67 Am. Bankr. L.J. 501, 583 (1993) (eloquently expressing similar sentiments without allusion to the British style provisions),
74. cited in Elizabeth Warren, A Principled Approach to Consumer Bankruptcy, 71 Am. Bankr. L.J. 483, 505 (1997).
75. See Ziegel, supra note 2, at 117-18.
76. Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 234-36 (1986).
77. Teresa A. Sullivan et al., Consumer Bankruptcy in the United States: A Study of Alleged Abuse and of Local Legal Cultures, 20 J. Consumer Pol'y 223 (1997).
78. I do not mean to suggest the system has no flaws; it clearly has. For an early critique see Jacob Ziegel, The Philosophy and Design of Contemporary Consumer Bankruptcy Systems: A Canada-United States Comparison, 37 Osgoode Hall L.J. 205, 227-28 (1999).
79. The Insolvency Service, supra note 5.
80. See Ziegel, supra note 2, ch. 7(b), p. 135;
81. cf. Kilborn, Innovative German Approach, supra note 9, at 258, 290.
82. The problem could be addressed by providing that payments below a threshold amount be paid into a public fund for consumer education or other worthy purpose. Compare the Belgian provision requiring lenders to pay a percentage of their defaulted loans into a public fund to help defray the fees of the debt mediators. See Kilborn, Belgium and Luxemburg, supra note 9, at 30. In Canada, the Superintendent of Bankruptcy has proposed a legislative amendment to allow uncashed dividend remittances to estate creditors to be credited to a bankruptcy research fund. However, the proposal did not find its way into Bill C-55, 53-54 Eliz. II, 2004-2005.
83. See supra note 31.
84. Nine months under the 1992 amendments to the Bankruptcy and Insolvency Act, R.S.C., ch. B-3 (1985) (Can.), and one year under the 2002 amendments to the English Insolvency Act, 1986, c. 45, with the possibility of a reduction of the period in the English Act to six months.
85. Kilborn, Innovative German Approach, supra note 9, at 269.
86. I hope this paper has made it clear that I am not opposed to enforcing promises if the debtor has a realistic capacity to pay. My concern over the continental philosophy is that it insists on continuing to squeeze the lemon even after it is clear that there is no juice left and that it too often ignores the reasons why the lemon was so small to begin with.
87. In England, the interval was 72 years between the Bankruptcy Act, 1914, 4 & 5 Geo. 5, c. 59, and the Insolvency Act, 1986, c. 45, although there were some ameliorating amendments in between. In Canada, the interval between the Bankruptcy Act of 1919 and the major 1992 amendments, Bankruptcy and Insolvency Act, R.S.C., ch. 27 (1992) (Can.), was 73 years, but again, there were intervening amendments.
88. A cynic may suggest that US opponents of BAPCA played their cards poorly. Instead of opposing the legislation, they should have supported it enthusiastically in the hope that in practice the Act would collapse under the sheer weight of its oppressiveness and bureaucratic demands, and that public opinion would force Congress to dismantle most of the 2005 changes.