Volume 42 | Number 3 Summer 2007
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The project involving the comprehensive reform of Japanese insolvency law started in October 1996, and was finished in November 2004. There are now two types of judicial proceedings for personal insolvencies under Japanese insolvency law. The first is straight bankruptcy proceedings based on the Bankruptcy Law, in which the debtor can be discharged; the other is special civil rehabilitation proceedings for individual debtors. In Part I of this Article, I offer a brief discussion of personal insolvency law, as well as bankruptcy proceedings and special civil rehabilitation proceedings, both for individual debtors. In Part II, I present an overview of the legislative discussion concerning the treatment of debtors, who might be able to repay more from future income than that which would be distributed in bankruptcy proceedings.
I. Overview of Japan’s Personal Insolvency Law: Bankruptcy Proceedings and Special Rehabilitation Proceedings for Individual Debtors
A. Overview of Japan’s Personal Insolvency Law
I start by providing a general description of the Bankruptcy Law and the Civil Rehabilitation Law before focusing on personal insolvency.
The Bankruptcy Law (Hasan Ho)1 was comprehensively amended in 2004, and became effective on January 1, 2005. The Bankruptcy Law provides for bankruptcy proceedings, which are applicable to both individuals and legal entities.2 A bankruptcy proceeding is a sell-out proceeding where a debtor gives up all assets (except for those exempt in the case of an individual debtor), the court-appointed trustee sells these assets, and the proceeds are distributed to creditors on a pro-rata basis.3 In 2005, there were 227,053 bankruptcy cases terminated; 216,582 of those cases involved bankruptcy proceedings of individual debtors.
The Civil Rehabilitation Law (Minji Saisei Ho)4 was enacted in 1999, and became effective on April 1, 2000. This law provides for civil rehabilitation proceedings, which are also applicable to both individuals and legal entities.5 A rehabilitation proceeding is a pay-out proceeding where a debtor can propose to keep all assets in exchange for promising to pay off debts from future income over a period of time according to a rehabilitation plan.6 A rehabilitation plan becomes effective upon its acceptance by a majority of unsecured creditors and court approval.7 In 2005, there were 27,478 rehabilitation cases terminated; 26,644 of those cases comprised special rehabilitation proceedings for individual debtors.
B. Bankruptcy Proceedings of Individual Debtors
There are several rules applicable to individual debtors, such as exemption and discharge. The law provides that exemptions shall include the debtor’s household furnishings, household goods, apparel, household appliances, cash of up to ¥990,000,8 and the debtor’s right to receive unpaid salary of up to ¥330,0009 per month. In addition, the court may, when petitioned by the debtor or at its own discretion, extend the scope of exemption in consideration of certain factors, including the following: the total amount of other exempted properties, whether the debtor is employed, and the number and age of family members. Typical examples of exemption extensions are bank account deposits up to a particular amount, and ownership of a motor vehicle in cases in which the debtor lives in an area (where the public transportation system is not well-established or where the debtor runs a carrier business). There is no homestead exemption in Japan, so the debtor has to give up real estate.
A filing for a bankruptcy proceeding by the debtor is deemed to be a filing for discharge. The court grants a debtor a discharge—except in certain instances. Grounds for denial of discharge include the debtor’s wrongdoing in or in connection with bankruptcy cases—such as concealment of assets to defraud creditors or making false statements feigning solvency when borrowing money—and refusal of the debtor to testify or cooperate with the trustee or court.10 The discharge is also denied if the debtor was granted a discharge in a previous bankruptcy case or rehabilitation case within certain time limits.11 Under the old Bankruptcy Law, a debtor could not receive a discharge in a bankruptcy proceeding if a prior discharge had been received within ten years of the new filing.12 It was argued that this period must be shortened to further protect debtors in the modern economy; although moral hazards must also be minimized. The new Bankruptcy Law provides that a debtor cannot presently receive a discharge if a prior discharge was received within seven years (rather than ten) of the new filing.13 Even in one of the above cases, the court may grant a discharge at its discretion in consideration of the grounds for financial failure.14
Under the old Bankruptcy Law, a discharge order did not discharge an individual debtor from debts for: (1) taxes; (2) compensation for damage caused by willful tort; (3) wages; or (4) penalties and fines.15 The new Bankruptcy Law, however, adds two categories of debts which cannot be discharged: (5) debts for personal injury or death caused by an intentional or reckless act of the debtor; and (6) debts to a spouse, former spouse, or child of the debtor, for alimony, maintenance, or support for the spouse or child.16
In the legislative discussion, it was argued that a cap should apply to debts under the above categories (5) and (6) to protect the debtor from unlimited obligations. However, the new Bankruptcy Law provides for no such limit or cap to discourage moral hazards.
In practice, most debtors who would satisfy the criteria for the commencement of bankruptcy proceedings never progress to being formally liquidated because it appears to creditors that there are no non-exempt assets in the estate with which to fund the administration of the bankruptcy proceeding, mainly compensation for the trustee. The Bankruptcy Law provides that a bankruptcy proceeding be commenced and then terminated simultaneously (often called “simultaneous termination”), and no trustee be appointed.17 In 2005, of 216,582 bankruptcy cases involving individual debtors, there were 194,865 simultaneous termination cases (ninety percent). It is argued that because no investigation by the trustee is conducted in these cases, the debtor’s wrongdoing that might otherwise lead to denial of discharge could be overlooked and a discharge could be granted. Recently, the court has appointed a trustee in some consumer bankruptcy cases, and awarded a comparatively lower amount of compensation to the trustee by limiting the scope of investigation that the trustee needs to conduct. Most of these cases turn out to be assetless cases, and are terminated after the trustee’s investigation. In 2005, among 216,582 bankruptcy cases of individual debtors, there were 15,897 cases (seven percent) where trustees were appointed and terminated because of an assetless estate.
C. Special Civil Rehabilitation Proceedings for Individual Debtors
Because civil rehabilitation proceedings were originally intended mainly for small- and medium-sized businesses, due to the cost involved, they are rather burdensome for consumers and individuals who run a business as an individual proprietorship. In the year 2000, the Civil Rehabilitation Law was amended to add new chapters, one of which specified simplified procedures for individual and regularly salaried debtors owing ¥50 million or less, with a three-year duration for the rehabilitation plan in principle.18 Under special circumstances, the duration of a plan can be extended to up to five years.19 Two major features of the simplified proceedings are as follows:
1. Officers
In most regular civil rehabilitation cases, the court appoints a supervisor, while debtors continue to have rights to administer and dispose of the debtor’s assets, subject to a broad range of supervision by the supervisor. On the other hand, they must remain inexpensive and simple, because such proceedings only deal with small cases. The court may appoint a Rehabilitation Officer for Individuals (Kojin Saisei Iin), whose function is limited to investigating the debtor’s assets and income, assisting the court in reviewing the legitimacy or amount of claims to which the debtor or other creditor may object, and advising the debtor in drafting an appropriate plan.
2. Claim Verification Process
When an objection is raised to a claim filed by the debtor or other creditors, the court reviews the legitimacy or amount of the claim in summary, rather than plenary, proceedings. The court makes a binding decision only on the amount of voting rights for creditors’ meetings—allotted to the creditor whose claim is objected to—and there are no provisions for appeal. This decision, however, does not have the same effect as a judgment, in the sense that the decision has no binding effect on the substance of the claim.
Chapter 13 of the Civil Rehabilitation Law provides for two kinds of simplified Civil Rehabilitation proceedings for individual debtors. The first type is for individual debtors with a generally regular income, and is referred to as “small size individual rehabilitation.”20 There were 18,567 cases of such proceedings in 2005. In these proceedings, a rehabilitation plan may become effective with the creditors’ acceptance and the court’s confirmation. A plan is accepted if the creditors that reject the plan in writing are owed half or less of the total allowed claims and number less than half of all the creditors. This “negative approval standard” assumes that creditors who do not reject a plan in writing accept the plan. Major requirements for court confirmation are: (1) a “best interest test,” under which each creditor should receive an amount no less than that which he or she would receive if the debtor’s assets were liquidated under bankruptcy proceedings; and (2) a minimum payment rate, basically twenty percent, depending on the total amount of debt.21
The second kind of proceeding is intended for individual debtors with regular stable income, such as wages, and is called the “wage earners rehabilitation.” The most important feature of such a proceeding is that the rehabilitation plan becomes effective with the court’s confirmation, and without the necessity for creditors’ approval. There were 8,428 cases of such proceedings in 2003, and 8,077 in 2004. Major requirements for confirmation are not only (1) and (2), as aforementioned, but also a “disposable income standard,” under which the debtor must repay his or her debts (as modified by a plan) from his or her regular income, less taxes, social insurance premiums, and permissible living expenses provided by the cabinet order.