Volume 42 | Number 3 Summer 2007
Page 3 of 4
« First
<
1
2
3
4
>
Last »
II. Debtors with Ability to Repay and Possibility of Abusive Filings
A. Issues Discussed in the Legislative Process
One of the issues most intensively discussed in the legislative process was the ability of the debtor to opt for bankruptcy proceedings, regardless of the amount of expected future income. The tentative draft that was publicized for comment in June 2000 proposed three alternatives: (1) the debtor would be able to choose between either bankruptcy proceedings or simplified rehabilitation proceedings; (2) the debtor would be discharged in bankruptcy proceedings only after attempting to repay his or her debts in rehabilitation proceedings, if his or her expected disposable income exceeded a certain amount; and (3) the debtor would be discharged in bankruptcy proceedings only once he or she had repaid his or her debts to the amount receivable by each creditor if the debtor chose simplified rehabilitation proceedings (where the “minimum payment rate standard” or “disposable income standard” would apply), if the expected disposable income of the debtor exceeded a certain amount.
As long as a debtor chooses a rehabilitation proceeding, creditors will be able to receive an amount no less than what they would receive if the debtor’s assets were liquidated under bankruptcy proceedings, because a “best interest test” applies when a rehabilitation plan is confirmed. On the other hand, if a debtor with the ability to repay more than hypothetical bankruptcy distribution chooses a bankruptcy proceeding and is discharged, it could be argued that the interest of creditors is damaged in the sense that they lost an opportunity to be repaid from the debtor’s future income. This concern is serious when a debtor has minimum assets to maintain his or her life now but where high and regular future income is definitely expected.
An argument for the second and third alternatives is that creditors—namely consumer financing and credit card companies—usually look to debtors’ future income rather than, or at least in addition to, debtors’ current assets. Under the second and third alternatives, debtors would be forced, directly or indirectly, to pay more than what would be distributed in bankruptcy proceedings.
The Bankruptcy Law Committee finally chose the first alternative, mainly because both the second and third were rather impractical. Calculating the expected disposable income means having to initially estimate the debtor’s income in the near future, and then deducting tax, social insurance, and necessary expenses of the debtor and dependents, which may vary based on the number and age of dependents. Calculation would have to be done by neutral court-appointed officers, and hearings of debtors would also be necessary. Although there is no empirical study on the ability of debtors who filed for bankruptcy proceedings to repay, it is said that only a small portion of debtors would be able to repay more from their future income. Calculating the expected disposable income to pick up debtors with the ability to repay more in all personal bankruptcy cases,22 numbering as many as two hundred thousand, would be time-consuming and not at all cost-effective. This gate-keeping difficulty was critical in making the decision. Therefore, under the current law, a debtor can choose between either bankruptcy proceedings or rehabilitation proceedings, regardless of the amount of expected disposable income.
B. Possibility of Abusive Filings
Some practitioners argue that current laws allow petitions for bankruptcy proceedings to be dismissed through abusive use (general clause in Japanese law), if the amount of the expected disposable income of the debtor is relatively high. As far as I know, however, there has been no reported case in which a petition for a bankruptcy proceeding was dismissed because of the amount of the debtor’s disposable income. It is pointed out that an argument for dismissal based on abusive filing is problematic because there are no clear criteria for judging whether a certain filing is an abuse and judgments could vary from judge to judge.23
Should Japanese insolvency laws be amended in the future to introduce a new legal scheme to prevent abusive filings? In order to answer this difficult question, I first focus on who will bear the burden of defaults in a legal scheme to prevent abusive filings. On the one hand, under current law, the cost of defaults of individual debtors could be passed along to other persons who borrow money from consumer financing companies (some of which are financially related to mega banks), in the form of higher interest rates;24 the cost could even be passed on to all other people, in the form of higher interest rates and higher prices. On the other hand, if the second or third of the aforementioned alternatives (Part II.A) is introduced, the cost of gate-keeping in bankruptcy or rehabilitation proceedings would be a burden to courts, and ultimately to all tax payers. It would also cause a delay in insolvency proceedings and other regular civil cases. It could be argued that a solution to the cost problem is a legal scheme under which gate-keeping—that is, calculation of debtors’ future income—is needed only in cases in which one or more creditors request it, and the cost for gate-keeping is borne by the creditors who requested it. But this idea cannot be an answer, because those creditors can easily pass along the cost they paid to the court to other people in the form of higher interest rates and higher prices.
Should the view that a legal scheme is needed to prevent abusive filings prevail, it should first be discussed whether it can be justified to help creditors (mainly consumer financing companies and credit card companies) in collecting their loans, by establishing a threshold to sort out debtors and by imposing costs to apply the court system to all taxpayers. Would this be cost effective? Even if it were, could we call it justice?