Personal Bankruptcy In Vietnam The Necessity And Possibility

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
HUYNH TUONG LINH
PERSONAL BANKRUPTCY IN VIETNAM: THE
NECESSITY AND POSSIBILITY
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MASTER THESIS IN LAW
Ho Chi Minh City - 2022

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
HUYNH TUONG LINH
PERSONAL BANKRUPTCY IN VIETNAM: THE
NECESSITY AND POSSIBILITY
Major: Economic Laws
Code: 8380107
MASTER THESIS IN LAW
SUPERVISOR
1. DR. PHAM DUY NGHIA
Ho Chi Minh City - 2022

DECLARATION
This thesis is a presentation of my original research work. Wherever
contributions of others are involved, every effort is made to indicate this clearly, with
due reference to the literature, and acknowledgement of collaborative research and
discussions.
Author
Huynh Tuong Linh

CONTENT
DECLARATION
CONTENT
SCHEDULE OF ABBREVIATIONS
SCHEDULE OF TABLES
SCHEDULE OF PICTURES
SUMMARY
TÓM TẮT
CHAPTER 1. PREAMBLE....................................................................................1
1.1. Background information.....................................................................................1
1.2. Research issues...................................................................................................1
1.3. Research questions .............................................................................................4
1.4. Research methodology .......................................................................................5
CHAPTER 2. THE NECESSITY TO REGULATE PERSONAL
BANKRUPTCY IN VIETNAM...............................................................................7
2.1. The volatility of consumer credit market ...........................................................7
2.2. Insolvency in case of unlimited liability business............................................10
2.3. Other advantages that may come with the personal bankruptcy system..........11
CHAPTER 3. INTRODUCTION TO INTERNATIONAL EXPERIENCES IN
REGULATING PERSONAL BANKRUPTCY ...................................................13
3.1. A human right to declare bankruptcy...............................................................13
3.2. Role of culture and economic in the development of personal bankruptcy.....15
3.3. Arguments on the adverse impacts of personal bankruptcy.............................16
3.4. The historical evolution of personal bankruptcy..............................................18
CHAPTER 4. AN OVERVIEW OF INTERNATIONAL LEGISLATIONS ON
PERSONAL BANKRUPTCY................................................................................25
4.1. Personal bankruptcy law in US ........................................................................25
4.2. Personal bankruptcy law in Europe..................................................................34
4.3. Personal bankruptcy law in Asia......................................................................38
CHAPTER 5.KEY PROVISIONS OF PERSONAL BANKRUPTCY LAWS
..................................................................................................................................41
5.1. Discharge..........................................................................................................41

CONTENT
5.2. Mechanism of debt liquidation.........................................................................42
5.3. Case administrator............................................................................................44
5.4. Protection against debt collection activities.....................................................45
5.5. Avoidance of abuse ..........................................................................................45
CHAPTER 6.APPLICATION OF PERSONAL BANKRUPTCY IN VIETNAM
..................................................................................................................................49
6.1. Personal bankruptcy in Vietnam as provided by the current law.....................49
6.2. Vietnamese lawmaker’s argument against personal bankruptcy .....................50
6.3. Proposed concept, prerequisites and recommendation for adaptation of personal
bankruptcy in Vietnam law.......................................................................................53
CHAPTER 7. CONCLUSION .............................................................................58
REFERENCES

SCHEDULE OF ABBREVIATIONS
BAPCPA – US Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
IRS – US Internal Revenue Service
LOB 2014 – Vietnam Law on Bankruptcy 2014
UNCITRAL - United Nations Commission on International Trade Law
US – United States of America
USD – US Dollar
UST – US Trustee
USTP – US Trustee Program
VND – Vietnam Dong

SCHEDULE OF TABLES
Table 3.1. Summary of US Personal Bankruptcy Legislation Development
Table 3.2. Summary of Europe Personal Bankruptcy Legislation Development

SCHEDULE OF PICTURES
Picture 1.1. The Growth of Consumer Credit in 2017
Picture 3.1. US Personal Bankruptcies in 1900-2004
Picture 3.2. Private credit in Europe as a percentage of GDP
Picture 4.1. US personal bankruptcy cases by chapter
Picture 5.1. Debt liability in personal bankruptcy case

SUMMARY
Vietnam's credit market, especially the consumer credit sector, has grown
steadily in recent years. However, under the current Vietnam law, an individual’s
liability is unlimited, and personal bankruptcy is not recognised. Because of the
absence of a legal framework for personal bankruptcy, economically an individual
cannot get out from the credit market and settle his/her debts in civilised ways when
he/she has unfortunately become insolvent. Vietnamese lawmakers initially
discussed the personal bankruptcy during the drafting of the LOB 2014 but concluded
that allowing individuals and business households to declare bankruptcy is not urgent.
By studying and analysing the Vietnam socio-economic conditions, international
experiences with personal bankruptcy (of which the US personal bankruptcy
legislation is mainly focused) and the potential challenges in case of Vietnam
personal bankruptcy law to be adopted, this thesis is expected to find out whether the
personal bankruptcy law is necessary, applicable and implementable to Vietnam.
Upon the findings, it is believed that personal bankruptcy is necessary and applicable
in consideration of socio-economic conditions in Vietnam. The basics and
preliminary mechanisms of personal bankruptcy to be adopted in Vietnam are also
proposed in this thesis for future research.

TÓM TẮT
Thị trường tín dụng Việt Nam, đặc biệt là khu vực tín dụng tiêu dùng, đang trên
đà tăng trưởng trong những năm vừa qua. Tuy nhiên, theo quy định pháp luật hiện tại
của Việt Nam, trách nhiệm của một cá nhân là vô hạn, và phá sản cá nhân vẫn chưa
được thừa nhận. Xuất phát từ sự thiếu vắng một hành lang pháp lý cho phá sản cá
nhân, xét về phương diện kinh tế thì một cá nhân không thể thoát khỏi thị trường tín
dụng và giải quyết những món nợ của mình theo con đường dân sự trong trường hợp
họ không may bị vỡ nợ. Nhà làm luật Việt Nam đã từng đề cập sơ bộ đến phá sản cá
nhân trong quá trình soạn thảo Luật Phá sản 2014 nhưng đã kết luận rằng việc cho
phép cá nhân và hộ kinh doanh cá thể được tuyên bố phá sản là không cấp thiết. Qua
việc nghiên cứu và đánh giá điều kiện kinh tế-xã hội Việt Nam, những kinh nghiệm
quốc tế đối với phá sản cá nhân (trong đó hệ thống pháp luật phá sản cá nhân của Hoa
Kỳ được chú trọng) và những thử thách tiềm tàng trong trường hợp luật phá sản cá
nhân Việt Nam được áp dụng, luận văn này được mong đợi sẽ làm rõ được việc liệu
phá sản cá nhân có cần thiết, áp dụng được và có khả năng thực thi tại Việt Nam hay
không. Dựa trên kết quả nghiên cứu, người viết tin rằng phá sản cá nhân là cần thiết
và áp dụng được đối với điều kiện kinh tế-xã hội của Việt Nam. Những yếu tố cơ bản
và phương thức sơ bộ của phá sản cá nhân áp dụng tại Việt Nam cũng được đề xuất
trong luận văn này nhằm phục vụ cho các nghiên cứu khác trong tương lai.

1
CHAPTER 1. PREAMBLE
1.1. Background information
Over the past few years, accompanying the rapid growth of the economy, the
private sector gains the leading role of Vietnam economic structure, and the market
factors have been dismantling the command economy from day to day.
Amongst other things under the market economy, the need for an adequate legal
framework for bankruptcy activities is essential. It was recognised by the Vietnam
government, as many issues in connection to the former Law on Bankruptcy were
addressed and resolved by the LOB 2014.
During the drafting of LOB 2014, though there were suggestions to include
individual as a regulated entity thereof, the opposite opinion made up the majority,
and the final draft of LOB 2014 omitted personal bankruptcy. However, on the way
to concluding the necessity of individual to be covered by the laws of bankruptcy, the
mainstream rationale was only that the individual is not required by law to register
for any capital when involving in the economic activities, and the civil laws should
regulate its insolvency1
. Such rationale seems not adequate.
Article 51.2 of Vietnam Constitution 2013 also provides for that “Participants
in different economic sectors are equal, cooperate and compete under the law”.
Therefore, giving the incorporate entity the right to declare bankruptcy but not giving
the same to the individual entity, as the chance to restart not only its economic
activities but also its social life, is not appropriate.
On the side note, UNCITRAL, in accordance with its legislative guide on
insolvency law, recommends that insolvency law should govern insolvency
proceedings against all debtors engaged in economic activities, whether natural or
legal2
.
1.2. Research issues
Under Vietnam's laws, natural persons have unlimited liability for their debt.
This means that if an individual owes an amount of money, his or her responsibility
1
The Supreme People's Court, 2013. Explanation report on opinion collection, adjustment of draft law on
bankruptcy (Amended), p.5-6.
2
UNCITRAL, 2005. Legislative Guide on Insolvency Law, p.40.

2
to pay back will last until such time as the amount, together with any interest arising,
is fully paid; or the death of that person (not to mention the event of an inheritance).
Due to such a debt handling mechanism, there is no "full stop" to a debt unless it is
duly paid or negotiated.
Subsequently, the Vietnam jurisdiction can merely enforce or annul the debt, to
the extent permissible bylaws, or recognize the agreement between the parties. That
is literally all of their power over a debt case. They can neither arbitrarily arrange for
the repayment plan, cease any part of the debt nor apply whatsoever measure to
protect the entitlement of the creditors and the debtor.
This has resulted in some social and legal issues relating to debt collection and
related activities.
Firstly, the debt repayment pressure. Such pressure does not refer to the usual
type of debt repayment, but rather to the unforeseen insolvency. People who suffer
from unforeseen overindebtedness will be shocked by the unexpectedly large size of
financial obligation, which their sensible ability cannot afford. In such circumstances,
there will be a remarkable chance that the insolvent will have adverse reactions, such
as committing crimes to meet his financial needs or committing suicide. Either case
may result in a spill - over effect.
To name a few, some farmers in Gia Lai committed suicide when their pepper
died in mass and the price of the product dropped significantly; a couple killed
themselves with dynamite in Nghe An because of a debt of VND 5 billion; or a used
car seller in Bac Giang robbed the bank to pay the debt of VND 400 million. If these
debtors and like - minded people had a more acceptable and less stressful repayment
plan given and implemented by the competent authorities, would they make negative
choices or spend effort restarting their lives?
Secondly, the manner of debt collection. When a person becomes insolvent or
is likely to become insolvent, it is common practice for him or her to seek another
loan to repay existing loans. This practice makes the debt scattered and complicated,
as does the debt collection, since the debtor will repay his debts for some emotional
reasons instead of logical priority. The creditors, on the other hand, because they do
not know exactly whether the debtor can pay the debt and when such payment is
made, must do everything possible to accelerate debt collection. Things may even get
worse when the creditors know each other's involvement.

3
Picture 1.1. The Growth of Consumer Credit in 2017
Source: Vietnam National Financial Supervisory Commission 2018
In addition, demand for consumer loans and trust loans in Vietnam has
increased in both quantity and quality. According to the National Financial
Supervisory Commission3
, consumer credit was estimated to increase by 65% in
2017, higher than the growth of 50.2% in 2016. The financial companies that provide
such loans have increasingly developed their debt collection methods, including
threats and harassment activities. It contributed a huddle of debt collection activities
to that chaotic picture, such as a report claiming that a financial company made 17
calls and 20 messages to a debtor's spouse in one day.
Last but not least, the equal treatment of creditors. According to Article 42.1 of
the Laws on Civil Procedures 2015, the court may join two or more cases which it
has separately accepted to resolve. This provision is not practical in the event of debt
collection, as the creditors should have an enormous conflict of interest, especially
when the debtor appears to become insolvent.
Without a special procedure, creditors would take separate action to protect
themselves, which could lead to an unfair outcome for creditors who lack information
or other debt collection capabilities and legal procedures. The similar story can be
found where a Hui (as known as the tontine, a Vietnamese scheme for saving money
and raising capital) get “broken”. The Hui master in such story will be indebted to
3
National Financial Supervisory Commission, 2017. Financial Market Report, p.45.

4
numerous persons. In most cases, those unexpected creditors are helpless and suing
the Hui master under an ordinary civil proceeding seems not suitable.
Concerning this immense need for personal credit and liability, it is strongly
necessary to redraw a more comprehensive picture of the necessity and possibility of
personal bankruptcy in Vietnam.
1.3. Research questions
The principal purpose of this thesis is to draw up a comprehensive picture of,
and based on the obtained study, to demonstrate the necessity and possibility of
personal bankruptcy in Vietnam.
In light of that, this thesis is devoted to solving the following questions.
1.3.1 Would Vietnam’s socio-economic context need the adoption of
personal bankruptcy?
Vietnam’s lawmakers have recognized and allowed the corporate’s possibility
to become insolvent, and therefore its ability to declare bankruptcy for a while.
However, the adoption of personal bankruptcy may be viewed as a different
perspective.
Therefore, by analyzing Vietnam’s socio-economic context together with the
benefits that the personal bankruptcy may generate, the findings for this question is
vital for building a solid foundation of this thesis.
1.3.2 What are the international legislation and experience in regard to the
personal bankruptcy?
Unlike corporate bankruptcy, personal bankruptcy is not a common regulation
around the global legal system. Although recommended, personal bankruptcy is still
a controversial regulation, which not all countries are willing to apply.
Finding the countries that apply the personal bankruptcy regulation, whose legal
system would be the valuable references, will provide the research with a
comprehensive perspective on personal bankruptcy regulation.
Furthermore, by addressing the critical provisions of personal bankruptcy
regulation in highlighted countries, the research can fuse the essential matters of
personal bankruptcy into the Vietnam laws, which should be more efficient than

5
merging the terminologies obtained from other legal systems.
The process of answering this question will, hopefully, also disclose the
advantages and disadvantages of application of personal bankruptcy regulation in
legal systems around the world.
1.3.3 What was taken into account when the Vietnam legislators considered
the need for, and consequently set aside the personal bankruptcy
regulation?
As mentioned before, the personal bankruptcy was referred to during the
drafting of LOB 2014, but finally excluded. Answering this question will clarify the
concerns of Vietnam government bodies about the application of personal bankruptcy
regulation in Vietnam, thereby to establish a more appropriate orientation for the
research and consolidate the applicable outcome thereof.
Finally, the findings are expected to point out what are the real problems that
the personal bankruptcy regulation is susceptible to when applying in Vietnam. It will
address not only the present concerns of Vietnam government bodies but also the
potential risks that the competent executives may suffer when solving respective
cases.
1.4. Research methodology
Based on and to adequately address the research questions, this thesis will be
applied with the following methods for researching activities.
- Analysis of written laws: At the very beginning of the research, the laws
of the countries who are applying personal bankruptcy regulation and the
relevant legal articles will be scanned to capture an overview of personal
bankruptcy regulation.
These legislations will be studied and analysed to extract the critical
provisions of personal bankruptcy.
The reports and opinions given by Vietnam government bodies during the
drafting of LOB 2014 will also be considered to record all concerns of
Vietnam legislator on personal bankruptcy.
- Legal comparison analysis: The process of comparing the legal systems is
expected to reveal the advantages and disadvantages of personal
bankruptcy regulation.

6
Nevertheless, few similar analyses will be applied throughout the research, as
they may contribute copious economic, social and even political data to refine the
outcome thereof.

7
CHAPTER 2. THE NECESSITY TO REGULATE PERSONAL
BANKRUPTCY IN VIETNAM
2.1. The volatility of consumer credit market
2.1.1 The rise of consumer credit in Vietnam
Consumer lending emerged from the urgent need to settle the personal spending.
However, consumer credit has overcome its initial mission and now either helps
improve social quality, facilitates access to official credit services rather than usury,
and promotes domestic production.
Consumer credit is therefore considered important data to reflect the "health" of
the economy. For example, consumer loans contribute 70% to GDP growth in US. In
the first quarter of 2018, total US consumer credit rose 5.1% over the same period of
last year to 3.82 trillion USD. This includes credit activities such as credit card debt,
home loans and student loans. It is also reported that the household debt is equal to
94% of GDP in United Kingdom, 95.6% in South Korea, 88% in Malaysia, and 136%
in Australia4
.
In Vietnam, according to the Financial Market Overview Report 2017 of
Vietnam National Financial Supervisory Commission, there is over 1 trillion Dong
of outstanding loans in the consumer lending sector by the end of 2017, which has
increased almost five times in the last five years. The consumer credit in 2017 has
also grown by 65%, and its proportion in total credit went up from 12.3% in 2016 to
18%. Such figures can more or less draw up the picture of an active consumer lending
market in Vietnam. The blooming of consumer loans is now quite easy to recognise,
as it appears in every corner of the Vietnam consumer market. It would be effortless
for a Vietnamese to obtain a consumer loan, even without any requirement to prove
his/her earnings and ability to payback5
.
In these years, the consumer finance market began to flourish as a result of
major changes in consumer habits and the high demand for middle - income real
estate credit. It comes from the change of Vietnamese habit, as spending on consumer
4
Hoang Ngan, “Cho vay tiêu dùng: Bài học từ các cường quốc kinh tế” (Consumer lending: Lessons from
the top economies; Translated by the author), Reatimes, published on 24 July 2018, http://reatimes.vn/cho-
vay-tieu-dung-bai-hoc-tu-cac-cuong-quoc-kinh-te-27091.html
5
Do Linh, “Cẩn trọng cõng nợ từ thẻ” (Be careful in carrying debt from the card; Translated by the author),
Sai Gon Dau Tu, published on 6 September 2018, http://saigondautu.com.vn/tai-chinh/can-trong-cong-no-tu-
the-61113.html

8
product from less than to more than their current income; and borrowing from
relatives and friends to borrowing from the banks and financial companies.
Not to mention the population structure and the average growth in income in
recent years. Under the "golden population" period, Vietnam has approximately 63
million people between the ages of 20 and 59 - the main customer group that financial
companies are targeting. This is also a segment of customers who need to make loans
of small value, mainly focused on personal consumption, living, household goods
and transportation.
It was reported that consumer credit growth in Vietnam increased by nearly 60%
in 2017 and it is forecasted that in the next three years, the average growth rate of this
sector will reach 29-30% per year6
.
The blooming of consumer loans has a positive impact on the economy in many
respects, including:
- Provide opportunities for low-income people to access the financial
services, who are often refused by the commercial bank due to the
difficulty to prove their ability to repay. Thereby, consumer lending has
been contributing to the reduction of informal lending, especially the
usurious loans or "black credit".
- Encourage consumer demand, thereby increase productivity and create
more employment opportunities at the macro level, which contributes to
economic growth.
In view of this, the rise of consumer credit is not a bad signal and should not be
severely interfered with by the media. However, the downsides of consumer credit
must be examined to ensure that it is well managed and to prevent its negative impacts
as much as possible.
2.1.2 The risky nature of consumer credit
The flourishing of consumer loans means the potential increase of people who
may be overindebted, especially when there are many Vietnamese who obtain a
consumer loan without proper knowledge of the interest rate and payment plan.
6
Thanh Tung, “Đổ xô vào vay tiêu dùng” (Rush on consumer loans; Translated by the author), Nhip Cau
Dau Tu, published 30 January 2018, http://nhipcaudautu.vn/thuong-truong/do-xo-vao-vay-tieu-dung-3322393/

9
In recent times, interest rate programs have become one of the indispensable
elements in almost all off - the – plan real estate projects, including the high - end,
middle - income or low - income projects, which usually offer loans up to 70 per cent
of the value of the property. However, real estate loans are not as affordable as
advertised. The low-interest rates are only available in short, and then the remainder
of the loan is subject to the market interest rate. That rate includes typically the
deposit interest rate plus 3.5 – 4 percent of the bank's management and operating
expenses; thus, the increase of deposit interest rates means the increase of loan
interest rates. Therefore, the unforeseeable spike of interest rate, or incidents affecting
the borrower’s earning, for a long enough period, can cause the borrower to become
insolvent.
On the other hand, because it is easy to obtain small loans from financial
companies for means of transport, smartphones and other consumer purposes,
together with the flourishing of credit cards, the Vietnamese can be "trained" to have
bad spending habits and lose ability to manage their finances.
In this regard, Japan had also struggled to address the social unrest caused by
financial companies that lend money to low-income workers at high-interest rates.
For decades until 2006, when the Japanese government took an important step in
applying the ceiling interest rate on consumer loans, the financial companies played
a vital role in the Japanese economy as financing for borrowers considered too risky
by the banks. In 2005, Japanese consumers borrowed USD 292 billion from financial
companies and other non - bank lenders7
. This amount is equivalent to 10% of total
outstanding loans of the crediting system. However, financial companies could easily
become black credit providers due to high-interest rates and sometimes harsh debt
collection methods, which produce high pressure on borrowers and cause them to
take wrong financial actions. A key example is Toyoki Yoshida, who borrowed a
small sum in 1991 to buy a car and quickly fell into trouble. Due to the high-interest
rates, his total debts from five financial companies grew to USD 17,000. He then
relied on the black credit world to pay his debts, but five years later the debt reached
USD 70,000 at 50 different places.
Back to Japan's consumer credit crisis, Japan's per - capita consumer credit
7
Thu Huong, “Tài chính tiêu dùng bùng nổ không kiểm soát đã khiến Nhật Bản và Hàn Quốc khốn đốn
như thế nào?” (How did uncontrolled consumer finance affect Japan and South Korea?; Translated by the
author), Biz Live, published 27 May 2018, https://bizlive.vn/kinh-doanh-quoc-te/tai-chinh-tieu-dung-bung-no-
khong-kiem-soat-da-khien-nhat-ban-va-han-quoc-khon-don-nhu-the-nao-3451815.html

10
reached USD 5,164 in 1996 and exceeded the similar US index. The number of
personal bankruptcies in Japan then increased from 71,299 cases filed in 1997 to more
than 100,000 in 19988
. Yoshida finally filed bankruptcy after a creditor threatened to
kill his mother, and once tried to commit suicide. His story, more or less, can
demonstrate the essential purpose of personal bankruptcy, which is "to restart
someone's life".
2.1.3 Debt collection manner in Vietnam
The evolution of financial companies also exposes the defects of debt collection
activities in Vietnam, where there is no real efficient and legal measure to collect bad
debt, especially in the non-business sectors.
Since the consumer loan is usually unsecured debt, financial companies must
have unique debt collection methods. In the beginning, the financial companies
repeatedly call and message the debtor, reminding them to pay. However, failing to
collect the debt by standard methods, the financial companies increase pressures, try
for other ways and many debt collection cases, which, unfortunately, often involved
intimidation, terrorism, contact to the debtor’s colleagues, relatives to collect debts.
In some cases, the debtor has to move his or her home, turn off the phone to avoid
the threat of debt collection. In some other cases, the debtor, despite having contacted
the financial companies to propose a debt restructuring solution, is still threatened to
recover the debt.
On the other hand, the victims of the broken Hui system or network marketing
are likely to continue being the victims of the debt collection activities of hopeless
creditors who have lent money to the victims’ contribution to such Hui system or
network marketing.
In such cases, the debtor may surrender or even refuse to pay the debt, which
not only affects the business of financial companies but also threatens the overall
development of the financial sector in Vietnam.
2.2. Insolvency in case of unlimited liability business
The concept of unlimited liability in business is necessary that the owner of a
8
Sonoko Setaishi, “Personal Bankruptcies Rise in Japan; Process Gains Acceptance Amid Crisis”, The
Wall Street Journal, published 22 October 1998, https://www.wsj.com/articles/SB908985917584932000

11
business is liable for debts and other financial obligations with all of its assets and
notwithstanding the registered charter capital of that business. Under Vietnam laws,
three following legal forms of doing business shall have unlimited liability to their
debts:(i) the household business, (ii) the owner of the private enterprise, i.e. sole
proprietorship, and (ii) the partners of the partnership (unlimited liable partners).
Aside to several businesses that legally require the paradigm of unlimited
liability, many Vietnamese still choose one of the types mentioned above of business
due to the following benefits:
- The ability to raise more capital than his or her investment in the business,
as the liability limitation is merely estimated upon his or her owned assets.
- The unlimited liability can help to build up trust with the customers and
partners.
- In most cases, the management and operation of these businesses is more
straightforward than those with limited liability.
The number of these persons may be approximately 5 million, as the number of
household businesses as of October 2017 was recorded to be around 4.9 million 9
.
This is sufficient not to be overlooked when assessing the necessary personal
bankruptcy law. Vietnam's laws currently stop to the extent that the persons
mentioned above are indefinitely responsible for their business operations, which
only take into account the business aspect, but there is no comprehensive solution if
they, unfortunately, become insolvent as a natural person. In this respect, the opinion
of the legislators that the individual is not required by law to register for any capital
when engaged in economic activities, therefore not entitled to the bankruptcy
procedure, seems superficial and inhumane.
2.3. Other advantages that may come with the personal bankruptcy system
Among other things, the personal bankruptcy system also has a positive impact
on society and the economy in the long term.
Firstly, the possibility of bankruptcy in the event of unforeseen misfortune can
encourage individuals to borrow money to invest in their personal lives, which boost
9
Thuy Dung, “Hộ kinh doanh không muốn lớn thành doanh nghiệp” (Household businesses do not want
to grow up to enterprises; Translated by the author), The Saigon Times, published on 3 October 2017,
https://www.thesaigontimes.vn/165245/Ho-kinh-doanh-khong-muon-lon-thanh-doanh-nghiep.html

12
not only the trading market but also the country's development.
Secondly, personal bankruptcy helps to protect the creditors ' rights, even
though the personal bankruptcy system normally tends to benefit the debtor.
Although creditors cannot recover all of their loans in most cases of bankruptcy, the
bankruptcy procedure should guarantee the equality of creditors in debt collection. In
principle, no creditor can claim the debt individually and be paid by the debtor while
other creditors have not been paid. All creditors must wait until the court declares
bankruptcy and distributes the debtor's assets in their respective proportions (except
for the secured creditors). Furthermore, by resolving the interest between creditors
and debtors fairly and satisfactorily (in the most reasonable way) and among
creditors, the bankruptcy law helps to prevent conflict and tension between these
persons, thereby ensuring the orderly discipline of society.
Finally, the mandatory conditions for petitions for personal bankruptcy can
improve the ability of the state to manage personal finances and assets. In other
words, a debtor who files for bankruptcy shall disclose honestly and comprehensively
all of his financial situations, including living costs, actual income, assets and even
proof of tax compliance, failing which his petition will be rejected. Therefore, the
implementation of personal bankruptcy law can improve the ability of the state to
manage personal finances and assets.

13
CHAPTER 3. INTRODUCTION TO INTERNATIONAL
EXPERIENCES IN REGULATING PERSONAL BANKRUPTCY
3.1. A human right to declare bankruptcy
The right of an individual to declare bankruptcy was not simply accepted
worldwide. The word “bankruptcy” evolved from an Italian phrase “banca ratta” that
means “broken bench or table”. In medieval times, when a merchant failed to pay his
debts, creditors would ceremoniously break the bench or table from which he
conducted his business10
. The early Romans hacked and divided the bodies of people
who did not pay their debts. In early England, people who were in over their heads
financially were tossed in dungeons.
Today, the fact that a person can declare bankruptcy if he or she has insufficient
property and the ability to pay his or her debt should be considered a legitimate right.
The ultimate goal of allowing an individual to declare bankruptcy is to give him or
her the opportunity to fulfil his or her debt obligations by liquidating or reorganizing
the financial situation. The specific paradigms and mechanisms may vary subject to
the legislative views of each country around the world.
In particular, the personal bankruptcy process can help insolvent debtors no
longer be disturbed by creditors, find a legal and complete solution to repay their
debts or reshape their personal finances. On the other hand, creditors should be
guaranteed to be paid as much as payable by the debtor and permitted by law.
Personal bankruptcy is, in most cases, a collective debt collection process. When a
person decides to file for bankruptcy, the number of his or her creditors is usually two
or more. Once summoned by the court, the creditors shall stop their debt collection
activities and either liquidate the debtor's assets or devise a plan for the debtor to
recover its financial stability and gradually pay back. This procedure should ensure
equality between creditors ' interests.
The US personal bankruptcy law is, without a doubt, the most forgiving system,
which strongly encourages people who have failed financially to return to the
economy. In many stages, the exemption is extremely generous and may allow
debtors an unlimited amount of equity in a house11
.
10
James P.Caher and John M.Caher, 2006. Personal Bankruptcy Laws For Dummies. Wiley Publishing,
Inc.
11
Nathalie Martin, "The Role of History and Culture in Developing Bankruptcy and Insolvency Systems:

14
The rest of the world is less generous than the US about debt forgiveness. In
some parts of the world, it is ultimate disgrace not to pay the debts. Today, however,
many countries are moving towards an American model of corporate bankruptcy and
some are replicating US personal bankruptcy laws.
There are contrasting approaches in international legislation on personal
bankruptcy, in particular the concept of "fresh start" under US personal bankruptcy
law, as opposed to the concept of "earned start" under Europe's personal bankruptcy
law. In other words, the legislators of Europe have a different perspective on the
fundamental philosophy of supporting personal bankruptcy legislation. While the US
personal bankruptcy law considers personal bankruptcy to be a market failure,
Europeans believe that personal bankruptcy is due to macroeconomic factors such as
recession and unemployment, which cause debtors financial distress and lead them
to petition for bankruptcy12
. In this respect, the US personal bankruptcy law offers,
inter alia, a straight discharge to the debtor, while Europe's personal bankruptcy law
generally requires a compulsory payment plan as a condition of discharge.
Developing countries now usually take into account the comparative advantages
and disadvantages of US or European approaches to personal bankruptcy when
considering measures to resolve overindebtedness.
In Singapore, a neighbouring country of Vietnam, the individuals can file for
bankruptcy if their unpayable debt is at least 10,000 Singapore Dollar. According to
the statistics of the Insolvency Office of Singapore Ministry of Law, there were
17,463 undischarged insolvent persons as at the end of July 2018, which is equivalent
to approximately 0.3% of Singapore population. The applications for bankruptcy in
Singapore have continuously increased from year to year, reached 2,932 files in 2017
and will likely to exceed 3,000 files in 2018. There are many reasons for the
Singaporean to go bankrupt, but most of them are spending excessive amounts of
their income on credit cards, gambling addictions, investing in real estate, securities
or participating in business projects that they cannot control in well manner.
Apparently, during the bankruptcy procedure and even afterwards, the
insolvents shall suffer from both personal and social consequences. They can
The Perils of Legal Transplantation", Boston College International and Comparative Law Review, published
12 January 2005
12
Niemi-Kiesilainen, Johanna. "Consumer Bankruptcy in Comparison: Do We Cure a Market Failure or a
Social Problem." Osgoode Hall Law Journal 37.1/2 (1999):473-503.

15
continue to work but must share a portion of his income with the creditors. Their
expenditures must be reasonably explained in a report, which will be periodically
controlled by the court’s delegate. For example, the insolvent shall justify why he or
she used a taxi instead of public transportations and whether such circumstance is an
emergency. On another hand, the bankrupted employees will be publicly disclosed
by the employer, thus should be more challenging to advance in their professional
lives. Before leaving the country, the bankrupt shall apply for a permit from the court,
and the court usually approves for business purposes only. However, the insolvents
still have a chance to restart and continue their life.
3.2. Role of culture and economic in the development of personal bankruptcy
The insolvency systems are a profound reflection of the legal, historical,
political and cultural contexts of the countries that developed them13
. Thus, there are
also significant differences in the approach to both businesses and personal
bankruptcies in countries that share a legal tradition. Countries with different legal
traditions, such as those in Europe and Japan, have more different systems of
bankruptcy, although many are moving towards US models.
Culture is sometimes used to explain national differences in both the use of
credit and attitudes to bankruptcy: the Japanese are supposed to be averse to consumer
credit and regard bankruptcy as highly stigmatising, while the French and Belgians
are averse to borrowing. Another example is the Korean Individual Rehabilitation
Proceeding. When it was revealed, critics focused on its generous discharge policy
and the moral hazard that could result from discharge; for example, people borrow
too much and make less effort to repay their debts.
In these accounts, culture seems to have a wide range of practices, a
phenomenon that is almost natural and apolitical. It was said that law is the mirror of
society. This description, however, overshadows the contingent nature of cultural
values and historical conflicts over cultural development. In other words, a historical
view is crucial, as it can demonstrate that culture is an adjustment to conflicting ideas
and interests. For example, the idea of a "pro-debtor" culture in the US appears to be
an essential characteristic in US history. This, however, can understate the historical
conflict over the laws and institutions that are still developing. The evolution of
13
Nathalie Martin, "The Role of History and Culture in Developing Bankruptcy and Insolvency Systems:
The Perils of Legal Transplantation", Boston College International and Comparative Law Review, published
12 January 2005

16
Chapter 13 under the US Bankruptcy Code may demonstrate these matters. Since the
Chandler Act, the US Congress has been convinced that Chapter 13 is a more
responsible way of handling consumer debts. The BAPCPA has also acknowledged
the rise of such culture, though it is difficult to predict the actual influence of the
legislation at present.
Japan, on the other hand, is often used to demonstrate the importance of cultural
attitudes. The argument is that overindebtedness and bankruptcy are a significant
cultural stigma in Japan, leading to suicide instead of bankruptcy. However,
amendments to Japan's insolvency law and practices have increased the level of
accessibility for insolvency, and Japan has now a higher rate of bankruptcy filings
than England and Wales14
. This may have reduced the suicide rate15
. Other legal
research in Japan shows that institutional and legal factors lie behind the so-called
cultural attitudes and that changes in them can consequently have an impact on social
standards.
3.3. Arguments on the adverse impacts of personal bankruptcy
Personal bankruptcy, whether under US or European approaches, can be seen
as a mechanism that interferes with mutual, legal and enforceable agreements
between the debtor and creditors. In most cases, personal bankruptcy results in a
discharge that offers more remarkable benefits to the debtor.
Therefore, it has always been concerned about several negative impacts that
may result from the application of personal bankruptcy, especially the moral hazard
and the downturn of credit supply.
For example, when the Individual Rehabilitation Proceeding was introduced in
Korea, criticism focused on its generous discharge policy and assumed that discharge
could result in people borrowing too much and could lead debtors to make less effort
to repay their debts16
.
Theoretically, there may be moral hazard, but for the following reasons, it
cannot have any significant impact:
- Debtors receiving discharge must have a bad credit rating. The discharge
14
Kent Anderson, 2006. Japanese Insolvency Law After a Decade of Reform
15
Mark D. West, 2003. Dying to Get Out of Debt: Consumer Insolvency Law and Suicide in Japan
16
Soogeun Oh, 2006. Personal Bankruptcy in Korea: Challenges and Responses

17
removes only legal liability and does not prevent creditors from refusing
to deal with discharged debtors. Even lenders who extend credit to certain
bankruptcy borrower may choose to offer minimum credit amounts and
charge high-interest rates and fees to mitigate their default losses 17
.
- The reputation of the debtor must be severely affected, especially among
individual creditors like friends and colleagues.
- The punishment of those who are fraudulently discharged, and the
accompanying cancellation of the discharge also deter potentially
fraudulent debtors.
There is also an argument about the fact that a full discharge could harm the
creditors' financial situation. It should be noted, however, that creditors' financial
failure is not caused by personal debt discharge, but by unpaid claims or non-
performing loans. Discharge is merely the process of wiping out uncollectible claims
after they have been proven to be uncollectible. If reimbursement of claims is
possible, the creditor may appeal the adjudication of bankruptcy or a discharge
decision by proving such a possibility.
However, such failure can lead to another concern that creditors, mostly
financial institutions, will adjust the credit supply to respond to debt relief. Indeed,
creditors may increase interest rates, set higher minimum standards to qualify for
loans, increase collateral requirements, or screen loan applicants more vigorously in
response to the bankruptcy phenomenon.
Research on US personal bankruptcy has shown that the size of the bankruptcy
exemption of the relevant state has a statistically and economically significant
positive effect on the likelihood that potential borrowers in the state will be denied
credit or discouraged from borrowing18
. It was also found that households in the
lower half of the distribution of assets have less debt and are facing higher interest
rates on car loans in states with high exemptions from bankruptcy than borrowers in
low exemption states. In contrast, households in the upper half of the asset
distribution have more credit in states with high bankruptcy exemptions, suggesting
17
Song Han, Benjamin J. Keys, and Geng Li, 2011. Credit Supply to Personal Bankruptcy Filers: Evidence
from Credit Card Mailings. Finance and Economics Discussion Series Divisions of Research & Statistics and
Monetary Affairs Federal Reserve Board, Washington, D.C.
18
Reint Gropp, John Karl Scholz and Michelle J, 1997. White. Personal Bankruptcy and Credit Supply and
Demand. The Quarterly Journal of Economics, Vol. 112, 217-251.

18
higher credit demand for these households than lenders are willing to accommodate.
Thus, the research as mentioned above concluded that personal bankruptcy
increases the amount of credit held by high-asset households and reduces credit
availability to low-asset households. In other words, personal bankruptcy does not
reduce the supply of credit but redistributes credit to high-asset borrowers.
The issue of the moral hazard of the creditor should also be discussed. Because
debtors lack adequate overindebtedness protection, creditors can give the debtor
excessive credit without proper assessment of the financial situation of the debtor19
.
The fall in credit supply can, therefore, be concluded from the short-sighted
statistics addressing borrowers who might not meet the financial capacity to repay
the debt at the start. In the long run, however, personal bankruptcy would be a tool to
more efficiently redistribute the credit flow and improve the behaviour of creditors
in crediting activities.
3.4. The historical evolution of personal bankruptcy
3.4.1 The development of personal bankruptcy law in US
From day one of its histories, the US Constitution has granted the US Congress
the power to “establish a uniform Rule of Naturalization, and uniform Laws on the
subject of Bankruptcies throughout the United States”.
However, the beginning of bankruptcy law in the US was not easy, as there were
no “actual” bankruptcy laws for the first 120 years of the US.
Though the first bankruptcy act was passed in 1800, it had lasted for only three
years and was repealed in 1803. Its successors that were passed in 1841 and 1867,
also shared a similar destiny as were repealed after 18 months and 11 years
respectively. The short life of these acts is supposed to be contributed by the
following reasons20
:
- During the period of 17th – 18th centuries, the demand for bankruptcy
legislation was not permanent as it wildly fluctuated between the recession
19
Soogeun Oh, 2006. Personal Bankruptcy in Korea: Challenges and Responses
20
Thomas A. Garrett, 2007. The Rise in Personal Bankruptcies: The Eighth Federal Reserve District and
Beyond. Federal Reserve Bank of St. Louis Review,89:15-37.

19
and boom of the US economy.
- There were the political divides between the pro-creditor and pro-debtor
parties in the US Congress.
- The bankruptcy filing process under these acts was complicated, as it must
be done at the few federal courts across the country with a costly
administrative procedure.
Despite its short life, the very first provisions regarding personal bankruptcy
were introduced in the 1841 Bankruptcy Act, which has originated the concept of the
individuals those are “honest but unfortunate” for the next hundreds of years of US
personal bankruptcy legislation, which can be briefly read in the table 3.121
.
Table 3.1. Summary of US Personal Bankruptcy Legislation Development
Event
1800 The enactment of the first Bankruptcy Act, which followed the model of
England bankruptcy legislation and merely regulated the involuntary
bankruptcy process to be initiated by the merchants.
1803 The repeal of 1803 Bankruptcy Act.
1839 The abolishment of imprisonment for debt.
1841 The enactment of the second Bankruptcy Act, which allowed both
voluntary and involuntary bankruptcy, and even introduced the paradigm
of personal bankruptcy.
1843 The repeal of 1843 Bankruptcy Act.
1867 The enactment of the third Bankruptcy Act, which allowed the negotiation
of repayment plan between the creditors and the debtor.
1874 The 1867 Bankruptcy Act is amended to allow the debtor to propose a plan
21
US Federal Judicial Center, 2018. The Evolution of U.S. Bankruptcy Law: a time line

20
of assets distributed among the creditors.
1878 The repeal of 1867 Bankruptcy Law.
1898 The enactment of the fourth Bankruptcy Act, which was the first
permanent bankruptcy legislation of the US. This Act is more debtor-
oriented as narrowing the exceptions for discharge.
1933 The 1898 Bankruptcy Act is amended to include railroad reorganisation,
corporate reorganisation, and individual debtor arrangements.
1938 The Chandler Act amends the 1898 Bankruptcy Act to allow
reorganisation for both corporation and individual debtor. There was an
earlier amendment to 1898 Bankruptcy Act in the period of 1933 – 1934,
but such amendment was shortly repealed in 1936.
1978 The Bankruptcy Reform Act replaces the 1898 Bankruptcy Act.
The enactment of the fifth Bankruptcy Act, namely the Bankruptcy
Reform Act to supersede the 1898 Bankruptcy Act. This Act addressed the
trend of US bankruptcies in the period of 1930 – 1970, for which the
corporate bankruptcies had decreased, and the individual bankruptcies had
continuously increased. This Act introduced the essential provisions of
what so-called the modern US personal bankruptcy law, of which Chapter
7 provides for liquidation and Chapter 13 provides for repayment and
reorganisation.
1994 The 1978 Bankruptcy Reform Act is amended to expedite the procedures
of the bankruptcy filing and extend the debtors’ assets to be exempt from
creditors.
2005 The enactment of Bankruptcy Abuse Prevention and Consumer Protect
Act of 2005, which is an effort to reduce the number of personal
bankruptcies that steadily grown since the enactment of the 1978
Bankruptcy Reform Act. Generally, this Act provides the “mean test” upon
individual debtors’ income, increase the costs of filing, requires the
debtors to have financial management training to obtain the discharge.

21
Source: US Federal Judicial Center, 2018
The current US personal bankruptcy legislation has been formed since 1978,
afterwards was aided in 1994 and then emasculated in 2005. This modern legislation
was once considered as the most generous personal bankruptcy law of the world, due
to its fundamental philosophy that the personal bankruptcy shall be treated as the
market failure. In particular, the US Bankruptcy Laws Commission while drafting
the 1978 Bankruptcy Reform Act, had in their mind that:
- The primary target of personal bankruptcy is the credit market. If the
access to credit market should be open (which is the best description for
US credit market from time to time), the personal bankruptcy, serving as
an exit from the credit market, should be open as well; and
- The personal bankruptcy should take the role of risk allocation amongst
the parties involved in the credit market.
Therefore, the US current personal bankruptcy legislation has had a clear
intention to allocate the risks arising from the consumer credit market to the creditors
who should be in a better position to bear such risks.
The development of US personal bankruptcy legislation explains its importance
in the US economy and society.
Picture C.1. US Personal Bankruptcies in 1900-2004
Source: Administrative Office of the US Courts 2004
According to the Administrative Office of the US Courts, the personal
bankruptcy filings started from approximately 0.15 per 1,000 persons at the
beginning of the 20th century, began to increase from 1960 and dramatically grew

22
from 1980. As of 2004, the bankruptcy filings rate was 5.3 per 1,000 persons, which
is four times more than the rate as of 1980 and 35 times more than the rate as of 1900.
3.4.2 The development of personal bankruptcy law in Europe
Europe governments see personal bankruptcy as a social problem instead of a
market failure22
. Consequently, they would rather reform the consumer protection
policies or other market regulation to cure the problem, instead of worrying about the
debtor’s entitlement to be discharged. Most of Europe personal bankruptcy
legislation did not contain discharge provisions at the beginning of the 1980s.
It was attributable to the fact that the consumer credit market in Europe had
been strictly regulated until the 1980s, hence the default and overindebtedness was
rare. Though at that time, numerous individual debtors had been overindebted, their
cases were not resolved by a legal procedure, but by some kinds of the creditors’
action, such as writing off the debts. Nevertheless, these debtors were to have political
pressure for the Europe governments to change the personal bankruptcy legislation.
In the 1980s, the European credit markets were quickly deregulated, leading to
an increase in consumer credit supply. Due to an accumulation of unsatisfied demand
during the governed period, the credit market rapidly expanded. The total outstanding
volume of consumer credit is estimated to have doubled during the 1980s in several
European countries23
.
22
Niemi-Kiesilainen, Johanna. "Consumer Bankruptcy in Comparison: Do We Cure a Market Failure or a
Social Problem." Osgoode Hall Law Journal 37.1/2 (1999):473-503
23
Nuria Diez Guardia, 2002. Consumer credit in the European Union. ECRI Research Report, 1-39

23
Picture 3.2. Private credit in Europe as a percentage of GDP
Source: Nuria Diez Guardia 2002
The increase in unemployment already hit households with a high level of debt
when the recession began at the turn of the decade. In contrast to the poor, the new
middle-class debtors were able to create political pressures for excessive debt -
reduction measures.
However, as mentioned before, Europe governments see personal bankruptcy
as a social problem instead of a market failure. Therefore, they would have the
personal bankruptcy laws as a part of welfare societies to help people with excessive
debt loads, rather than as a measure for quick economic recovery and re-entry to the
credit market. Besides, credit market participation was not deemed necessary and
might not even have been desirable. The economic recovery was intended to ensure
the payment plan for the partial reimbursement of old debt.
In that respect, all EU debt adjustment bills underline that the law should not
undermine the overall moral imperative to pay debts. The Swedish Debt Adjustment
Law, for instance, states that the primary function of the law is, in both terms and
spirit, to uphold its debt payment obligations. Other bills stress that only debt that the
debtor would never be able to repay may be discharged.
Nevertheless, due to the need for economic rehabilitation, for only ten years,
the personal bankruptcy laws in the form of the consumer debt adjustment had been
140
120
100
80
60
40
20
0
1980 1985 1990 1995
Belgium
France
Finland
Germany
Italy
Sweden
Spain
Netherlands
United Kingdom

24
produced and quickly expanded across Europe as demonstrated in the table 3.224
.
Table 3.2. Summary of Europe Personal Bankruptcy Legislation
Development
Event
1984 Denmark has taken the lead as the first European country to introduce a
specific process for adjusting consumer debt and discharging the debt.
1989 The French law on individual and household debt prevention and
regulation were implemented. This law provides primarily for the
repayment of debts, together with the limited discharge provisions that
only apply after a grace period.
1993 The rapidly deregulated credit market and recession in the early 1990s
following the collapse of the Soviet Union led to substantial increases in
Finland and Norway's unemployment and bankruptcy filings.
Consequently, the laws on consumer debt adjustment in these countries
were drafted quickly and came into effect.
1994 The consumer debt adjustment legislation with a specific procedure was
also introduced in Austria this year.
1998 Sweden has been the latest Scandinavia to introduce legislation on debt
adjustment. The Swedes began preparatory work very early, and the report
of the committee was published in 1990. The law, however, was approved
by law only enacted and entered into force in 1994.
1999 French legislation aided its limited provisions on discharge.
Source: Johanna Niemi-Kiesilainen, 2003
24
Johanna Niemi-Kiesilainen, 2003. Consumer Bankruptcy in Global Perspective. Hart Publishing.

25
PERSONAL BANKRUPTY CASES BY CHAPTER
Chapter 7 Chapter 13
1994 2005 2013 2014 2015 2016 2017
CHAPTER 4. AN OVERVIEW OF INTERNATIONAL LEGISLATIONS
ON PERSONAL BANKRUPTCY
4.1. Personal bankruptcy law in US
4.1.1 The modern US personal bankruptcy law
Under the present US Bankruptcy Act, if an individual chooses to petition for
bankruptcy, there are generally two alternatives as petitioning for liquidation
bankruptcy under Chapter 7 or for repayment bankruptcy under Chapter 13.
407322
1628749 330899
307783
240639 299515 294396 292581
706499 600885
537551 519130 475332 472190
Picture 4.1. US personal bankruptcy cases by chapter
Source: American Bankruptcy Institute 2018
According to the data from American Bankruptcy Institute, since 1994- the year
of the amendment to 1978 Bankruptcy Reform Act to expedite the procedures of
bankruptcy filing and extend the debtors’ assets to be exempted from creditors, the
number of personal bankruptcy cases filed under Chapter 7 has always been 2 times
more than those filed under Chapter 13, as the US people would prefer to an instant
fresh start instead of a repayment plan across the years. The rate dramatically
fluctuated in 2005 contributable to the Bankruptcy Abuse Prevention and Consumer
Protect Act. During the last five years, the total of personal bankruptcy cases has
slightly decreased, but such proportion between cases under Chapter 7 and Chapter
13 has remained.

26
Chapter 7, entitled Liquidation, contemplates an orderly procedure supervised
by the court through which a trustee took over, reduced the property of the debtor to
cash and made distributions to the creditors, subject to the right of the debtor to retain
certain exempt property and the rights of secured creditors. If the insolvent files for
bankruptcy under Chapter 7, most unsecured debts will be determined. The court will
allow such individual to keep some of his or her properties and appoint a trustee to
confiscate and sell the remainder. The trustee shall use its best endeavour to repay
the debt as much as possible.
Chapter 13, entitled Adjustment of Debts of an Individual with Regular Income,
is for an individual debtor with a regular income source. Chapter 13 provides a debtor
with the ability to maintain a valuable asset such as a house and enables the debtor to
propose a plan to repay creditors over time – usually 3 to 5 years. Chapter 13 differs
significantly from Chapter 7 since debtor usually remains in possession of its assets
and makes payments through the trustee to creditors based on the expected income
of the debtor over the lifetime of the plan. Unlike Chapter 7, the debtor shall, before
the discharge is granted, complete the necessary payments under the plan.
All petitions thereunder are towards the result of a bankruptcy discharge. A
bankruptcy discharge releases the debtor from personal liability for certain specified
types of debts. In other words, the debtor is no longer legally required to pay any
debts that are discharged. The discharge is a permanent order prohibiting the creditors
from taking any form of collection action on discharged debts, including legal action
and communications with the debtor, such as telephone calls, letters, and personal
contacts.
4.1.2 Eligibility to petition for personal bankruptcy
Generally speaking, a person can file for bankruptcy if no previous bankruptcy
petition has been dismissed within the preceding 180 days either because a debtor has
deliberately failed to appear before the court or comply with court orders, or because
the debtor voluntarily dismissed the previous case. The debtor must also receive
credit counselling from an approved credit counselling agency within 180 days before
the filing.
Furthermore, the eligibility requirements will be subject to which chapter the
debtor petitions under:
- If a person makes bankruptcy petition under Chapter 7 and its current
monthly income is more than the state median, the Bankruptcy Code

27
requires the application of a means test to determine whether the Chapter
7 filing is presumptively abusive. Abuse is presumed if the total debtor's
current monthly income upon netting of legally allowable expenditures is
more than a certain amount. The debtor can reject the presumption of
abuse only by demonstrating special situations which justify additional
costs or changes in current monthly revenues. The case is generally
converted to Chapter 13 (with the consent of the debtor) or dismissed
unless the debtor overcomes such presumption of abuse.
- Any person is eligible for relief under Chapter 13, provided that the debts,
either unsecured or secured, are less than the amounts that are regularly
adjusted to reflect changing consumer price indexes.
4.1.3 The first steps to petition for personal bankruptcy
A personal bankruptcy case (either under Chapter 7 or Chapter 13) begins with
the debtor filing a petition with the bankruptcy court serving the area where the
individual lives.
The debtor shall also file in addition to the petition the schedules of assets and
liabilities, the current revenue and expenses schedules, the financial statement, the
executory contract un-expired leases contract, a credit counselling certificate together
with a copy of any debt repayment plan developed through credit counselling. In
general, the information to be disclosed in such documents comprises of (1) List of
all creditors and their claims amount and nature; (2) The debtor's revenue source,
amount and frequency; (3) List of all properties of the debtor; and (4) List of monthly
expenses of the debtor, e.g., food, clothing, shelter, utility, taxation, transport,
medicine, etc.
In case of a Chapter 7 petition, a schedule of "exempt" property will be included
among the schedules that the debtor files. The Bankruptcy Code provides an
individual debtor with the ability to protect certain property against creditors ' claims.
Many states have used a provision in the Bankruptcy Code which allows individual
states, instead of federal exemptions, to adopt its exemptions law. Within some states,
the debtor may decide between the federal or state law exemptions.
The petition for personal bankruptcy automatically stays (stops), except for
certain types of actions, most collection actions against the debtor or the debtor's
property. The stay arises by operation of law and requires no judicial action. In
general, creditors may not start or continue legal proceedings, wage garnishment or

28
even telephone calls that demand payment as long as the stay is effective.
4.1.4 Personal bankruptcy under Chapter 7
A bankruptcy case in Chapter 7 does not involve a repayment plan, as is the
case in Chapter 13. The bankruptcy trustee instead collects and sells debtor’s non -
exempt assets and uses the proceeds of those assets to pay the creditors under the
Bankruptcy Code provisions.
The relief is available according to Chapter 7 regardless of whether or not the
debtor is solvent or insolvent, subject to the means as mentioned above test. While a
case of Chapter 7 usually leads to debt relief, the right to a discharge is not absolute,
and certain types of debt are not discharged. Furthermore, a discharge for bankruptcy
does not extinguish a lien on the property.
4.1.4.1. The Involvement of Case Trustee under Chapter 7
When a Chapter 7 petition is filed, the UST (or the bankruptcy court in Alabama
and North Carolina) appoints an impartial case trustee to administer the case and
liquidate the debtor’s non-exempt assets.
The case trustee will hold a creditor meeting between 21 and 40 days after filing
the petition. The trustee puts the debtor under oath during this meeting, and questions
can be asked both by the trustee and creditors, such as the debtor’s financial affairs
and property. The trustee shall ask the debtor questions at the meeting of creditors to
ensure that the debtor is aware of the potential consequences of seeking a discharge
in bankruptcy such as the effect on credit history, the ability to file a petition under a
different chapter, the effect of receiving a discharge, and the effect of reaffirming a
debt. Bankruptcy judges are prohibited from attending the creditors ' meeting in order
to preserve their independent judgment.
Within 14 days of the creditors meeting, the UST shall inform the Court if the
case is presumably an abuse per the means test. If all the assets of the debtor are
exempt or under valid liens, a "no asset" report will usually be filed with the court
and no distribution shall be made to unsecured creditors. It is reported that 93% of
Chapter 7 cases involving individual debtors are no asset cases25
. However, if the
25
Dalie Jimenez, 2009. “The Distribution of Assets in Consumer Chapter 7 Bankruptcy Cases”. American
Bankruptcy Law Journal, The 83(4)

29
case seems to be an asset case at the beginning, unsecured creditors must file their
claims with proofs with the court within 90 days from the first set date of the
creditors’ meeting.
The beginning of a case of bankruptcy creates an “estate”. The estate is
technically the temporary legal owner of the entire property of the debtor, including
property owned by another person if the debtor has an interest in such property. In
other words, the creditors are paid from non-exempt property of the estate.
The primary function of a trustee of Chapter 7 in an asset case is the liquidation
of non - exempt assets to maximise the return to unsecured creditors. The trustee shall
do so by selling property of the debtor, if it is free of liens (unless the property is
exempt), or if it is worth more than any security interest attached to the property and
any exemption from the property that the debtor holds.
The trustee may exercise its “avoiding powers” to recover money or property.
The trustee’s avoiding powers comprises of set aside the preferential transfers to
creditors within 90 days before the petition; undo security interests and other
prepetition transfers of assets not correctly perfected by the law, and pursue
nonbankruptcy claims like fraudulent and mass transfers remedies available under
state law.
4.1.4.2. The Chapter 7 Discharge
A discharge shall remove the personal liability of the debtor for most of the
liabilities and prevent any collection action against the debtor. In most cases, the
bankruptcy court will issue a discharge order at a relatively early stage in the case –
generally 60 to 90 days after the first scheduled date for the creditor meeting, unless
a party to the interest file a complaint objecting to the discharge or a motion
requesting an extension of time for objecting.
In a Chapter 7 case, the reasons for denying a discharge are narrow and are
construed against the moving party. Among other reasons, the judge may refuse a
debtor's discharge if it is found that the debtor has not kept or produced adequate
books or financial records, has not satisfactorily explained any loss of assets, has
failed to comply with a lawful order of the bankruptcy tribunal, has fraudulent
transferred, concealed or destroyed property that would have become property of the
estate.
Secured creditors, however, can retain certain rights to take possession of

30
property securing a debt even after a discharge has been granted. If a debtor wishes
to maintain specific secured properties (e.g. car), depending on individual
circumstances, it may “reaffirm” the debts before the discharge is entered. A
reaffirmation is an agreement between the debtor and the creditor that, if the debtor
is otherwise discharged in the bankruptcy, it shall remain liable and pay all or part of
the money owed. In return, the creditor promises that the car or other property will
not be repossessed or taken back as long as the debtor continues to pay the debt. The
reaffirmation agreements shall contain an extensive set of disclosures, which shows,
amongst the other things, the balance of income paying expenses is sufficient to pay
the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed,
there is a presumption of undue hardship, and the court may decide not to approve
the reaffirmation agreement.
In principle, a person receives discharge in a Chapter 7 bankruptcy case for the
majority of their debts, save for debts for (1) alimony and child support, (2) certain
taxes, (3) specific educational benefit, overpayments or loans made or guaranteed by
a governmental unit, (4) deliberate and malicious injury to another entity or other
entity's property, (5) death or personal injury caused by the debtor during the s
intoxicated operation of a motor vehicle, and (6) specific criminal restitution orders.
The debtor remains liable for such debts insofar as they are not paid in the bankruptcy
case.
The court may revoke a Chapter 7 discharge on the request of the trustee, a
creditor, or the UST if the debtor (1) was granted discharge through fraud, (2)
acquired property that has would be of the estate and knowingly and fraudulently
failed to report such acquisition or surrender the property to the trustee, or (3)
(without a satisfactory clarification) makes a significant false statement or fails to
provide documents or other information related to a debtor's case audit.
4.1.5 Personal bankruptcy under Chapter 13
A Chapter 13 bankruptcy is also called a wage earner’s plan. It enables
individuals with regular income to develop a plan to repay all or part of their debts.
Chapter 13 offers individuals some advantages over Chapter 7, such as, perhaps most
remarkably, an opportunity to save their assets from foreclosure and cure delinquent
mortgage payments. Chapter 13 also provides an advantage that individuals can
reschedule and extend the secured debt over the life of the Chapter 13 plan, except
the mortgage for their primary residence, which may lower the payments. Chapter
13, finally, is like a consolidation loan, whereby the debtor makes payments to the

31
trustee (who after that distributes payments to creditors) and will not have direct
contact with creditors while covered by Chapter 13.
According to this chapter, debtors propose repayments to creditors for three to
five years. The lifespan of the repayment plan is usually subject to the debtor’s current
monthly income. Where the current monthly income of the debtor is below the
applicable state median, the plan will last for three years unless a court approves a
more extended period. For instance, a case that may only last 3 years on the basis of
the current income of the debtor could be scheduled to last longer, as the budget of
the debtor may not permit payment within 3 years of everything the debtor needs to
pay or wished to pay (home mortgage arrearage, tax or alike). Otherwise, if the
debtor’s current monthly income is higher than the applicable state median, the plan
must be five years in general. Under no circumstances should a plan provide for
payments over a period longer than five years.
4.1.5.1. The Involvement of Case Trustee under Chapter 13
An impartial trustee administers the bankruptcy under Chapter 13. In individual
districts, a standing trustee is appointed by the UST or bankruptcy administrator for
handling all cases of Chapter 13. In summary, the Chapter 13 trustee evaluates the
case and acts as a payment agent, who collects debtor payments and distributes the
same to the creditors.
The Chapter 13 trustee will hold a creditors’ meeting between 21 and 50 days
upon the debtor’s filing of the petition. The trustee puts the debtor under oath during
this meeting, and the trustee and creditors can ask questions. The debtor shall
participate and answer questions concerning his financial affairs and the proposed
terms and conditions of the plan. Bankruptcy judges are prohibited from attending
the creditors ' meeting in order to preserve their independent judgment.
Unsecured creditors shall file their claims with the court, within 90 days of a
first date set for the meeting of creditors, to participate in distributions of a repayment
plan in Chapter 13.
4.1.5.2. The Chapter 13 Plan and Confirmation Hearing
The debtor must submit a repayment plan with a petition or within 14 days of
the petition unless the court grants an extension. A plan shall be submitted for court
approval and shall provide regular (typically biweekly or monthly) payments of fixed
amounts to the trustee.

32
The plan does not have to pay unsecured claims in full for as long as (1) the
debtor pays all projected “disposable income” for the applicable commit period and
(2) the unsecured creditors receive at least the same amount under the plan as the
debtor's assets were liquidated in Chapter 7. In Chapter 13, “disposable income” is
income (excluding child support payments received by the debtor) less reasonably
necessary amount to maintain, or to support the debtor or dependents’ life and less
charitable contributions up to 15 per cent of the debtor's gross earnings. Where the
debtor is operating in business, the definition of disposable income also excludes
those amounts necessary for ordinary expenditure.
In general, if the debtor wants to keep the collateral securing a debt, the plan
must provide that such secured creditor receives at least the current value of the
collateral. Nevertheless, the plan must provide for full payment of the debt if it was
used to buy the collateral within specific time frames before the bankruptcy filing.
Payments to certain secured creditors (i.e., the home mortgage lender), may be made
over the original loan repayment schedule (which may be longer than the plan) so
long as any arrearage is made up during the plan.
The bankruptcy judge shall hold a confirmation hearing and determine, no later
than 45 days after the creditors’ meeting, whether the plan is feasible and complies
with the confirmation standards laid down in the Bankruptcy Code. The debtor, the
Chapter 13 trustee, and the creditors will come to court for such hearing. The most
frequent objections are made is that the payments under the plan are less than those
provided to the creditors should the debtor's assets be liquidated, or that the plan does
not include all projected disposable income of the debtor for the applicable
commitment period.
If the court confirms the plan, the Chapter 13 trustee will distribute funds
received under the plan as soon as is practicable. If the court refuses to confirm the
plan, the debtor may submit the modified plan or convert the case into a Chapter 7
case. If the court dismisses the case, the court may authorise the trustee to keep certain
money for costs, however (other than funds already disbursed or due to creditors) the
trustee shall return all the remaining funds.
Changing circumstances, such as the creditor’s objection to the plan or the
debtor’s inadvertent failure to list all creditors, can occasionally compromise the
ability of the debtor to make plan payments. In such cases, either before or after
confirmation, the plan may be modified.

33
4.1.5.3. Implementation of the Plan
The provisions of a confirmed plan are binding on each creditor and the debtor.
The debtor must pay the trustee regularly either directly or via payroll deductions that
require adaptation to live on a fixed budget for an extended period. Furthermore, the
debtor may not incur new debt without consulting the trustee, as additional debt may
impair the ability of the debtor to complete the plan.
The Court may dismiss or convert the case to a liquidation under Chapter 7 if
the debtor fails to (1) make payments due under the confirmed plan (2) pay any post-
filing domestic support obligations (i.e., child support, alimony), or (3) make required
tax filings during the case.
4.1.5.4. The Chapter 13 Discharge
The debtor is principally entitled to discharge upon its completion of all
payments under the Chapter 13 plan. Creditors provided for in whole or in part under
Chapter 13 may no longer take legal or other action against the debtor to collect the
obligations that have been discharged. However, the court will not issue discharge
until, after notice and hearing, it determines that there is no reason to believe that
there is any outstanding proceeding might lead to a limitation of the home exemption
of the debtor.
After confirmation of a plan, the debtor may not finish the plan by
circumstances, such as injury or illness that precludes employment sufficient to fund
even a modified plan. The debtor may ask the court in these situations to grant a
“hardship discharge”. This discharge is generally only available if: (1) the failure of
a debtor to complete plan payments is due to uncontrolled circumstances and no fault
on the part of the debtor; (2) creditors have at least received as much as in the
liquidation case of Chapter 7; and (3) modification of the plan is not possible.
The extent of discharge is slightly broader in Chapter 13 than in Chapter 7.
Debts dischargeable under Chapter 13, but not under Chapter 7, include debts in
respect of wilful and malicious property injury (as opposed to a person), non-
dischargeable tax obligations and property settlement in a divorce or separation
proceedings. However, such an extension of discharge does not apply to the hardship
discharge.

34
4.2. Personal bankruptcy law in Europe26
4.2.1 Personal bankruptcy law in Denmark
In 1984, the Danish bankruptcy legislation was changed to include consumer
debt adjustments. During its drafting works for this bill, the preparatory committee
compared the probability of repayment of hopeless debts and the collection efforts of
the creditors. In conclusion, the discharge of such debts would not cause any party a
significant loss but could also benefit society in different ways.
One of such amendment’s crucial missions was to set forth the conditions
precedent for debt adjustment to spot those hopeless debts for discharge, including
the clarification of debtor’s insolvency and overall circumstances as follows:
- The debtor has total debts of 40,000 USD approximately in case of
employed or 15,000 USD approximately in case of unemployed (or
retired, as the case may be).
- The debtor’s overall circumstances are principally subject to the court’s
discretion. The court shall examine the origin, age and payment history of
the debt, the circumstances of the debtor incurring the debt, the likelihood
of the debtor incurring new debts or inheriting money shortly.
Procedurally, the debtor shall file its application to the court, who will pursue
the said conditions precedent to decide if such application is admissible. In the case
of admissibility, the application will be administered by a private attorney taking the
role of the trustee. The trustee shall investigate the circumstances of the debtor in
detail and shall participate in the preparation of the plan.
The debtor shall propose a payment plan, which is usually five years. The
creditors are heard, but their opinions are not binding on the court. The court
discharges any debt or part thereof that is not included in the plan. The debtor shall
pay the debt using part of its income that exceeds the necessary living costs, which
generally take the same line as the national minimum social security. However, a
straight discharge may be possible if the debtor is unemployed or retired.
4.2.2 Personal bankruptcy law in France
26
Johanna Niemi-Kiesilainen, 1999. Consumer Bankruptcy in Comparison: Do We Cure A Market Failure
or A Social Problem?

35
Under the French Law on individual and household overindebtedness
prevention and regulation, which was adopted in 1989, the debtor could file its
rescheduling application with an administrative commission, comprising of Bank of
France, local banks, consumer groups and local governments representatives. After
receiving the filing, this commission will then facilitate negotiations and establish a
plan for the parties’ acceptance. If such a plan is not accepted, the debtor might go to
court, to which the commission will propose a plan accordingly.
Though there was an exceptional case, the court principally shall not discharge
the debt under the 1989 Law. In particular, the court is authorised to grant a time
extension, adjust the interest rate and order payments to be credited to the capital
before interest. Nevertheless, the court’s authority is limited not to reduce the debt’s
capital. The debt payment may be rescheduled up to one and a half times or for a
maximum of five years from the original repayment period.
These provisions, however, are insufficient to help debtors with very little or no
debt payment capacity. The commissions and courts had to grant the following grace
periods to the hopeless debtors. Consequently, the law was amended in 1998 to allow
for a discharge to be granted for debtors with no payment capacity after a three-year
grace period.
4.2.3 Personal bankruptcy law in Finland
Under the Finnish legislation, the insolvent debtors shall prove for a reasonable
rationale for their overindebtedness. Such rationale may include unemployment,
illness or layoff. The filings which contravene the moral imperative for paying debts
are mostly rejected. In early 1997, the law was even reformed to rule out provisionally
unemployed debtors.
The debtor shall present a voluntary payment plan for the creditors before
submitting his application to the court. If the parties cannot reach the agreement on
such a plan, the court will then step in and appoint a trustee to draft a new repayment
plan. Same as Danish legislation, the creditors are heard, but the Court is not bound
by the acceptation of the plan by the creditors. The maximum duration is five years
or more if the debtor is permitted to keep a private house and repay the mortgage debt
during the plan. Payments of mortgage debt can be extended to more than five years,
and the interest rate can be adjusted.
4.2.4 Personal bankruptcy law in Norway

36
Though access to debt adjustment is regulated broadly under Norwegian
legislation, there are principles similar to those under Finnish legislation that an
adjustment cannot be accepted when it contravenes the general moral duty to pay
one's debts.
In Norway, the bankruptcy filings were handled initially not by the court, but
by the enforcement official who at first instance compiled the debtor information.
The enforcement official shall forward the filing to the court, who then order a three-
month stay of proceedings against the debtor.
During the stay, the debtor will submit a plan. The enforcement official will
meet the creditors and confirm the plan if none of them objects. Because creditors
typically object to the enforcement official's arranged plan, a judge who could
confirm a plan despite the creditors' objections had to be heard in most cases. The
plan is five years but can be prolonged by the court.
Because housing loans are a favourite reason for overindebtedness, mortgages
are included in the Norwegian debt adjustment law as same as the Finnish legislation.
Most debtors, in particular, can retain their homes in adjustment procedures. The
debtors shall only sell their home if the house exceeds the debtor’s reasonable needs
and such sale is in the best interest of the creditors. The debtor shall nevertheless pay
the secured debt up to the total house value plus ten per cent, provided that only
interest will be paid during the debt adjustment plan. Payment of the secured debt
principal will begin after the plan expires.
4.2.5 Personal bankruptcy law in Austria
According to Austrian legislation, the adjustment proceeding will initiate with
the negotiation between the debtor and the creditors. The court determines the special
conditions for the adjustment after the debtor has negotiated with the creditors twice.
The plan is seven years long and equates to wage garnishment.
The debtor is subject to the supervision of the trustee and creditors concerning
its employment, domicile, and other situations. The trustee is responsible for the
administration of the payments.
Afterwards, the debtor may seek discharge where (1) 50% of the total debt has
been paid after three years; (2) 10% of the total debt has been paid after seven years;
or (3) after ten years due to special hardships.

37
4.2.6 Sweden
Under Sweden legislation, a discharge shall only be granted in tough situations.
The minimum requirement for insolvency is usually at least 25,000 USD
approximately in total debts.
The court shall take into account the overall debt picture, including debts’ age,
debtor’s age, revenue and how debts have been incurred, upon receipt of the
application. Consequently, the admissibility of a case is heavily subject to the court’s
discretion. For example, a case will be dismissed if the debts thereof are recent and
belong to a young and unemployed debtor, who had not tried to reach with the
creditors to a voluntary payment plan and sold its property in order to pay debts.
The procedure is composed of debt counselling, application filing, plan
negotiations supervised by the debt enforcement official, and the court hearing. The
debt counselling is not obligatory, but before filing the debtor must provide its
creditors with a voluntary payment plan. The application is filed with the enforcement
official, who assists the debtor in preparing the plan, submits the same for creditors’
consideration and, if unchallenged, confirms it. The decision of the enforcement
official can be presented to the court by either the debtor or the creditors.
4.2.7 Personal bankruptcy law in Germany
The German legislation has a two-track procedure with different conditions of
discharge for each track.
One track for the adjustment of small debtors designed for consumers and
people in a small business. The primary duty of the debtor is to negotiate during the
proceedings with its creditors. If a majority of creditors accept the plan, the court will
confirm the plan.
The other track is to serve as a mean to end bankruptcy proceedings. These
procedures give the right to initiate a payment plan, so the creditors do not have to
accept the plan in the first place. The payment plan shall last for seven years without
exception, under which the payment obligation shall only allow the debtor to live in
an essential condition. The debtor is subject not only to the supervision of the trustee
and creditors in respect of its debt repayment, but also its job finding obligation. In
the last three years of the plan, payment obligations can be reduced.
The previous two-track procedure, however, was criticised for being too harsh

38
for the debtors as it leaves the debtors at the mercy of creditors. For instance, since
the debtor may file for the second track if the creditors do not accept its first proposal,
the creditors are unlikely to accept a more lenient plan than what the second track
procedure would offer.
4.3. Personal bankruptcy law in Asia
4.3.1 Japan
Following numerous enactments and changes, there are now two kinds of
personal bankruptcy proceedings under Japanese legislation27
. First, a straight
bankruptcy procedure that enables the debtor to be discharged; second, a particular
civil rehabilitation procedure for individual debtors.
4.3.1.1. Bankruptcy proceedings
Except in certain instances, the court shall grant discharge to a debtor. Reasons
for denial of discharge include wrongdoing by a debtor in relation to insolvency, such
as hiding assets or making false statements that claim creditworthiness when
borrowing money and debtor’s refusal to the testimony or cooperation with the trustee
or court. The discharge is also denied when, within certain periods, which is currently
seven years, the debtor has been granted a discharge in a previous bankruptcy or
rehabilitation case.
The law provides that exemptions shall include the debtor’s household
furnishings, household goods, apparel, household appliances, cash of up to a certain
amount. Furthermore, the court may extend the scope of the exemption when
requested by the debtor or at its discretion. Temporary exemption extensions include
depositing bank accounts to a specific extent and owning a motor vehicle when a
debtor lives in an area not well established by the public transport system or where
the debtor operates a carrier business.
In practice, most debtors who meet the criteria to initiate bankruptcy
proceedings will never formally be liquidated, because it seems to creditors that the
estate does not contain non - exempt assets28
. In these cases, instead of appointing a
27
Junichi Matsushita, 2006. Comprehensive Reform of Japanese Personal Insolvency Law
28
Junichi Matsushita, 2007. Japan’s Personal Insolvency Law. Texas International Law Journal, Vol. 42,
765-771

39
trustee, the bankruptcy proceeding will start and end at the same time.
4.3.1.2. Civil Rehabilitation proceedings for individual debtors
These special procedures are, in principle, the procedures for regularly waged
debtors owing less than a certain amount of debt for the repayment plan of three years.
The court may appoint a "Rehabilitation Officer for Individuals" (Kojin Saisei
Iin), whose role is to examine the assets and income of a debtor to assist the court to
review the legitimacy or number of claims made by creditors (that may be objected
by the debtor or other creditors), and to advise the debtor in drafting the relevant plan.
The court can grant a discharge to the debtor if the debtor has paid more than
75% of its debts under a plan and it becomes difficult for the debtor to continue paying
according to the same plan. Nevertheless, this provision is merely applicable where
the amount received by each creditor involved in the proceeding is not lower than
that receivable if the assets of the debtor were liquidated in a bankruptcy proceeding.
4.3.2 Korea
The number of Korean credit defaults has increased steadily since 1997,
reaching 3,700,000 in late 2003, representing around 8.4% of the Korean population.
29
. The government launched several support programs, but the number of credit
defaults slowly decreased. It was then determined that, in order to successfully
recuperate the credit defaults, debt reductions must be more comprehensive, personal
bankruptcy mechanisms must be used in a simple manner and incentives must be
provided to encourage debtors to proceed their repayment plans.
The Korean personal bankruptcy legislation also includes Bankruptcy
Proceeding and Individual Debtor Rehabilitation Proceedings.
4.3.2.1. Bankruptcy Proceeding
The Bankruptcy Act governs bankruptcy proceedings for both individuals and
companies. A bankruptcy estate shall be established upon the adjudication of
bankruptcy by the court. All properties of the debtor and the rights to handle and
dispose of such properties are exclusively vested in the bankruptcy trustee, which
shall be subject to the court’s supervision. Upon liquidated, the debtor may be granted
29
Soogeun Oh, 2006. Personal Bankruptcy in Korea: Challenges and Responses.

40
a discharge unless crimes of bankruptcy or loans fraud have been committed, a false
list of creditors has been presented, or the debtor was discharged within ten years.
Although the Korean Bankruptcy Act was in force since 1962, debt relief in a
personal bankruptcy proceeding was not rendered until 2001. The court has even
struggled with negatives about discharge for years after this first discharge decision.
Sometimes partial debt discharge was issued in cases when judges relucted to grant
full discharge; however, there was no statutory ground for partial discharge, and it
lacked transparency. Nowadays, since Korean judges became more familiar with
discharge and with the bankruptcy procedure, the discharge tended to be more
generous.
4.3.2.2. Individual Debtor Rehabilitation Proceedings
In March 2004, the National Assembly passed the Individual Debtor
Rehabilitation Act in response to the political concern.
The Individual Rehabilitation Proceeding may be utilised by wage earners or
the self-employed who petition for bankruptcy due to a shortfall of a certain amount
of debts. A Rehabilitation Administrator, who is appointed by the court, shall review
the presented documents, including the repayment plan, investigate the debtor's
property and revenues, seek an order for exercising avoidance rights and participate
in such avoidance procedure, chair the creditors’ meeting and disburse the debtor's
money with the creditors in accordance with the repayment plan. The court may order
revisions to the payment plan, and before confirmation by the court, the debtor may
revise the payment plan.
In September 2004, when the Individual Rehabilitation Proceeding was initially
implemented, robust criticism was caused by the rigidity of the eight-year repayment
plan, and many debtors discouraged the application. It was then rectified that, if the
debtor is deemed unable to repay the debts within five years, the repayment period
shall be five years and any debt not repayable by the debtor shall be discharged.

41
CHAPTER 5. KEY PROVISIONS OF PERSONAL BANKRUPTCY
LAWS
5.1. Discharge
Under the business bankruptcy, the debtor shall, subject to its financial
conditions and recovery capacity, be determined to be dissolved or allowed to
reorganise. However, a natural person cannot merely be “dissolved” by a court
judgement.
Save for being dismissed, the final target of a personal bankruptcy case is the
discharge, whether such case has been handled under Chapter 7 or Chapter 13 under
US bankruptcy law, or even the Europe and Asian legislations. In other words,
discharge can be seen as a fuse between legal consequences of the dissolvent and
reorganisation of business bankruptcy, which can put the full stop for the crediting
relationship between the creditors and the debtor in a legal manner. There might be
the differences in prerequisites, mechanisms and procedures of personal bankruptcy
across the chapters and legislation, but generally, at the end of the day, an honest but
unfortunate debtor shall be granted a discharge, upon which to be released from the
liability to repay his/her debts.
Theoretically, discharge eliminates the debtor’s liability in all of its debt, for
either secured or unsecured, unless excluded by laws or reaffirmed by the debtor.
This principle can be easily demonstrated in the case of secured debt, where the
bankruptcy discharge eliminates debts, but it does not eliminate liens. The lien stays
on the property until the debt gets paid. If the debtor has a secured debt, bankruptcy
can merely eliminate the obligation to pay the debt, but it will not take the lien off the
property—the creditor will still be able to recover the collateral. For example, if the
debtor files for Chapter 7 bankruptcy, it can wipe out a home mortgage; however, the
lender’s lien will remain on the home. As long as the mortgage remains unpaid, the
lender can foreclose on the home. However, in return, if certain conditions are
satisfied (for instance, the debt isn’t fully secured by the collateral, and the property
is worth less than what’s owed), this principle allows the debtor to strip off a wholly
unsecured junior lien or cram down a secured debt (reduce the loan to match the
property value).
Discharge also persuades the creditors, especially the financial companies, who
usually have a higher position in the crediting relationship, to come down and
negotiate with the debtor for an alternative to bankruptcy. Consequently, an

42
overindebted person may seek other alternatives to personal bankruptcy such as debt
consolidation, debt settlement, credit counselling or consumer proposal. Creditors
will accept a deal offered through these alternatives because they would instead
receive some amount of money from debtor as opposed to less in a bankruptcy.
Typically, when someone uses these alternatives, they are not too far away from
having to declaring bankruptcy. Their creditors are looking for the best recovery for
themselves; as a result, reaching an agreement under such alternatives is a win-win
for both the debtor and their creditors.
5.2. Mechanism of debt liquidation
In principle, there are two common mechanisms of debt liquidation for the
debtor to obtain the discharge:
- Liquidating the currently-owned assets to pay the “obliged debt” and
protecting the future income from garnishment; or
- Protecting the currently-owned assets from liquidation and use the future
income to pay “obliged debt”.
The “obliged debt” means the dischargeable debts after deducting exemption
under the applicable legislation, for which the debtor shall remain liable to pay in the
personal bankruptcy case as a condition precedent to discharge.
The ordinary dischargeable debts are credit card charges, medical bills, personal
loans, utility bills (past due amounts only), student loans (only in the rare
circumstance that can be proved undue hardship), auto accident claims (except those
involving drunk driving), business debts, money owed under lease agreements and
civil court judgments (unless based on fraud).
On another hand, exemptions allow the debtor to keep a certain amount of assets
safe in bankruptcy, such as an inexpensive car, professional tools, clothing,
retirement account or alike. The definition of exemptible properties and limit of
exemption vary under the different personal bankruptcy legislation, even across the
states of the US. Many exemptions protect specific types of property, such as a motor
vehicle or furniture, up to a particular dollar amount. Sometimes an exemption
protects the entire value of the asset. Some exemptions, called "wildcard
exemptions," can be applied towards any property the debtor owns.
The role of exemptions varies according to if the debtor is submitting
bankruptcies in Chapter 7 or Chapter 13.

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