Wednesday, February 18, 2009

U.S. No Longer "Most Liberal" Consumer Bankruptcy System?

By Jason Kilborn (Credit Slips):

Unlike Bob, I am not a statistics wizard, but like him, I like to follow consumer bankruptcy filing trends. Since 2005, I've been following these trends with an eye toward deciding where the U.S. stands among the "most liberal" consumer debt relief systems. Before the 1990s, only a handful of countries offered consumers any formal relief from debt, but since then, and especially in the past few years, consumers have flocked to a series of new and increasingly forgiving systems, especially in Europe.

Take, for example, France. The just-released 2008 filing figures for the French system of "consumer overindebtedness" (surendettement des particuliers) show that France passed an important landmark last year. In February 2004, the administrative commissions in charge of delivering relief to overburdened consumers in France started referring the most hopeless cases to a new track that is functionally equivalent to a U.S. Chapter 7--theoretical (but not practical) liquidation of valuable assets followed by immediate discharge. This new "procedure for personal re-establishment" (proc├ędure de r├ętablissement personnel) got off to a slow start, with only about 11% of all fully administered cases in 2004 diverted to this more aggressive form of relief, but by 2008, that figure had almost doubled, surpassing the 20% mark for the first time (21% of the nearly 160,000 fully administered cases were diverted to the PRP last year).

Particularly disturbing for those who continue to insist that private ordering is the better approach, the percent of cases concluding with a consensual, creditor-accepted workout fell to 55% this past year, down from about 65% in 2006 and earlier years. Creditors, it seems, are increasingly happy to wait and see what the formal, coercive system brings, rather than agreeing to write down obviously uncollectible debts. This pattern has repeated itself in every major consumer debt relief system I've observed, and Nick Huls and Nadja Jungmann, in particular, have written some great stuff attempting to explain this phenomenon in the Netherlands (sorry--I couldn't find any internet examples for a link).

The ostensibly more rigorous European systems are offering relief to lots of people in exchange for no payment: about 80% of some 100,000 consumer insolvency cases in Germany, and about a third of some 2500 cases annually in Sweden, for example. With the corresponding figure rising in France annually, and especially in light of the headaches that the BAPCPA have caused in the U.S., it is no longer altogether clear that the U.S. offers the "most liberal" consumer debt relief today. More debts are nondischargeable in the U.S., and the budgets that the IRS guidelines allow are in many cases less "livable" than those offered by similar guidelines in Europe. This is a developing story, but we in the U.S. can no longer comfort ourselves after the latest round of backpeddling consumer bankruptcy reforms by saying "at least it's still easier to get relief here--look at those poor schmoes in Europe!"

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