Home
Calendar
Workshop on Bankruptcy
May 17–19, 2001
St. Louis, Missouri
Iain Ramsay, Professor of Law
Osgoode Hall Law School, York University
Toronto, Canada
There has traditionally been a sharp divide between continental European systems and the United States in their approach to personal bankruptcy. The US had a relatively open access to bankruptcy and the fresh start. In contrast, until recently, discharge of debts by consumers was not possible in many European countries. However, during the past decade or so many European states have adopted special consumer bankruptcy laws for the first time (see Nick Huls, Overindebtedness of Consumers in the EC member States: Facts and Search for Solutions (Kluwer, 1994)). At the same time the US is poised to modify open access to the fresh start. Countries elsewhere in the world are also considering the introduction of consumer bankruptcy law and are interested in determining which model of bankruptcy or debt adjustment is most appropriate for transplantation. In order to address these issues it is necessary to understand the empirical reality of consumer bankruptcy systems, their role within the credit granting system and other social safety nets. Consumer bankruptcy and debt adjustment is therefore a fascinating topic for comparative socio-legal analysis.
There have been two Journal issues devoted to comparative consumer bankruptcy, with participation by scholars from around the world: Journal of Consumer Policy (available electronically), vol. 20, No. 2 (pp. 133-287)(1997); and Osgoode Hall L. J., Vol. 37, Nos. 1 & 2 (pp. 1-511)(1999)(available on WestLaw foreign legal periodicals). At the joint meetings of the Law & Society Association and the Research Committee on Sociology of Law, to be held in Budapest on July 4-7, 2001, there will be five panels devoted to comparative consumer bankruptcy and debt adjustment as well as a meeting of the collaborative research network on this topic which is co-chaired by Bill Whitford of Wisconsin Law School, Johanna Niemi-Kiesiläinen of Helsinki University and myself.
Johanna Niemi- Kiesiläinen has drawn attention to three central differences between the Continental European approaches to consumer bankruptcy and the US (See Niemi-Kiesilainen, Consumer Bankruptcy in Comparison: Do We Cure a Market Failure or a Social Problem? 37 Osgoode Hall L. J.. 473 at 475 (1999)). First, there is not open access to bankruptcy in Continental Europe and moral judgments on the debtor's conduct may determine her access to bankruptcy. Second, discharge is conditional on a mandatory payment plan and there is no straight discharge similar to Chapter 7. Third, the European model places a significant emphasis on debt counseling services. Given these differences she argues that the European model should be described as a debt adjustment model rather than a bankruptcy model.
These differences suggest several specific topics which merit further comparative research. These include: (1) The role and impact of counselling and the different ideologies and practices associated with counselling (2) The function of repayment programmes as an alternative to straight bankruptcy. (Who administers them, who use them, how many debtors complete, to what extent do they achieve rehabilitative goals?) (3) The role of professional intermediaries (lawyers, debt counsellors, accountants) in advising debtors and channelling them into different solutions to debt problems. A more general line of inquiry is the relationship of consumer bankruptcy to other social safety nets. For example, the United States has a very limited social safety net and bankruptcy may function as a substitute for the more comprehensive public safety nets found in Continental Europe.
Comparative consumer bankruptcy and approaches to comparative law
It should be stated at the outset that since it is difficult to fully understand the working of a technically complex but socially significant area of law in one country, comparative analysis is fraught with danger. Several approaches might be adopted in comparative analysis of consumer bankruptcy. Functionalism has been a dominant approach in comparative law where the research question is --what foreign legal institution plays a similar role to the particular national institution under study? Thus we might look for different institutions which respond to the problem of overindebtedness or which might prevent problems of overindebtedness arising (see e.g. discussion in T. Sullivan, E. Warren and J. Westbrook, The Fragile Middle Class (2000) at 256-261). There is sometimes an assumption in functionalist writing that as economies develop along apparently similar lines (e.g. with relatively high levels of consumer debt) that there will be a convergence of approach among legal systems towards addressing problems of a consumer credit economy. But this thesis does not seem to be borne out by the facts. England has not dissimilar credit and debt levels to Canada but a much lower bankruptcy rate. Why? Is it because of cost, functional alternatives, cultural attitudes?
Reference to cultural attitudes might invite a second approach, namely to view the law as an expression of culture which might include attitudes towards risk and repayment of debt. Thus it has been argued that the generous fresh start in the US represents ideas of the frontier and rebirth (See T. Sullivan, E. Warren and J. Westbrook, As We Forgive our Debtors at 341 (1989)). This may be true. But a cultural approach tends to downplay conflict over cultural norms. It also does not explain the political success of credit card companies in lobbying successfully for substantial change to this cultural institution.
A final approach is a modified political interest group approach, which attempts to understand whose interests a law affects and how it fits into relations of power within particular legal systems. In areas of technical law this would include the power of relevant professional groups and other insiders to shape the law. Adopting this approach, one might attempt in the consumer context to undertake a study similar to the study of corporate insolvency by Carruthers and Halliday where they traced the interplay of professional and organizational power in the development of US and UK insolvency law (see B. Carruthers and T.Halliday, Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States (1999)
Canada as a site for comparative analysis with the US consumer bankruptcy system
Canada is an interesting site for comparison with the US consumer bankruptcy system. It has a similar consumer credit economy, not dissimilar debt/income levels but a slightly more generous social safety net and a publicly financed health care system. The rate of personal bankruptcy in 1997 was 3 per 1000 persons compared to 5 per 1000 in the US. In contrast, England and Wales had a bankruptcy rate of 0.47 persons per 1000 in 1997. There have also been recent reforms in Canada (1997) which were premised partly on the assumption that it was "too easy" to declare personal bankruptcy and which were designed to pressure individuals with “surplus income" into repayment programmes rather than straight bankruptcy. A useful overview of potential areas for further Canada-US research may be found in J.S. Ziegel, The Philosophy and Design of Contemporary Consumer Bankruptcy Systems: A Canada-United States Comparison 37 Osgoode Hall L. J. 205 (1999) and see J. Westbrook, Comparative Empiricism 37 Osgoode Hall L.J. 143(1999).
I describe the current working of the Canadian consumer bankruptcy system in a recent article in the American Bankruptcy Law Journal which examines empirically the role of the Canadian bankruptcy trustee (see Iain Ramsay, Market Imperatives, Professional Discretion and the Role of Intermediaries in Consumer Bankruptcy: A Comparative Study of the Canadian Trustee in Bankruptcy 74 Amer. Bankr. L. J. 399 at 403-407) . There are two alternatives open to an overindebted consumer in Canada: a straight bankruptcy or a consumer proposal to repay all or a portion of her debts over a period not exceeding five years (the norm is three years). A straight bankruptcy is a relatively routinised procedure and will result in an automatic discharge after nine months. Bankrupts are required as a condition of discharge to undergo counseling. Since 1997 an individual bankrupt with surplus income (this calculation is based on low income cut-off levels provided by Statistics Canada) must make contributions to the estate during the nine-month period while an individual is an undischarged bankrupt. It is also possible for the trustee to extend these payments for a further 12 months through the use of an automatic conditional discharge procedure. Although the great majority of debtors do not have surplus income (16 percent with surplus income in 1999) most debtors will make payments to the estate to meet the trustee's "fee". It is possible for creditors, trustees and the superintendent of bankruptcy to object to discharge and the court may grant a conditional discharge requiring payment to the estate by the debtor over a period of time. I found that there was an objection to discharge in 14 percent of cases in the Toronto bankruptcy district ( probably lower in other districts) . Many of these objections are made by trustees because a debtor has not made income payments into the estate to pay the Afee@. This concept of a conditional discharge is, of course, unknown in US law.
One of the objectives of the 1997 reforms was to channel individuals with surplus income into a consumer proposal. Introduced in 1992, consumer proposals were not attractive to debtors since they excluded secured debt and offered consumers little benefit over a straight bankruptcy. By 1997 they accounted for only 5 percent of personal bankruptcy filings. The reforms changed this situation through two strategies. First, those debtors with significant surplus income might find it difficult to make payments over nine months or even twenty one months and would be pressured into making a proposal which would permit them to make lower payments over a longer period of time. Second, proposals were made much more financially attractive to trustees in bankruptcy. Proposals now constitute about 13% of consumer bankruptcy filings and certain trustees in bankruptcy now appear to specialise in offering consumer proposals with perhaps 25 -30 percent of their cases represented by consumer proposals. There are no reliable national data on failure rates of consumer proposals. My own unpublished exploratory study in the Toronto bankruptcy district indicated a failure rate of over 40 percent for proposals commenced in 1994, with many of these individuals subsequently declaring bankruptcy.
A central figure in Canadian consumer bankruptcy is the trustee in bankruptcy who administers the bankruptcy estate, is the representative of creditors, and also advisor and counselor to a debtor. Most trustees are accountants. There is no identifiable consumer bankruptcy bar and few individual bankrupts are represented by lawyers. Trustees advertise their services widely to debtors in the Yellow Pages and are the person to whom an individual contemplating bankruptcy will turn for information and advice. The trustee is clearly in potential conflicts of interest and in my study of trustees I conclude that the relationship of trustee to debtor is one of professional dominance by the trustee. However, notwithstanding the substantial formal differences between the role of the Canadian trustee and the US consumer bankruptcy lawyer, there were also substantial similarities between my findings on the relationship of trustees to debtors and US studies of the relationship of consumer bankruptcy lawyers to debtors (see e.g. J. Braucher, Lawyers and Consumer Bankruptcy: One Code, Many Cultures 67 Am. Bankr. L. J. 501 (1993) . I draw two conclusions from these findings. First, there is a need for further analysis of the role of intermediaries in bankruptcy and debt adjustment and the impact of their financial and ideological interests on consumer bankruptcy processing. This is of particular importance in an area of law where professionals are likely to dominate their clients. I am therefore commencing a comparative study of the role of professional intermediaries in insolvency and overindebtedness in Canada and England and their impact on client choices. I also wish to explore the role of these professionals in the shaping and implementation of insolvency and debt adjustment law. Second, the existing findings on the role of intermediaries raise the question whether the path for reform should be to reduce the role of intermediaries through greater standardisation and simplification of the bankruptcy process.