Will you tolerate "deadbeats"?, Bankruptcy means you don't have to pay off your debts. Legal observation | Personal bankruptcy first case execution completed | Personal | Lai Lai

Release time:Apr 13, 2024 23:18 PM

On the morning of June 20th, the Shenzhen Bankruptcy Court of the Shenzhen Intermediate People's Court delivered a civil ruling to Mr. Liang, the debtor of the first personal bankruptcy case in China, exempting him from outstanding debts in accordance with the law. This means that the iconic event of China's bankruptcy system - the first individual bankruptcy reorganization case in the country - has been officially executed. By applying for personal bankruptcy and paying off debts according to the restructuring plan in accordance with the law, Mr. Liang truly achieved personal economic rebirth.

Several legal professionals have stated that the completion of the "first case" has provided valuable practical experience for the personal bankruptcy system in China, "which is of positive significance for improving the national governance system and enhancing governance capabilities, and perfecting the socialist market economy system." Li Ming, a representative of the Municipal People's Congress and partner of Siwei Lema Law Firm, said.

For most people, personal bankruptcy is a new term. Some netizens are concerned that this system may cause damage to the legitimate interests of creditors, or may allow "deadbeats" to maliciously evade debt.

So what kind of system is personal bankruptcy? How to avoid "deadbeats" exploiting loopholes? Jiefang Daily's Shangguan News reporter interviewed multiple legal professionals on this matter.

"Honesty" and "unfortunate" are the key words for filing for bankruptcy.

The news that the first personal bankruptcy reorganization case in the country has been completed has attracted widespread attention from society and public opinion. Although many people often talk about being poor enough to go bankrupt, they are still not very familiar with the legal implications and consequences of personal bankruptcy.

According to multiple legal professionals, the personal bankruptcy system refers to a legal system in which a natural person is declared bankrupt through legal procedures when they are unable to repay their due debts, and their assets are fairly distributed to creditors. For unpaid debts, the individual is exempted from continuing to pay off their debts.

Simply put, personal bankruptcy refers to the situation where the debtor is unable to repay the debt on time and cannot reconcile with the creditor. Through legal procedures, a natural person is declared bankrupt, and their remaining assets are fairly distributed to the creditors. For unpaid debts, the natural person is exempted from continuing to repay the debt.

This system originated in the ancient Roman period. Currently, many countries and regions around the world, including Hong Kong and Taiwan, have corresponding personal bankruptcy laws.

The first personal bankruptcy regulation in China, the Shenzhen Special Economic Zone Personal Bankruptcy Regulations, came into effect on March 1, 2021. This is the first appearance of the "personal bankruptcy system" in China. In the view of legal professionals, the introduction of this regulation fills the institutional gap for natural persons to remedy and withdraw as market entities, and further improves the mechanism for market entity withdrawal.

Legal professionals believe that "relief" is the most essential meaning and attribute of the personal bankruptcy system, and "honesty" and "misfortune" are the two key words for applying for bankruptcy. In a sense, the personal bankruptcy system provides an expected and reliable guarantee for honest and unfortunate debtors. "Only honest and trustworthy debtors can receive personal bankruptcy protection and help them escape from debt crises, participate in social and economic activities again, and create more wealth when unfortunately falling into a debt crisis," said Li Ming.

In July 2021, the Shenzhen court ruled on the first personal bankruptcy reorganization case in the country, which was the Mr. Liang case mentioned earlier. Mr. Liang started his business in 2018. Affected by the COVID-19 in 2020, his assets are not enough to pay off the debts owed by his business. After accepting Mr. Liang's personal bankruptcy application, the Shenzhen Intermediate People's Court proceeded with bankruptcy reorganization. According to the restructuring plan, Mr. Liang will retain his daily necessities and basic living expenses within 3 years, while all other income will be used to repay debts. Now, the restructuring plan has been completed, and Mr. Liang's debt principal has been fully repaid, with nearly 300000 yuan of interest and liquidated damages exempted from repayment.

Who is the personal bankruptcy system protecting?

In a market economy, it is inevitable that there will be failures due to investment mistakes, poor management, and the inability to repay huge debts. The parties involved have no malicious intention of evading debts, nor have they squandered, transferred, or concealed borrowed financial resources. In this situation, even if the creditors win the lawsuit, there is almost no property to enforce, and different creditors also face the problem of how to distribute the remaining property.

Legal professionals point out that in reality, there are a large number of individuals who have essentially "gone bankrupt" and become executors who cannot be effectively enforced. If we mechanically demand repayment of all debts, firstly, it is objectively impossible to do so, and secondly, it violates basic principles of humanity. This situation is a burden for creditors, debtors, and even enforcement judges. Therefore, we need to establish a personal bankruptcy system to provide an exit mechanism for "honest but unfortunate" market entities.

"The personal bankruptcy system is actually a bankruptcy protection system, which not only protects creditors but also debtors." Liu Zhengdong, a representative of the Municipal People's Congress and partner of the Shanghai branch of Junhe Law Firm, said that from the perspective of creditors, his creditor's rights cannot be realized for a long time, and from the perspective of debtors, this situation is also difficult to solve, and both sides have fallen into a dead end. After the establishment of a personal bankruptcy system, allowing individuals to go bankrupt under specific circumstances provides both creditors and debtors with predictable "ways out".

The Enterprise Bankruptcy Law promulgated in 2006 is also known as the "Half Bankruptcy Law" because it does not involve personal bankruptcy, and the Shenzhen Special Economic Zone Personal Bankruptcy Regulations have filled this gap. Liu Zhengdong and Li Ming both believe that there is an urgent need for personal bankruptcy law in society, and corporate bankruptcy law is difficult to meet the complex needs of society. The pilot experience and significant results of Shenzhen fully demonstrate that the Personal Bankruptcy Law can find a balance between protecting "honest and unfortunate" debtors and preventing malicious evaders. The introduction of the Personal Bankruptcy Law will also greatly improve the situation of "difficult enforcement" in courts.

"After establishing a personal bankruptcy system, honest and unfortunate individuals can be relieved of their debts and achieve rebirth through personal bankruptcy in accordance with the law. If there is no personal bankruptcy system to provide them with legal means to solve debt crises, it is also difficult to give people a chance to start over in the legal system." Liu Guixiang, a deputy ministerial level full-time member of the Judicial Committee of the Supreme People's Court, said in a media interview that the introduction of the "Shenzhen Special Economic Zone Personal Bankruptcy Regulations" reflects that the personal bankruptcy system not only prevents borrowing bankruptcy to evade debts, fully protects creditor rights, but also guarantees the legitimate rights and interests of debtors and families, tolerates failure, encourages entrepreneurship, and protects entrepreneurial spirit.

Being ruled "bankrupt" means you don't have to pay off your debts?

It should be noted that the exemption of personal bankruptcy system from debt is not absolute and unconditional, let alone simple debt repayment.

According to the Shenzhen Special Economic Zone Personal Bankruptcy Regulations, there are three types of personal bankruptcy procedures, namely bankruptcy liquidation, reorganization, and settlement procedures. Legal professionals explain that personal bankruptcy liquidation involves taking out all assets except for the exempted assets necessary for daily life to pay off debts. Afterwards, there is a supervision and inspection period of 3-5 years. During the inspection period, the debtor's life is greatly restricted and they cannot have high consumption income. In addition to meeting their daily needs, which is the lowest level of living, all other income must be returned to the debtor. Only through the inspection period can the debtor obtain exemption.

Personal bankruptcy reorganization refers to the agreement reached between the debtor and creditors to develop a repayment plan for the owed money, without the need to repay exempted debts beyond the plan. This requires negotiation between both parties to develop a repayment plan. The Mr. Liang case belongs to a reorganization case. If the principal is repaid within a certain period of time and the parties repay the principal in advance, the reorganization plan is executed, and the remaining debt interest and liquidated damages do not need to be repaid, and there is no investigation period.

"If a personal bankruptcy liquidation is carried out, it means that all assets, except for daily necessities, must be used to repay debts. During the three-year to five-year inspection period, all other income must also be used to repay debts. After the inspection period, the unpaid debt can be exempted. If a personal bankruptcy reorganization procedure is carried out, there are no restrictions on the debtor's life. During this process, the debtor is allowed to operate and invest, and the money is used under supervision to execute the reorganization plan. However, the previously agreed money to be repaid must be repaid on time. After repayment, other debts can be exempted, which is limited debt repayment," Liu Zhengdong said.

From this, it can be seen that the personal bankruptcy system is also beneficial for protecting the rights and interests of creditors. "Taking Mr. Liang's case as an example, according to the restructuring plan passed by the creditors' vote, he only needs to repay the principal, eliminating the accumulated interest and late fees. If not, the debtor's disposable income may not even be able to pay interest and late fees, the debt will continue to snowball, and the debtor will be crushed. At the same time, this debt may also become a bad debt for the creditors." Liu Zhengdong said.

Of course, not all debts can be exempted, and compensation and alimony debts with personal attributes cannot be exempted. Meanwhile, even if other debts need to be waived, certain conditions need to be met. For example, in the liquidation procedure, in addition to retaining the property necessary for maintaining daily life and other specific assets, the debtor should use all other property and income to repay the debt, and also go through a three-year to five-year exemption period. If there is no violation of regulations, and it is recognized by the court's ruling, the debtor can be exempted from paying the remaining debt.

Will it become a breeding ground for "deadbeats" to evade debt?

From the perspective of public opinion, the biggest concern of the public regarding the personal bankruptcy system is that it may become a breeding ground for "deadbeats" to evade debt. "This requires the supporting norms and management of the system to be fully implemented," Li Ming said.

How to avoid situations where "deadbeats" maliciously collect debts? "The purpose of personal bankruptcy is to free 'honest and unfortunate' debtors from the heavy burden of debt. For those who attempt to use the bankruptcy system to evade debt, they should be blocked out through institutional mechanisms, and even held accountable and punished." Li Ming believes that special measures to prevent debt evasion should be taken simultaneously in the design of the system. For example, requiring debtors to declare their family property together; Stipulate the obligation of special parties of the debtor to assist in identifying the debtor's property; Strict legal conditions for debt exemption, and provisions for the legal consequences of discovering debt evasion or abandonment during the inspection period; Clarify the information disclosure system and accept supervision from creditors and society.

In fact, in addition to the promulgation of the Shenzhen Special Economic Zone Personal Bankruptcy Regulations, Shenzhen has also formulated a series of supporting systems, including the bankruptcy administrator system and the disclosure of personal bankruptcy information. "This is a complete set of combination punches to ensure the smooth completion of individual bankruptcy reorganization procedures." Liu Zhengdong gave an example, for example, the disclosure of personal bankruptcy information can check how many creditors and assets the individual bankruptcy applicant has, and accept social supervision. "If this supervision mechanism is strictly implemented, it will not condone the scoundrels."

Legal professionals say that the personal bankruptcy system remedies "honest and unfortunate debtors", and whether the debtor has made every effort to repay the debt is an important criterion for judging whether the debtor is "honest". Even if entering bankruptcy proceedings, making every effort to repay debts remains a crucial requirement for the debtor. Attempting to default through bankruptcy is neither allowed by the system, nor can it be verified through procedures, nor can it obtain bankruptcy remedies.

Whether it is the original intention of legislation or practical operation, the personal bankruptcy system is not about letting the debtor maliciously evade debt, nor is it about letting the debtor let go. The Shenzhen Special Economic Zone Personal Bankruptcy Regulations tighten the fence to prevent false bankruptcy and real debt evasion. For example, clarifying that "compensation claims based on employment relationships" are "debts that cannot be exempted" to prevent bosses from taking the opportunity to deny employee salaries; Hiding, transferring, or improperly disposing of property and property rights in order to evade debt is invalid, and the people's court may admonish, detain, fine, detain, and even pursue criminal responsibility.

"The pilot experience and significant results in Shenzhen fully demonstrate that the personal bankruptcy law can find a balance between protecting 'honest and unfortunate' debtors and preventing malicious debt evaders." Li Ming said.

How to improve and promote the personal bankruptcy system?

In the eyes of legal professionals, establishing a personal bankruptcy system that is in line with China's national conditions is not a temporary achievement, and the initial exploration is particularly difficult. In the long run, it is necessary to establish a Personal Bankruptcy Law or a Bankruptcy Law that regulates both corporate and personal bankruptcies.

Based on current practical experience, there are still some shortcomings in the personal bankruptcy system that need to be addressed. For example, due to the lack of personal financial systems, the property and debt situation organized by debtors are mostly chaotic, and there is currently no pre bankruptcy counseling system established, resulting in slow progress in the court's review of application materials and handling of personal bankruptcy cases.

For example, the settlement procedure is a better way to clear the debtor's debts. The Shenzhen Special Economic Zone Personal Bankruptcy Regulations also specifically stipulate the settlement procedure, which not only includes provisions for in court settlement, but also reserves an interface for out of court settlement and in court confirmation. The pre settlement procedure is conducive to the handling of personal bankruptcy cases and is an important part of the construction of supporting mechanisms for personal bankruptcy. But currently, the settlement system is not yet perfect, and out of court settlement work has not been carried out.

"From the perspective of effectiveness, Shenzhen has taken the lead in testing the personal bankruptcy system, which has played a positive role in attracting investment and the business environment," Liu Zhengdong said.

As representatives of the Municipal People's Congress, Li Ming and Liu Zhengdong have previously submitted relevant proposals and suggestions, suggesting that Shanghai learn from the experience of Shenzhen, explore local legislation, and fill the gap in the personal bankruptcy protection system. "We can take the lead in setting up a basic framework for local legislation on personal bankruptcy in Pudong New Area, improve it while practicing, and summarize experience before promoting it to the whole city. This has a positive effect on optimizing the business environment and promoting market vitality," said Li Ming.

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