* Professor of Law, University of New Mexico School of Law. Thanks to Karen Gross, Frederick Hart, Christian Fritz, and Antoinette Sedillo-Lopez for their helpful comments on earlier drafts of this Article, as well as Michael Plante, Richard Moran, Jennifer Breakell, Benjamin Cross, Caitlin DiMotta, and Scott Jaworski, for their fine research assistance. I also thank the University of New Mexico School of Law for its financial support.
1 See Linz Audain, Critical Cultural Law and Economics, The Culture of Deindividualization, The Paradox of Blackness, 70 Ind. L. J. 709, 713–14 (1995) (discussing generally how culture informs law and economics and vice versa); Naomi Mezey, Law as Culture, 13 Yale J.L. & Human. 35, 37 (2001) (describing law as culture).
2 See generally European Credit Research Institute, Consumer Credit in the European Union 16–18, available at http://www.ecri.be/pubs/ECR1en.pdf (Feb. 2000) (last visited Oct. 22, 2004) (noting tremendous increases in credit card debt in Europe); Paul Mizen, Consumer Credit and Outstanding Debt in Europe 1, available at http://
www.nottingham.ac.uk/economics/ExCEM/issues/issues4.pdf (last visited Oct. 22, 2004) (exploring regional differences in the amount of outstanding debt in Europe); Jason Booth, KIS Investors Bet on South Korea’s Rising Debt, Wall St. J., May 30, 2002, at C14 (discussing the U.S. and South Korean levels of credit card debt and predicting a consumer-credit blowout in South Korea that could slow the entire economy); Ian Fletcher, Card Fraud Soars to �228M, Evening Standard, Oct. 16, 2002, at 15 (noting mounting credit card debt throughout the United Kingdom, Mexico, and Malaysia, as well as China, South Korea, and Thailand); Growth of Credit Cards in Emerging Markets Leading to Concern Over Mounting Consumer Debt and Card Fraud, M2 Presswire, October 15, 2002, at 2002 WL 26804947 (describing skyrocketing credit card debts in China, South Korea, Brazil, and Thailand).
3 See Rafeal Efrat, Global Trends in Personal Bankruptcy, 76 Am. Bankr. L.J. 81, 91–92 (2002).
4 See Julia M. Metzger & Samuel L. Bufford, Exporting United States Bankruptcy Law: The Hungarian Experience, 21 Cal. Bankr. J. 153, 153 (1993) (noting how other countries are looking to the United States for an example of a working bankruptcy system). Article 9 of the Uniform Commercial Code is also being examined by other countries. See Daniel E. Allen, Personal Property Security Interests in Australia, A Long, Long Trail A-Winding, 106 Dick. L. Rev. 145, 147 (2001) (discussing how New Zealand, Canada, Australia, and even England, are looking to Article 9 of the U.S. Uniform Commercial Code to solve a few nagging problems with personal property security systems in their own countries’ laws).
5 See infra notes 392–414 and accompanying text.
6 As one U.S. scholar recently noted:
[E]ach country gets the bankruptcy law it deserves. I think we deserve [C]hapter 11. Bankruptcy does not exist independent of the social system that exists in each nation. The United States has little in the way of government sponsored programs to compensate people for the dislocation caused by financial failure. So every financial problem, and that is not hyperbole, I think that’s almost true, every consequence of every financial problem is thrown into our bankruptcy system: environmental problems, mass tort problems, business failure problems, failure of companies properly to fund their retirement plans. Whatever the reason for financial failure, the only place we have to put it is bankruptcy.
Richard F. Broude et al., The Judge’s Role in Insolvency Proceedings: Views from the Bench: Views from the Bar, 10 Amer. Bankr. Inst. L. Rev. 511, 522 (2002) (comments of Richard Broude).
7 See Alan Reder, The Yoga of Money, Yoga J., Mar.-Apr. 2003, at 114 (discussing the importance of spending in the U.S. economy). Indeed, after September 11, 2001, President Bush’s frequent pleas to consumers to spend caused one author to call this the “shop-till-Osama-drops” plan for fighting terrorism. See id.; see also Mark Gongloff, When Will We Spend Again?, Money.Cnn.Com, at http://money.cnn.com/2001/10/26/economy/econ
omy_consumer/ (Oct. 26, 2001) (linking consumer spending to U.S. economic recovery).
8 See infra notes 153–201 and accompanying text.
9 See generally Broude et al., supra note 6; see also Karen Gross, Failure and Forgiveness: Rebalancing the Bankruptcy System 93–98 (1997) (describing the incredible emotional benefits of bankruptcy, which in turn benefit the economy as well as the person’s well-being).
10 See Edward J. Balleisen, Navigating Failure: Bankruptcy and Commercial Society in Antebellum America 28 (2001). In the United States, we do not draw large distinctions between our forgiving “rescue” culture for businesses on the one hand, and for individuals on the other. Philosophically, every person is a potential entrepreneur.
11 See, e.g., Letter from Tarrin Nimmanahaeminda, Minister of Finance, & M.R. Chatu Mongol Sonakul, Governor, Bank of Thailand, to Michel Camdessus, Managing Director, IMF (Aug. 25, 1998), available at http://www.imf.org/external/np/loi/082598.htm (last visited Oct. 22, 2004) (assenting to the IMF’s demand for a reorganization plan as a prerequisite to bail-out assistance for Thailand during the Asian banking crisis).
12 See Jeffrey Davis, Bankruptcy, Banking, Free Trade, and Canada’s Refusal to Modernize Its Business Rescue Laws, 26 Tex. Int’l L. J. 253, 253–54 (1991). The rationale is that providing for rescue opportunities creates additional benefits to society not available in a liquidation-only system, such as greater return for unsecured creditors, an ability for equity holders to retain an interest in a viable company, saving jobs, allowing suppliers to survive, and allowing customers to continue receiving goods and services that may be in short supply. See id. Liquidation, conversely, can cause a domino of failure, unnecessarily harming everyone with whom the debtor does business. See id.
13 See infra notes 268–308 and accompanying text.
14 See Jason J. Kilborn, The Innovative German Approach to Consumer Debt Relief: Revolutionary Changes in the German Law, and Surprising Lessons for the United States, 24 N.W. J. Int’l L. & Bus. 257, 257 (2003) [hereinafter German Approach]; Jason J. Kilborn, La Responsabilisation de l’Economie: What the U.S. Can Learn from the New French Law on Consumer Overindebtedness, 26 Mich. J. Int’l L. (forthcoming) [hereinafter French Law on Consumer Overindebtedness]; see also Efrat, supra note 3, at 91–92. Some countries, such as Italy and Greece, still have no personal bankruptcy system at all. See infra notes 241–267 and accompanying text.
15 See Rafael Efrat, The Rise and Fall of Entrepreneurs: An Empirical Study of Individual Bankruptcy Petitioners in Israel, 7 Stan. J.L. Bus. & Fin. 163, 165–66 (discussing the need for a forgiving bankruptcy system once credit has been deregulated).
16 See Nathalie Martin, Common-Law Bankruptcy Systems: Similarities and Differences, 11 Am. Bankr. Inst. L. Rev. 367, 403–10 (2003).
17 See infra notes 235–308 and 380–414 and accompanying text.
18 A country should not simply reproduce Chapter 11, with its emphasis on the enterprise, the shareholders, and the creditors, in societies that place more value on employees and government debt than on payments to private creditors. Nor can one expect a society that deeply values a person’s word, and his or her honor, to readily accept the personal bankruptcy discharge, even if doing so would fuel an economy based on consumer spending.
19 See infra notes 30–106 and accompanying text.
20 See infra notes 107–149 and accompanying text. This Section discusses empirical research regarding the types of debts that U.S. citizens have, as well as the circumstances many individual debtors face, when they file for bankruptcy. It briefly examines business or corporate debt culture in the United States as well, concluding that there is little stigma associated with business failure in the United States, given the premium U.S. citizens place on entrepreneurialism and risk taking.
21 See infra notes 150–160 and accompanying text.
22 See infra notes 209–228 and accompanying text. This Article does not do a true comparison of different systems, though a recent book describes many consumer systems around the world and compares some of these systems as well. See Consumer Bankruptcy in Global Perspective (Johanna Niemi-Kiesil�inen et al., eds., 2003).
23 See infra notes 209–228 and accompanying text.
24 See infra notes 511–513 and accompanying text.
25 See infra notes 514–523 and accompanying text.
26 See infra notes 514–523 and accompanying text.
27 See infra notes 514–523 and accompanying text.
28 One of the goals of this Section is to explain to foreign scholars who are studying the U.S. insolvency systems how the U.S. system came into being and how it fuels U.S. capitalism and entrepreneurialism.
29 See infra notes 107–201 and accompanying text.
30 See Richard C. Sauer, Bankruptcy Law and the Maturing of American Capitalism, 55 Ohio St. L.J. 291, 291–98 (1994).
31 See id. at 298.
32 See id.
33 This Article does not outline the history of U.S. bankruptcy laws, as this has been done well and extensively outlined by previous scholars. See Charles Jordan Tabb, The Historical Evolution of the Bankruptcy Discharge, 65 Am. Bankr. L. J. 325, 344–69 (1991) [hereinafter Tabb, Evolution of Discharge]; Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5, 7 (1995) [hereinafter Tabb, History of Bankruptcy].
34 Sauer, supra note 30, at 291–92.
35 See id. at 292.
36 See id. at 292–93. These were the Jeffersonian Republicans, who later became Democratic Republicans, and then finally, modern-day Democrats. See David A. Skeel, Jr., Debt’s Dominion 26 (2001).
37 Sauer, supra note 30, at 293. As Sauer notes, this view was not limited to purely southern agrarians. For instance, Benjamin Franklin wrote, “the only honest Way; wherein Man receives a real Increase of the Seed thrown into the Ground, in a kind of continual Miracle wrought by the Hand of God . . . as a Reward for his innocent Life and virtuous Industry.” Benjamin Franklin, Positions to Be Examined, in 16 Franklin Papers 107, 109 (William Willcox ed., 1972). Thus, Franklin’s sentiments illustrate that upon this nation’s formation, mercantile capitalism (with its venture capitalists) was not an idea embraced immediately. See id.
38 See Sauer, supra note 30, at 293–94.
39 See id. at 294–95. These were the Federalists, who later became the Whigs, who then became modern-day Republicans. See Skeel, supra note 36, at 26.
40 See Sauer, supra note 30, at 295. Much of this view was predicated on the intangibility of credit. See id. That is, as a primarily agrarian economy, where trade and commerce existed as a real exchange of goods, credit allowed one party to the transaction to cheat by receiving something for nothing. See id. In a sense, the idea of credit as a vice to these agrarians makes perfect sense as their time-frame within each commercial transaction was as limited as the perishability of the items they sold. Thus, selling on credit a perishable item that could never be repossessed likely influenced this view.
41 See Balleisen, supra note 10, at 26.
42 Id. at 26–27.
43 See id. at 27.
44 Id.
45 See id.
46 Balleisen, supra note 10, at 27.
47 See id. at 26–27. As Balleisen notes, this dependence on credit was based in part on the development of the United States’ post-revolution brand of market capitalism. Id.
48 Id. at 28 (describing how merchants rarely expected to be paid upon delivery, either for agricultural products or finished articles).
49 See id. at 27–28. Balleisen spent several years in the Northeast branch of the National Archives in Bayonne, and later, when it relocated to Manhattan, examining federal bankruptcy records following the passage of the Bankruptcy Act of 1841. Balleisen found that as many as one in three businesses had succumbed to filing for bankruptcy as of the 1840s and 1850s. Id. at 3. He found that the availability of credit was far greater than many had anticipated. Id. at 27–29. One of his underlying theses is that the integration of a national credit system helped contribute to a new phase of capitalism in the United States. See id. at 27. The average U.S. citizen could now start up a business on credit and attempt to attain his or her dreams. Of course, the business cycle, economic blights, and large debt burdens forced many to file. See id. at 32–41.
50 See id. at 28–32.
51 See Balleisen, supra note 10, at 53. Balleisen quotes an article from a defunct New York magazine from the time, which read “All classes became smitten with a sudden criminal passion of being rich . . . . They thought no more of the gradual accumulation of wealth by labor, but would escape the curse imposed on Adam. A fortune must now be made in a day.” Rural Tales and Sketches of Long Island: The Kushow Property, 12 Knickerbocker 190 (1838).
52 See Sauer, supra note 30, at 294–95 (discussing how the availability of credit has long been central to developing a capitalist economy); see also Forest McDonald & Ellen Shapiro McDonald, Requiem: Variations on Eighteenth-Century Themes 184 (1988); Adam Smith, Wealth of Nations 275–77 (Knopf 1991).
53 See Balleisen, supra note 10, at 32. The quote comes from a July 22, 1837 article in NWR, Address of the Albany General Republican Committee.” Credit is the universal solvent of a market economy. It increases the liquidity of assets and allows extensive investment, even from geographically remote locations.
54 “[Credit] is a kind of mercantile funding system, which enables [merchants] to enlarge their capital by anticipating the profits of their enterprises.” 38 Annals of Congress 1098 (1822) (remarks of Rep. Wood).
55 See Balleisen, supra note 10, at 31.
56 See Sauer, supra note 30, at 295–96. But see Balleisen, supra note 10, at 26–27. Thus, the division between agrarians and capitalists, and that between bankruptcy advocates and those against it, was predicated on a recognition of the potential for failure and the need to address such failure.
57 Sauer, supra note 30, at 296 & n.28.
58 Balleisen, supra note 10, at 15. The desire to go into business, despite inexperience and limited capital, made many early entrepreneurs vulnerable to financial failure. See id.
59 See id.
60 See id. at 18.
61 See Karen Gross et al., Ladies in Red: Learning from America’s First Female Bankrupts, 40 Am. J. Legal Hist. 1, 3–4 (1996). The stories of the women told in this article prove that women of the 18th and 19th centuries were indeed engaged in the commercial marketplace and the world of debt and credit. Some had children and some did not, and most were engaged in business of some sort. See id. at 16–18. Like the men, some failed, but in a sense this is evidence of their success. Id. at 36. They too were willing to take risks. See id.
62 See Balleisen, supra note 10, at 16. Of course, this is just one side of the story, and the rosy one at that. See Bruce H. Mann, Republic of Debtors: Bankruptcy in the Age of American Independence 79 (2002) (chronicling the history, development, and ultimate abolition of debtors’ prisons in the United States, which originally were permitted in every state).
63 See Balleisen, supra note 10, at 13.
64 Id. at 13. Tolerance toward bankruptcy debtors was seen as a significant contributor to successful capitalism, as volatility in the free market was a fact of life. See id. at 18; see also Sauer, supra note 30, at 295. As during financial panics and depressions, bankruptcy helped problems percolate slowly through the system. More importantly, endemic insolvency and the ability of bankrupts to gain legal absolution from old debts “unleashed a range of economic energies.” As Balleisen explains:
Perhaps the most important connections between antebellum bankruptcy and the release of capitalist energy manifested themselves in post-failure career strategies. Not every former bankrupt sought a haven from risk after insolvency. Discharge from past obligations encouraged a number of highfliers to redouble their entrepreneurial efforts. These bankrupts typically sought to breech prevailing commercial boundaries, either by expanding the domain of market transactions, developing new products, or devising new methods of distribution. On occasion such efforts produced spectacular postfailure success; more commonly they led only to new accumulations of unpayable obligations. Collectively, the ventures of risk-taking former bankrupts helped to consolidate a business culture predicated on “creative destruction,” in which a multitude of entrepreneurs mounted ongoing assaults on prevailing forms of economic activity, at once seeking profits and envisioning, if not always realizing, a continuous process of social “improvement.”
Balleisen, supra note 10, at 19. A lenience toward debtors helped ordinary people create a market economy in the United States, and also caused some to rethink their role in the capitalist economy and thus to engage in valuable “capitalist adaptation.” Id. at 21.
Thus, bankruptcy’s historical popularity with the commercial classes is attributable to its ability to promote and foster commercial development in several ways. First, having an involuntary bankruptcy system in place makes it more efficient to collect and distribute assets and also serves a deterrent function of causing people to pay debts rather than lose assets. See Sauer, supra note 30, at 299. Both involuntary and voluntary bankruptcy save the costs of fighting among creditors and prevents state law collection efforts from eviscerating the debtor’s estate before it can be efficiently distributed. Preference laws, which require that creditors who received advantageous payments or property just prior to a bankruptcy to return it, discourage creditors from trying to gain such advantage while a debtor is insolvent. See id. Finally, by allowing a debtor to discharge most debts as long as he or she is honest and cooperative, the debtor has every incentive to be honest and helpful and not hide assets. See id. at 300.
Other more obvious financial benefits flow from a well-developed bankruptcy system as well. By limiting the financial exposure of individuals, risk-taking is encouraged and the economy can grow. See id. Finally, and perhaps most obviously, by allowing an individual to discharge debts that are a burden, he or she can return to economic life, hire employees or be an employee, pay taxes, buy things, and otherwise fuel the economy. Such a system can keep that person “in play,” rather than leaving him or her economically dormant, imprisoned, and with a family supported by the state. See id.
This Bankruptcy Act of 1898 was the precursor to the current U.S. system and the first systematic bankruptcy system of the nation. See id. The history surrounding its enactment explains in some measure how the complex U.S. bankruptcy system developed so much earlier than all other systems of its kind around the world. See id. at 300–01.
65 See Skeel, supra note 36, at 2–4.
66 Id. at 2.
67 Id. at 16.
68 See id. at 2.
69 See id. at 92.
70 Skeel, supra note 36, at 47.
71 See id.
72 See John Henry Schlegel, Law and Economic Change in the Short Twentieth Century 15 (unpublished manuscript, on file with author).
73 Id.
74 See id. at 18.
75 See id.
76 David Ray Papke, Discharge as Denouement: Appreciating the Storytelling of Appellate Opinions, in Narrative and the Legal Discourse 206, 214 (Papke ed., 1991) (quoting D. Miller & M. Nowak, The Fifties: The Way We Really Were 117 (1977)).
77 See id.
78 See Schlegel, supra note 72, at 18.
79 Id.
80 See id. at 19.
81 See generally Matthew J. Slaughter, Multinational Firms and Wages in a Global Economy, available at http://www.dartmouth.edu/~glm/pdf/SageMJS.pdf (last visited Oct. 25, 2004) (noting that low-skill labor wages in the United States are much higher than similar skill labor wages elsewhere, and therefore, firms have a clear incentive to move those operations abroad which utilize low-skill labor).
82 See Series Title: Household Sector: Total Credit Market Debt Owed by: Credit Market Debt Outstanding: Billions of Dollars: Amounts Outstanding End of Period, NSA, at http://www.economagic.
com/em-cgi/data.exe/frbz1/fl154102005 (last visited Nov. 5, 2004).
83 See Bureau of Economic Analysis, Real Gross Domestic Product and Related Measures: Percent Change from Preceding Period, tbl.1(2), available at http://www.
bea.doc.gov/bea/newsrel/2003cr.xls. (last visited Nov. 29, 2004).
84 U.S. Housing Act of 1937, ch. 896, 50 Stat. 888 (codified as amended at 42 U.S.C. �
 1437(2000)).
85 Thomas W. Hanchett, The Other “Subsidized Housing:” Federal Aid to Suburbanization, 1940–1960s in From Tenaments to Taylor Homes 165 (John I. Bauman et al. eds., 2000).
86 Id.
87 Florence Wagman Roisman, Teaching About Inequality, Race, and Property, 46 St. Louis U. L.J. 665, 676 (2002). Perhaps I should say that this legislation made it easier for the average white person to buy and keep a home. Numerous scholars have noted that at the same time that the FHA and VA reduced down payments under these programs, minorities were refused such loans and instead lived in stingy, alienating public housing projects, which hindered minority home ownership for the rest of this country’s history. See id.
88 See National Housing Act, Pub. L. No. 73–479, 48 Stat. 1246 (1934) (codified as amended at 12 U.S.C. �� 1701–1750 (2000)).
89 David Dante Troutt, Ghettos Made Easy: The Metamarket/Antimarket Dichotomy and the Legal Challenges of the Inner-City Economic Development, 35 Harv. C.R.-C.L. Rev. 427, 439 n.46 (2002) (stating that the FHA’s new lending model allowed for smaller down payments, lower interest rates, longer repayment periods, and full loan amortization, making it easier for many homeowners to buy rather than rent).
90 See id. Troutt notes that between 1936 and 1941, new home owners increased from 332,000 to 619,000. See id.
91 See In the Good Old Days: Fact or Fiction on the Nostalgia Trip, available at http://www.agls.uidaho.edu/ccc/CCC%20Families/pdf/coontz.pdf (last visited Dec. 5, 2004).
92 The Feminine Mystique, at http://www.columbia.edu/~rr91/3567_lectures/feminine_
mystique.htm (last visited Nov. 8, 2004).
93 Id.
94 Id. William Levitt became:
the Henry Ford of home building by applying methods of mass production to housing. In the late forties, William Levitt embarked on the biggest private housing project in American history. Buying up 4,000 acres of potato fields in Hempstead, Long island, about 25 miles east of New York City, he started work on 17,500 homes in what was to be known as Levittown. To minimize costs, he broke down construction into 26 steps. Teams of workers executed specific tasks: bulldozing the land, paving the roads, pouring foundations, planting trees, joining the walls and roof, installing the plumbing and electricity, and painting. Every house was identical, one story high, covering 25 by 32 feet, with a living room, kitchen, two bedrooms and a bathroom. . . .
Those cape cod houses became the single most powerful symbol of the dream of upward mobility and home ownership for American families. With no down payment, a 30-year mortgage, and a tax deduction for interest payments, it was cheaper to buy a house in Levittown, where mortgage costs ran $56 per month, than to rent an apartment in New York, where apartment rentals averaged $93 per month.
Id.
95 E-mail from Polly Dwyer, President of Levittown Historical Society, to Frederick Hart, Professor Emeritus of Law, University of New Mexico School of Law (Jan. 11, 2003; 01:20:40 MST) (on file with author); see also John Cassidy, The Next Crash: Is the Housing Market a Bubble That’s About to Burst?, The New Yorker, Nov. 11, 2002, at 123 (discussing the Levittown development project).
96 See Marc A. Weiss, The Rise of the Community Builders: The American Real Estate Industry and Urban Land Planning 32 (1987).
97 See Kenneth T. Jackson, Crabgrass Frontier: The Sub-urbanization of the United States 204 (1985).
98 U.S. Census Bureau, Housing Vacancy Survey First Quarter of 2004, available at http://www.census.gov/hhes/www/housing/hvs/q104tab5.html (last visited Nov. 8, 2004); see Coastal Business, Sun-News (Myrtle Beach, S.C.), Apr. 6, 2002, at D1 (reporting a 67.8% home ownership rate in April of 2002, and noting that the Great Plains and the Great Lakes region had a rate of 73.9% and 72.7% respectively but that the Pacific Coast had a rate of just 59.6%, showing a large variation across the country).
99 New Zealanders purportedly have the highest home ownership rate at 71.2% with Australia in second place at 70.1%. See Australia Has World’s Second Highest Home Ownership Rate, Asia Pulse, Feb. 11, 2002. The United States is next at 67%, see Coastal Business, supra note 98, at D1, and England is next at 66%. See Roger Bootle, Not a Common European Home Economic Agenda, The Sunday Telegraph (London), Aug. 18, 2002. Continental Europe’s rate is currently 58%, but, of course, this number represents an average of a number of different rates across Europe. See id.
100 See, e.g., “0” Down, at http://www.newloan4you.com/0_down/0d1.html (last visited Nov. 9, 2004).
101 In many parts of Europe, a buyer seeking a loan from a lending institution is still expected to put down 50% in order to get a home loan. See, e.g., Broich, Bayer, von Rom, Restructuring & Turnarounds, at http://www.broich.de/eng/restructuring-and-turnarounds.htm (last visited Nov. 10, 2004).
102 U.S. General Accounting Office, Tax Policy: Many Factors Contributed to the Growth in Home Equity Financing in the 1980s 12–14 (1993). While home equity loans grew at a rate of 20% per year between 1981–1991, other consumer debt increased by just 4% per year Id. at 1. For a more detailed exploration of the dilemma with home equity loans, see generally Julia Patterson Forrester, Mortgaging the American Dream: A Critical Evaluation of the Federal Government’s Promotion of Home Equity Financing, 69 Tul. L. Rev. 373 (1994) (discussing the federal government’s promotion of home equity financing).
103 A recent radio advertisement asks “Did you know that there currently is available over $30 billion in equity in American real estate?” It then admonishes listeners not to let this money waste and to call an 800 number immediately to get the cash they deserve out of their home.
104 Lord Madoc Arundel & Christopher T.C. Miller, The Governance of Real Property in England from Henry I to the Second Reiteration of Magna Carta, available at http://www.pbm.com/~lindahl/articles/land_law.html (last visited Nov. 9, 2004).
105 See Nicola Clark, Frugal Europeans Hold up Recovery: Struggle Is on to Persuade Consumers to Spend Despite Economic Uncertainty, Int’l Herald Tribune, July 22, 2004, at 1 (stating that strict banking laws make it difficult, if not impossible, to extract added value from a mortage through a home equity loan). With this background, one can begin to understand how the U.S. bankruptcy system of debt forgiveness came into being. What is not clear is whether the countries that are importing aspects of the U.S. bankruptcy system actually need this system or will need it. Will they also become highly consumeristic because that is where globalization will take them? As stereotypes would have it; some Europeans are known for having one small closet filled with a few expensive pieces of clothing, whereas U.S. citizens prefer a huge closet full of moderately priced items, a reflection of differing consumer cultures. Not all Europeans are cut from the same spending mold, however. The Italians love beautiful things while northern Europeans would consider high-ticket fashion items to be highly unnecessary.
106 See Ronald J. Mann, Credit Cards and Debit Cards in the United States and Japan, 55 Vand. L. Rev. 1055, 1064 (2002). As Mann explains, American Express, Diners Club, and Carte Blanche first offered charge cards, which, as their name implies, had to be paid off each month. See id. The big profits occurred with the development of the credit card, and the resulting high interests rates to lenders. See id. These did not blossom until the 1970s and the 1980s in the United States, see id., and still have not done so throughout the rest of the world. See id. at 1056–57. Mann attempts to explain this phenomenon by examining the banking and lending systems of the United States versus other parts of the world, particularly Japan. See id.
107 See Jacob S. Ziegel, The Fragile Middle Class: Americans in Debt, Discussed from a Canadian Perspective, 79 Tex. L. Rev. 1241, 1244 (2001).
108 See id.
109 Consumer spending is one of the major indicators by which the government and economists measure the strength of our economy. Consumer spending makes up about two-thirds of our gross domestic product, which is the broadest measure of economic health. See Gongloff, supra note 7.
Consumer spending is widely believed to be a measure of overall consumer confidence. When a household is deciding what it can afford, it will look at probable future income as well as current income. If consumers are optimistic about the future economy, they will be inclined to spend their dispensable income. If, however, they do not believe that good times lay ahead, they are more likely to save their money. Thomas Mayer et al., Money, Banking, and the Economy 273 (1999).
110 One advertisement admonishes U.S. citizens to get the money they deserve by tapping into the $30 trillion dollars in equity currently available in U.S. real estate. No mention is made of the need to pay such funds back. In a title loan company advertisement, a woman finds that as long as she takes out a title loan, she has the money to go out to dinner after all. In another advertisement, Mr. T tells a huge, slovenly debtor that all his financial problems can be solved if he takes out a title loan. In a MasterCard advertisement, a man in a cubicle becomes ecstatic beyond words when he wins a trip to Hawaii from his benevolent credit card company. Businesses advertising on every network offer free credit for 6–12 months, as long as you spend a certain dollar amount, and even the government told U.S. citizens to go out and spend money last fall (despite high bankruptcy rates and low savings rates) in order to breath life into the flagging economy.
111 Letter from United Pan Am Mortgage to Professor Frederick M. Hart (Sept. 30, 2002) (on file with the author).
112 See id.
113 Sophie Kinsella, Shopaholic Ties the Knot 8 (2002)
114 I respectfully disagree with Professor Ronald Mann’s conclusion that neither Japanese nor U.S. consumers are encouraged to over-extend. See Mann, supra note 106, at 1084 n.107 (citing Robert D. Manning, Credit Card Nation: The Consequences of America’s Addiction to Credit 3 (2002)). Mann proposes that U.S. society does not venerate those who rely on credit beyond their income. See id. Unfortunately, I believe that Manning is just a voice in the wilderness on this point, with U.S. media having won the war against sensible credit use.
115 Thomas A. Fogarty, Home Foreclosures at 30-Year High, USA Today, Sept. 11, 2002, at A1, available at http://www.usatoday.com/money/perfi/housing/2002–09–09-foreclosure_x.htm (last visited Dec. 4, 2004). Fogarty reports that during April, May, and June of 2002, 1.23% of all mortgages—or 640,000—were in foreclosure. See id. This is the highest rate recorded in the 30 years since this data has been kept, and is up from 1% just one year ago. See id.
116 See Am. Bankr. Inst., Quarterly U.S. Bank Statistics, at http://abiworld.org/
statistics (last visited Dec. 4, 2004). Yet, at least one scholar has wondered why more U.S. households do not file for bankruptcy, concluding that as of 1998, only about 1% of households file but 15% could benefit from such a filing. See Michelle J. White, Why Don’t More Households File for Bankruptcy?, 14 J.L. Econ. & Org. 205(1998).
117 CardFAQs - Frequently Asked Questions, at http://www.cardweb.com/cardlearn/faqs/
2003/jan/8.xcml (last visited Dec. 4, 2004).
118 See generally Riva D. Atlas, Home Equity Borrowing Rises to Worrisome Levels, N.Y. Times, Mar. 26, 2003, at C1 (stating that home equity loan levels have reached such a high level that consumer groups think many people will be unable to service these loans and will end up homeless). Some lenders, including Wells Fargo Bank, are even lending up to 100% of the home’s value, despite the fact that people often have insufficient income to service such loans. Id.
119 See Theresa Sullivan et al., The Fragile Middle Class 3 (2000). Since World War II, personal bankruptcies have steadily increased most years. “These increases accelerated during the 1980s and 1990s, frequently breaking records from quarter to quarter and year to year.” Id.
120 Id. As the authors state, financial collapse amidst all this prosperity was both mystifying and worrisome. See id.
121 See id. at 17. Department of Labor Statistics indicate that between 1995 and 1997, 8 million U.S. workers were displaced, and that by 1998, 50% were re-employed at their old salaries, 25% were earning 20% less, and the other 25% were still unemployed. See id.
122 Some bankruptcy experts and policy-makers believe an increased willingness to declare bankruptcy and a diminishment in the social stigma attached to it are largely responsible for the recent jump in filings. See Michelle Clark Neely, Personal Bankruptcy: The New American Pastime?, The Regional Economist (Oct. 1998), at http://www.stlouisfed.org/
publications/re/1998/d/re1998d4.html (last visited Dec. 4, 2004). This is hardly strong proof that the stigma is gone. See Sherry Qualters, Once a Stigma, Ch. 11 Seen as Management Tool, Boston Bus. J., July 12, 2002, at 1; Gregory E. Maggs, Bankruptcy as a Business Tool, 71 Tex. L. Rev. 681, 684–87 (1993) (reviewing Kevin J. Delaney, Strategic Bankruptcy: How Corporations and Creditors Use Chapter 11 to Their Advantage (1992)) (describing the development of strategic uses for Chapter 11, while reviewing a book whose name speaks for itself); American Financial Services Association, Explaining the Escalation in Personal Bankruptcies, Spotlight on Financial Services, at http://www.spotlightonfinance.
org/issues/march/stories/story7.htm (last visited Dec. 15, 2004); see also Skeel, supra note 36, at 1 (discussing the issue of stigma in general).
123 See Sullivan et al., supra note 119, at 263.
124 See generally id.
125 See id. at 22. While only 10% of the consumers in the authors’ empirical study reported that consumer or credit card debt as the actual cause of their bankruptcy, in most cases, the debtor could have withstood the layoff, illness, or family breakup, if not for their crushing amounts of consumer debts. See id.
126 See id. at 123.
127 See id. By the 1990s economists speculated that U.S. citizens could tolerate no more credit card debt. Since 1993, however, growth in credit card debt has been greater than any other type of consumer loan. See id.
128 The bankruptcy debtors in the study carried more credit card debt than the average U.S. citizen, but most are now carrying more than they can afford to repay. This is because there is virtually no limit to the amount of credit a person can obtain through credit cards. See id. The credit card industry did not grow to its current size by being cautious about distributing cards. See id. at 135. It grew because it distributed cards freely, and solicited new customers relentlessly, at a cost of $100 in solicitation for every new card member acquired in 1994. See id.
129 See id. at 135.
130 See id. at 123. Interest rates drive profitability, and interest payments account for more than 80% of the profits of credit card companies. The enormous profits available from people who charge up to the limit and pay only the minimum monthly payment make delinquent cardholders the most valued customers in the business. See id.
131 See id. at 135–36.
132 See id. 137.
133 Nellie Mae, Undergraduate Students and Credit Cards: An Analysis of Usage Rates and Trends 1, available at http://www.nelliemae.com/library/ccstudy_2001.pdf (Apr. 2002) (last visited Dec. 4, 2004).
134 See Sullivan et al., supra note 119, at 139–40.
135 See id. at 23.
136 See President George W. Bush, Speech to Congress, (Sept. 20, 2001), available at http://www.whitehouse.gov/news/releases/2001/09/20010920–8.html (last visited Nov. 22, 2004). Moreover, in the wake of September 11, President Bush told us that we could all fight terrorism by being good consumers. Id. The Federal Reserve then encouraged consumer spending by repeatedly cutting interest rates over the next few months. See U.S Economy Shrinks, Money.CNN.Com, at http://money.cnn.com/2001/10/31/economy/economy/ (Oct. 31, 2001) (last visited Nov. 22, 2004). Again, on January 7, 2003, President Bush delivered a speech in which he encouraged U.S. citizens to be good consumers in spite of the economic stand-still. See President George W. Bush, Speech to the Economic Club of Chicago (Jan. 7, 2003), available at http://www.whitehouse.gov/news/releases/2003/01/20030107-5.html (last visited Nov. 22, 2004).
137 See, e.g., Greg Ip, Consumers’ Attitudes Brighten, Wall St. J., Dec. 16, 2002, at A2 (discussing the possibility of economic recovery).
138 Id. This top financial newspaper often devotes an entire two-page spread to bankruptcy and consumer sentiments. For example, on Monday, December 16, 2002, the paper not only contained this story about whether consumer spending would be “bright” enough to give retailers a profitable Christmas season, but also included a comparison of Australian bankruptcy and U.S. bankruptcy, and an article about United Airlines’ request to borrow $2.4 billion from its union’s pension plan to fund its Chapter 11 activities. See id.; Sarah McBride, Australia’s Tough-Minded Bankruptcies May Serve as Role Model, Wall St. J., Dec. 16, 2002, at A2; Susan Carey, United Lobbies for More Savings from Its Unions, Wall St. J., Dec. 16, 2002, at A2.
139 See Ip, supra note 137, at A2. News stories of this kind equate good moods or spirits with high consumer spending, even though more personal financial failures occur after the holidays than at any other time of year. It is not surprising that we have as much debt as we do, when we are told that spending on consumer goods is critical to keeping our economy viable.
140 See Sullivan et al., supra note 119, at 3. Sullivan, Warren, and Westbrook uncover a few surprising facts about bankruptcy debtors in this study, including that bankruptcy rates are very similar across racial and ethnic lines, see id. at 41–47, that bankruptcy debtors come from a cross-section of occupations, see id. at 59, that debtors tend to be from the middle rather than the lower classes, see id. at 55, and that bankruptcy debtors are more likely to have attended college than the average citizen, see id. at 51–55. This last statistic can be read several different ways. What the study actually showed was that bankruptcy debtors were more likely to have attended college than the general population, but less likely than average to have graduated from college. Thus, more went to college but few graduated. Is it possible that the study actually showed that bankruptcy debtors were more likely to try new things but less likely to stick with them? These are not the conclusions drawn by the authors, see id. at 55, but the numbers did suggest these alternative conclusions to me.
141 See id. at 259.
142 See id. Whether these high levels of consumer bankruptcies are seen as a societal problem or not, it is clear that consumer bankruptcy is the ultimate free-market solution to bad debt. It forces individual creditors who have made voluntary decisions to lend to recoup the losses from bad loans out of the profits of the good ones. And recoup they have, earning the highest profits in lending history despite all the defaults. Bankruptcy is the market-driven choice to deal with privatized rather than socialized risk. See id. at 260–61. Moreover, while creditor-funded campaigns to restrict consumers’ access to bankruptcy have been both popular and successful in Congress, there have been no campaigns to restrict access to credit. That type of legislation would be seen as anti-capitalist and paternalistic. Many would say that individuals should be allowed to make their own choices about credit and should be responsible for their own decision-making and the resulting consequences.
143 Data collected by the Consumer Federation of America suggests that despite the constant barrage of solicitations, acceptance of new cards has finally stemmed to some extent. See Consumer Fed’n of Am., Credit Card Issuers Expand Marketing and Available Credit While Consumers Increasingly Say No, at http://www.consumerfed.org/081402bankruptcy_
credit_card_report_02_2.html (Aug. 15, 2002) (last visited Nov. 22, 2004). In the twelve month period ending March 31, 2002, card issuers mailed five billion solicitations, nearly fifty per household. They now make available more than $3 trillion in unused credit, or $30,000 per household. Id. Yet consumers are increasingly rejecting more of these solicitations and refusing to expand their lines of credit. Id. During the first three months of 2002, revolving consumer debt declined by $29 billion, bringing the ratio of credit used to a low of 22.1%. Id. There is some indication that British subjects are also cutting back a bit on credit. The Credit Card Research Group (CCRG) reports that total credit card spending in the United Kingdom (UK) rose to �16.8 billion in September 2002, up 6.9% from the same period the prior year. This rate of growth, while high, is lower than the increase for the same period last year, which was 10%. See Credit Card Spending Eases, News.BBC. Co.UK, at http://news.bbc.co.uk/1/hi/business/2409655.stm (Nov. 6, 2002) (last visited Nov. 22, 2004).
My own sense is that if means testing is implemented in the United States, this may eventually backfire on the credit industry and cause at least the educated middle-class consumers to use less credit, thus reducing the industry’s profit margins. If this happens, the industry may respond by granting more credit to less educated and poorer consumers, increasing the gap between the haves and the have-nots. No doubt, the credit industry is already recognizing that the new bill might not be good for business. In one article, a banking industry representative stated the following: “The one-sided provisions of this bill are bad news for consumers. But they are also bad news for our industry. Consumers are our customers. By creating a form of debt imprisonment, this bill will hobble the most important player in the world economy—the American consumer.” See Arkadi Kuhlmann, Bankruptcy Bill Hurts Odds of Second Chance, Am. Banker, Mar. 5, 2004, at 11.
144 See Sullivan et al., supra note 119, at 260.
145 For help scaling back, see Bankrate’s Guide to Managing Credit, at http://www. bank
rate.com/brm/news/credit-management/debt-home.asp (last visited Oct. 28, 2004).
146 See White & Chase LLP, Bankruptcy and a Fresh Start: Stigma on Failure and Legal Consequences of Bankruptcy 10 (European Comm., U.S. Report, 2002), available at http://europa.eu.int/comm/enterprise/entrepreneurship/support_measures/failure_bank
ruptcy/stigma_study/report_usa.pdf (stating that although the stigma associated with filing for Chapter 11 has diminished substantially, “the decision to commence a Chapter 11 case is never easy.”) (last visited Oct. 28, 2004).
147 See Theresa Forsman, Failure as a Badge of Honor, BusinessWeek Online, at http://
www.businessweek.com/magazine/content/01_35/b3746632.htm (Aug. 27, 2001) (last visited Nov. 22, 2004).
148 This could also be due to the uniquely U.S. corporate concepts of limited liability, given that we tend to see businesses as entities separate and apart from their owners and managers. See Joseph A. McCahery, Comparative Perspectives on the Evolution of the Unincorporated Firm: An Introduction, 26 J. Corp. L. 803, 807 (2001) (discussing how some European scholars believe, for example, that extending limited liability to small firms will cause moral hazard and that as such, the costs of extending limited liability to such firms would outweigh the benefits to society of doing so).
149 Bi-partisan politics continue to play an important role in the development of bankruptcy laws, though in some respects these politics are counter-intuitive. The credit industry, particularly the consumer credit industry, has pushed tremendously in recent years for stricter bankruptcy laws for consumers that require larger paybacks on old debts. See Elizabeth Warren, The Changing Politics of American Bankruptcy Reform, 37 Osgoode Hall L.J. 189, 192–93 (1999). These sentiments, though not entirely partisan, are generally thought to be Republican or conservative sentiments. See id. at 194. Underlying these views is a strong belief that individuals have overspent irresponsibly. Id. at 195; see Ame Wellman, Relief for the Poorest of All: How the Proposed Bankrutpcy Reform Would Impact Women and Children, 6 J.L. & Pol’y 273, 274–75 (2002). Yet Republican or big-business interests, or even those interested in fueling the economy, have consistently admonished U.S. citizens to do the right thing and spend even more for the sake of economic growth. This seems inconsistent with the bankruptcy crack-down, given that the government officials who have admonished us to spend, as a group, know full well that most people now have more debt than they can repay and that savings rates are now negative in the United States. See Lester C. Thurow & Basler Zeitung, Surprising 1998 American Economic Strength, at http://www.
com/articles/html/suprising.htm (Dec. 1998) (last visited Nov. 22, 2004) (reporting negative U.S. savings rates). Spending without going into debt is not an economic reality, yet we are still encouraged to do it. Moreover, the much-decried bankruptcy crack-down is most likely to hurt consumer credit interests rather than help them, when people reduce spending in reaction to the bankruptcy crack-down.
On the other side of this political coin, it is no less ironic. Very liberal persons, though certainly not all Democrats, favor debtor-oriented bankruptcy laws like the ones in place now. See Warren, supra note 149, at 194 (noting that liberals have traditionally considered bankruptcy laws in the larger context of progressive social legislation). But, some of these people believe that excess spending on the part of U.S. citizens is so harmful to society that it could ultimately destroy the world and its resources. See id. at 195. While this would be deeply disturbing if true, the idea of not spending is almost incomprehensible to U.S. citizens. Clearly, U.S. citizens operate in a culture of consumption and spending unlike any other in the world. Kurt Richeb�cher, Consumption: Recovery Leader or Potential Profit-Killer?, Gold Dig. (Nov. 3, 2003), at http://www.gold-eagle.com/gold_digest_03/richebacher110303.html (last visited Nov. 22, 2004).
150 Skeel supra note 36, at 1–2.
151 See id.
152 See id.
153 In a Chapter 7 bankruptcy, an estate is created to collect and sell property to satisfy the debt of the debtor. But, a debtor can claim certain assets exempt from the bankruptcy estate not to be sold for the benefit of the creditors. “The historical purpose of these exemption laws has been to protect a debtor from his creditors, to provide him with the basic necessities of life so that even if his creditors levy on all of his nonexempt property, the debtor will not be left destitute and a public charge.” H.R. Rep. No. 95–595, at 126 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6087. In the United States, a debtor filing for bankruptcy may choose between the federal or state exemptions, see 11 U.S.C. � 522(b) (2000), if the state in which the debtor is filing has not “opted-out” of the federal bankruptcy exemption scheme. Some examples in the federal exemption system include the following: 1) up to $17,425 of equity in real or personal property used as a homestead, id. � 522(d)(1); 2) up to $2,775 in one motor vehicle, id. � 522(d)(2); 3) up to $9,300 in household furnishings, id. � 522(d)(3); 4) up to $1,150 of jewelry, id. � 522(d)(4); 5) $925 in any property (usually checking accounts), and if the debtor did not use the homestead exemption up to an additional $8,725, id. � 522(d)(5); 6) up to $1,750 in professional books or tools of the trade, id. � 522(d)(6), and the debtor’s right to receive payment for certain things such as social security, veteran benefits, and alimony, id. � 522 (d) (10) (all the dollar figures are updated by the United States Congress periodically to reflect economic conditions; these values are current through 2003). State exemption schemes were developed not because of bankruptcy but because of collection laws. Because each state has its own exemption legislation, there is quite a bit of difference between states. A person filing in Delaware, which has opted-out of the federal scheme, can only choose the Delaware exemptions, which are not generous. For example, a debtor can only exempt books, clothing, a seat or a pew in church, sewing machines, tools of the trade (limited to a certain amount in some counties), and pianos. See 10 Del. Code Ann. tit. x, � 4902 (1974 & Supp. 2002). Delaware does not even have any type of homestead exemption. See id. Texas allows not only unlimited homestead exemptions, see Tex. Prop. Code Ann. � 41.001 (1984 & Supp. 2004), but also exempts up to $30,000 in personal property, which includes household furniture, tools and equipment, clothing, jewelry, firearms, and motor vehicles. See id. � 42.002. But Texas does not allow a checking account to be exempt like the federal exemptions. See id. Unlike Texas, Florida has opted out of most of the federal exemptions, see Fla. Stat.Ann. � 222.20 (1999 & Supp. 2002), but does allow all federal 11 U.S.C. � 522(d)(10) exemptions. Fla. Stat. Ann. � 222.201 (1999 & Supp. 2002). Florida also has an unlimited homestead exemption. Fla. Const. art. VII, � 6(a)(1). However, Florida has a modest personal property exemption: only up to $1000 in personal property, Fla. Const. art. X, � 4(a)(2), and money contributed to retirement funds, Fla. Stat. Ann. � 222.21 (1999 & Supp. 2002), and college trust funds, id. � 222.22.
154 This is considered a straight liquidation bankruptcy under Chapter 7 of the United States Bankruptcy Code. See 11 U.S.C. �� 701–784.
155 This is considered a restructured debt plan under Chapter 13 of the United States Bankruptcy Code. See 11 U.S.C. �� 1301–1330.
156 See Skeel, supra note 36, at 2.
157 See 11 U.S.C. � 1322(b)(2) (allowing for the modification of secured claims except secured claims on real property). This option of modifying a secured creditor’s interest is not available under a Chapter 7 bankruptcy. See id. �� 701–784.
158 See id. � 727.
159 See Jacob Ziegel, Canada’s Phased-in Bankruptcy Reform, 70 Am. Bankr. L.J. 383, 404 (1996).
160 See, e.g., Tex. Prop. Code Ann. � 42.002 (2003); Fla. Stat. Ann. � 222.201 (2003) (allowing unlimited homestead exemptions in Texas and Florida, respectively).
161 Chapter 11 is available to corporations, partnerships, as well as individuals. 11 U.S.C. � 109(d). Because it is complicated and expensive in terms of legal fees, an individual normally will file a Chapter 13 instead, if his or her debts fall within the debt limitations, namely, the debtor has noncontingent, liquidated, unsecured debts of less than $290,525 and noncontingent, liquidated, secured debts of less than $871,550. See 11 U.S.C � 109(e).
162 See Davis, supra note 12, at 253.
163 See id. at 256. In fact, the debtor is permitted to sell off its assets piecemeal in a Chapter 11, even before a plan is filed, despite the fact that the formal name of this chapter of the code is Reorganization. See id. About 20–30% of confirmed plans are liquidation plans. Id.; see E. Flynn, Statistical Analysis of Chapter 11, at 12 (1989).
164 The French commercial system takes actual steps to prevent companies from getting into too much financial trouble. Judges of the Commercial Courts have the power to summon the chief executive officer (CEO) of any company that appears to be in financial trouble. Once summoned, an informal hearing is held to discuss the information gathered by the court (the information is collected by the Clerk of the Court, who is also basically the Registrar of Companies, who has filed information, such as liens, mortgages, and preferences, on each company in the territory). The CEO is allowed to inform the judge of the types of measures the company is taking to right itself. After the hearing, the judge 1) can accept the measures discussed by the CEO; 2) gather more information concerning the company from many sources; 3) the CEO can file for a court agent to oversee the company; and 4) can urge the CEO to file for protection under French law. See Broude et al., supra note 6, at 536–39.
165 Sometimes equity is distributed to the unsecured creditor class under the plan of reorganization. See 11 U.S.C. � 1129(b)(2)(B) (describing how equity cannot retain the stock unless unsecured creditor classes are paid in full or accept the plan).
166 Some scholars feel that Chapter 11 is not worth its astronomical costs, or its drag on the economy, particularly given the relatively low success rate for reorganizing companies. See Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 Stan. L. Rev. 311, 311 (1993); Douglas G. Baird, Loss Distribution, Forum Shopping and Bankruptcy: A Reply to Warren, 54 U. Chi. L. Rev. 815, 827–28 (1987) (stating that bankruptcy creates benefits to bankrupt companies that are not available to others, creating perverse incentives to file and giving some companies an unfair advantage); Douglas G. Baird, The Uneasy Case for Chapter 11 Corporate Reorganization, 15 J. Legal Stud. 127, 128 (1986); James W. Bowers, Wither What Hits the Fan? Murphy’s Law, Bankruptcy Theory, and the Elementary Economics of Loss Distribution, 26 Ga. L. Rev. 27 (1991) (arguing that Chapter 11 offers little to justify its existence); Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 Yale L.J. 1043, 1049–50 (1992) (arguing that because equity holders rarely recover anything in Chapter 11, Chapter 11 should be repealed); Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors’ Bargain, 75 Va. L. Rev. 155, 160 (1989) (questioning the incentives created by the current bankruptcy system). But see Gross, supra note 9, at 5 (claiming that 20%, one of the estimates of success rates in Chapter 11, is a respectable rate and evidence of the system’s success).
It is true that Chapter 11 fees are notoriously expensive. Enron attorneys had spent over $331 million dollars as of March 2003, and the company was still nowhere near confirming a plan at that time. See Kristen Hays, Enron Proposes New Pipeline Business, Associated Press, Mar. 19, 2002, available at 2003 WL 16151125; see also Lucian Ayre Bebchuck, A New Approach to Corporate Reorganization, 101 Harv. L. Rev. 775, 780–81 (1988) (describing the numerous costs and inefficiencies in the current Chapter 11 scheme). Also, in highly regulated industries with large infrastructures, critics have argued that the Chapter 11 of one player in a closed industry can be unfair and harmful to the other firms in the industry, and even weaken the other firms by allowing the company in bankruptcy to externalize pre-petition debts and undercut market prices, therefore recovering a greater market share. See Sarah McBride, Australia’s Tough-Minded Bankruptcies May Serve as Role Model, Wall St. J., Dec. 16, 2002, at A2.
167 See Metzger & Bufford, supra note 4, at 153–54.
168 Legal & Business Forms—Chapter 11 Reorganization, at http;//www.legal-forms-kit.com/freelegaladvice/bankruptcy/8.html (last visited Jan. 11, 2005). While scholars have regularly noted that old management is often replaced with new management as the case proceeds, this is often because old management wishes to resign.
169 Skeel, supra note 36, at 57.
170 See id.
171 Id.
172 Id. at 58.
173 Id.
174 Chapter 11 can also be used by individuals. See 11 U.S.C. � 109(d).
175 See generally 28 U.S.C. � 157(a) (2000) (establishing the bankruptcy court system).
176 11 U.S.C. �� 101-1330.
177 See, e.g., Butner v. United States, 440 U.S. 48, 55 (1979) (stating that “[u]nless a particular federal interest requires a different result, property interests are created and defined by state law”).
178 But see 11 U.S.C. � 1104(a). Although it is unusual, a party in interest may seek the removal of the debtor and have a trustee appointed by showing cause, such as fraud or mismanagement. See id. This is in order to protect interests of creditors and equity holders. See id.; see also In re Sharon Steel Corp., 871 F.2d 1217 (3rd Cir. 1989) (upholding, reluctantly, the trial court’s decision to appoint a trustee, because the debtor-in-possession had been unable to turn the company around, and because the debtor had conducted questionable transfers of property, had virtually violated its fiduciary duty by not pursuing claims to recover the transferred property, and had proven to be dishonest).
179 In the United States, the vast majority of cases filed under any chapter of the Bankruptcy Code are voluntary cases. See generally Nathalie Martin, �Qu� Es La Diferencia?: A Comparison of the First Days of a Business Reorganization Case in Mexico and the United States, 10 U.S.-Mex. L.J. 73, 75 (2002).
180 See 11 U.S.C. � 362(a).
181 See Martin supra note 179, at 75 (“There is a very broad, automatic stay granted in favor of the debtor. This stays virtually all collection activity that is out there, including . . . employee claims, labor claims, and every other type of lawsuit.”).
182 See 11 U.S.C. � 362(a)(3). For a secured creditor, any party in interest for that matter must ask the court for permission to lift the stay in order to proceed for repossession. The court will grant relief only in limited circumstances. See 11 U.S.C. � 362(d); see also Martin, supra note179, at 81.
183 See Martin, supra note 179, at 79 (citing 11 U.S.C. � 362) (stating that even government entities must stop all collection efforts and can only maintain lawsuits against entities in bankruptcy if the issue affects health and public safety, which is interpreted very narrowly); see also In re Universal Life Church, Inc., 128 F.3d 1294, 1297 (9th Cir. 1997) (finding that the � 362(b)(4) police and regulatory exceptions to an automatic stay “refers to the enforcement of laws affecting health, welfare, morals and safety, but not regulatory laws that directly conflict with the control of the res or property by the bankruptcy court.”). The two tests to determine if a government action is a police and regulatory exception in nature are the “pecuniary purpose” test and the “public policy” test. Id. (citing NLRB v. Continental Hagen Corp., 932 F.2d 828, 833 (9th Cir. 1991)). “In the pecuniary purpose test, the court determines whether the government action relates primarily to the protection of the government’s pecuniary interest in the debtor’s property or to matters of public safety and welfare. If the government action is pursued solely to advance a pecuniary interest of the governmental unit, the stay will be imposed.” Id. (citations omitted).
184 See 11 U.S.C. � 109(d) (defining who can be a debtor under Chapter 11). Some examples of entities excluded from Chapter 11 are insurance companies, banks, savings banks, cooperative banks, savings and loan associations, building and loan associations, and homestead associations. Id. � 109(b). These exclusions include both domestic and foreign entities. Id.
185 See 11 U.S.C. � 109(d).
186 See Martin supra note 179, at 77.
187 See Maggs, supra note 122, at 685–86 (discussing how Texaco filed its Chapter 11 case in order to delay collection on Pennzoil’s $10.53 billion judgment, and ultimately to gain leverage to settle the judgment for $3 million).
188 For example, US Airways recently tried to have a bankruptcy court intervene in a labor dispute on an immediate and emergency basis. See Susan Carey, UAL Says It Must Cut Expenses by More Than $1.1 Billion a Year, Wall St. J., Sept. 20, 2004, at A8 (discussing how the bankruptcy court may intervene to grant emergency relief to the company).
189 See 11 U.S.C. � 1121(c)(2) (stating that the debtor has the exclusive right to file a plan for 120 days).
190 See id. � 1129(a)(8) (discussing creditors’ rights to accept or reject a plan); id. � 1126 (2000) (discussing how acceptance is accomplished); see also id. � 1121(c) (stating that any party in interest can file a plan, if certain criteria are met).
191 See id. � 1129(b)(2) (describing the process of forcing a plan on classes of secured and unsecured creditors); see also 11 U.S.C. � 1126 (describing when a class is deemed to have accepted a Chapter 11 plan).
192 See id. � 1129(a)(10) (discussing how a Chapter 11 plan can be forced on dissenting creditors, as long as at least one class of creditors votes yes).
193 See id. � 506(a).
An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.
Id.
194 See 11 U.S.C. � 507(a).
195 See id. � 1129(a)(9).
196 See id. � 1141(d).
197 See id. � 1129(b)(2)(B)(i). But, if under a plan an unsecured creditor is impaired by the plan, the court can still approve the plan if it is shown that the unsecured creditor would receive as much under a Chapter 7 liquidation plan. See id. � 1129(a)(7)(A)(ii).
198 But see id. � 1129(a)(8) (stating that, if the creditor is not impaired by the plan and votes against the plan, the court can still verify the plan).
199 See 11 U.S.C. � 1121(b).
200 See id. � 1129(a)(11).
201 Id.
202 See infra notes 235–308, and 380–513 and accompanying text.
203 See infra notes 415–421 and accompanying text.
204 See infra notes 235–267 and accompanying text.
205 See infra notes 268–317 and accompanying text.
206 See infra notes 268–308 and accompanying text.
207 Martin, supra note 16, at 367. England, as well as Canada and Australia, have relatively lenient personal bankruptcy systems by world standards. Id. at 367 n.1; see Efrat, supra note 3, at 88–90. Other countries that have more lenient personal bankruptcy systems, besides the United States, England, Canada, and Australia, include Hong Kong, New Zealand, Taiwan, Russia, Scotland, and the Netherlands. Martin, supra note 16, at 367 n.1. Virtually all of these countries impose a Chapter 13-like payment plan on at least some bankruptcy debtors before granting them a discharge. Id.
208 See infra notes 209–513 and accompanying text.
209 See England: History, Lonely Planet World Guide, at http://www.lonelyplanet.com/
destinations/europe/england/history.htm (last visited Nov. 9, 2004).
210 See Skeel, supra note 36, at 38 (stating that in the 1880s, English bankruptcy law was quite tough on debtors, who had to subject themselves to searching scrutiny and long discharge delays). English law was hardly unique at the time in its tough treatment of bankruptcy debtors. Common punishments around the world included forfeiture of all property, relinquishment of the consortium of a spouse, imprisonment, and death. Early stories claim that in Rome, creditors were permitted to carve up the body of a debtor. See Tabb, History of Bankruptcy, supra note 33, at 7.
211 See Robert Weisberg, Commercial Morality, the Merchant Character, and the History of the Voidable Preference, 39 Stan. L. Rev. 3, 20 (1986).
212 See id. The Preamble stated that
[w]here divers and soondry persones craftelye obteyning into theyre handes greate substaunce of other mennes goods doo sodenlie flee to partes unknowne or kepe theyre houses, not mynding to paie or restore to any of theyre creditours theyre debtes and dueties, but at theyre owne willes and pleasures consume the substaunce obteyned by credyte of other men, for theyre owne pleasure and delicate lyving, againste all reasone equity and good conscience.
Id.
213 See id.
214 See Tabb, Evolution of Discharge, supra note 33, at 336.
In 1542 Parliament enacted the first English bankruptcy law, 34 & 35 Henry 8, chapter 4, entitled ‘An act against such persons as do make bankrupts.’ As the title indicates, the act was not passed with any heed for the interests of the debtor. Instead, it was intended to give creditors another collection remedy. The new remedy lay against all fraudulent and absconding debtors (but not merely unfortunate debtors), referred to throughout the act as ‘offenders.’ This act, along with all of the early bankruptcy laws, was quasi-criminal in nature, and provided for the imprisonment of the offender if necessary. A British commentator notes that ‘the law seems at that time to have been administered with considerable severity.’ Id. Under this act (and for almost three centuries hence) bankruptcy was purely involuntary as to the debtor. The right to commence a bankruptcy proceeding rested solely in the hands of the creditors of the debtor. This limitation was perfectly consistent with the rationale of the act, which was to protect creditors and thus facilitate commerce. Upon notice the various assets of the debtor were seized, appraised, and sold, and the proceeds were distributed pro rata to all creditors proving just claims.
Id. at 329–30. The first voluntary bankruptcy law in England was passed in 1844 and applied to traders only. Id. at 353. This was extended to non-merchants in 1861. See id. at 354.
215 See Tabb, Evolution of Discharge, supra note, 33 at 336. But see Weisburg, supra note 211, at 6. Weisburg looks at a 1697 treatise by Daniel Defoe, vocal commentator on bankruptcy law and its impact on society. In his “Essay on Projects,” Defoe sets out that the laws of England are, “generally good, and above all things are temper’d with Mercy, Lenity, and Freedom.” Id. But bankruptcy law
has something in it of Barbarity; it gives loose to the Malice and Revenge of the Creditor, as well as a Power to right himself, while it leaves the Debtor no way to show himself honest: it contrives all the ways possible to drive the debtor to despair, encourages no new Industry, for it makes him perfectly incapable of anything but starving.
Id. Sentiments such as Defoe’s clearly show that society, as a whole, was conscious of the ill effect the law had on the average bankrupt. See id.
216 See Tabb, History of Bankruptcy, supra note 33, at 7.
217 For an example of England’s historical perception of bankruptcy in the nineteenth century, one should read Dickens’ The Little Dorrit. See generally Charles Dickens, The Little Dorrit (Dodd, Mead 1951) (1857) (a story about a father and his family living and growing up in the Swansea debtors’ prison). Dickens’ tale is not unlike Defoe’s sentiment referred to supra in note 215. Essentially, the bankrupt was treated like a leper, and the prison was like a leper colony. Mr. Dorrit finally gets out of prison after receiving a windfall in inheritance, spends it all, and then dies before being forced to return to debtors’ prison. The story’s main focus is on how bankruptcy impacts the family unit and how it is truly punitive in nature.
218 See Tabb, Evolution of Discharge, supra note 33, at 330.
219 See id. at 333. Tabb also notes that discharge was not automatic. The bankrupt needed to receive a “certificate of conformity.” To receive this, the bankrupt needed to surrender voluntarily to an examination by the court, to full disclosure, and to delivery of all the bankrupt’s assets to the court. The court maintained the power to deny the certificate, but this discretion was seldom used. What is interesting is that creditors at the time had no power to block the bankrupt’s receipt of the certificate. See id. at 333–34. One could argue that this was one of the first pro-debtor bankruptcy laws, but as will be seen, the act lasted all but three years. See id at 333.
220 See id. at 339. This provision is still popular in the personal bankruptcy laws of many countries today.
221 See Tabb, Evolution of Discharge, supra note 33, at 335–36.
222 See Weisberg, supra note 211, at 66. As Professor Weisberg notes, in the United States, bankruptcy law was seen as a “robust, economical, and scientific instrument of commercial efficiency.” See id. In England, credit was morally tinged and represented false wealth to many people in the traditional land-based society. See id. at 13.
223 See id.
224 See James A. Morone & Janice M. Goggin, Health Policies in Europe: Welfare States in a Market Era, 20 J. Health Pol., Pol’y & L. 557, 558, 563 (1995) (noting that England currently has a state-run health care system, but that it and other similar European systems may soon be “Americanized”).
225 See Efrat, supra note 3, at 100–01. English bankruptcy rates are higher than those in most other parts of Europe. See Michael Harrison, Personal British Bankruptcies Hit 10-Year High, The Fed. Cap. Press of Austl., Nov. 10, 2003, at A17 (stating that high rates of bankruptcy in Britain are the result of the explosion of consumer credit).
226 As an example of how harsh the “bankrupt” was treated by the early British code, consider that a nonconforming bankrupt was subject to the death penalty and that to obtain a discharge the bankrupt had “to (i) secure a certificate of conformity from a majority of ‘bankruptcy commissioners,’ (ii) obtain such a certificate from four-fifths of creditors, in value and number, and (iii) swear that the creditor certificates ‘were obtained fairly and without fraud.’” Peter V. Pantaleo, Basic Business Bankruptcy, PRACTICING L. INST., COMMERCIAL LAW AND PRACTICE COURSE HANDBOOK SERIES 7, 11 (1992).
227See, e.g., David Gow, Former Alstom Chief to Return His �2.7 Million Pay-off, Guardian Unlimited, at http://www.guardian.co.uk/executivepay/story/0,1204,1021483,00.html (Aug. 19, 2003) (last visited Nov. 22, 2004) (discussing the public disdain at a corporate officer who received a golden parachute before the company failed).
228 See Lucinda Kemeny & Garth Alexander, Blair Chases American Dream, Times (London), Feb. 18, 2001, at A1 (noting mantra of “once a bankrupt, always a bankrupt”). The United States did away with the word bankrupt in the 1978 Code, replacing it with the more genteel “debtor,” exactly because bankrupt carried such negative stigma. Donald R. Price & Mark C. Rahdert, Distributing the First Fruits: Statutory and Constitutional Implicaitons of Tithing in Bankrutpcy, 26 U.C. Davis L. Rev. 853, 862 n.33 (1993) (stating that the 1978 Reform Act, which created the current Bankruptcy Code, does not refer to the word “bankrupt” but uses the more euphemistic word “debtor” instead).
229 Steven Pearson, Successful Restructuring Requires Sensitivity, The Financial News, Dec. 1, 2002, available at 2002 WL 24141004.
230 See infra notes 230–307 and accompanying text.
231 See Efrat, supra note 3, at 100–101.
232 See infra notes 259–308 and accompanying text.
233Cf. Philip Cullum et al., Entrepreneurship Around the Globe: Adapting to Different National Environments, Outlook Point of View (May 2002), at http://www.accenture.com/
xdoc/en/ideas/outlook/pov/A4_Global_entrepreneurial_models_PoV2.pdf (last visited Nov. 22, 2004) (stating that the most important aspect for entrepreneurial executives is the particular country’s attitude toward the possibility of failure).
234 Metzger & Bufford, supra note 4, at 153.
235 See Kilborn, German Approach supra note 14, at 257; French Law on Consumer Overindebtedness, supra note 14, at 5–9.
236 Eur. Credit Research Inst., Consumer Credit in the European Union (Feb. 2000), available at http://www.ciaonet.org/wps/gun01/gun01.pdf (last visited Dec. 4, 2004). “The weight of consumer credit is far higher in the U.S. economy than in the EU countries, including the UK.” Id. Because of large differences in the use of consumer credit observed across EU countries, however, it is hard to generalize about a European consumer credit use. Id.
237 See Org. for Econ. Cooperation & Dev., Household Saving Rates - Statistical Data Included, Economic Outlook, June 2001, at Annex, tbl.26, available at http://www.findarti
cles.com/p/articles/mi_m4456/is_2001_June/ai_78133182 (last visited Dec. 10, 2004). As of 2000, France’s national saving rate was 16.1% while Britain’s was 4.7%. Id. The savings rates overall appear to be trending down over the long term.
238 See Heather Stewart et al., Hawkish King Fears High Debt Could Tip UK into Crash, Guardian Unlimited, at http://www.guardian.co.uk/business/story/0%2C3604%2C106
3043%2C00.html (Oct. 15, 2003) (last visited Dec. 4, 2004).
239 OFT Issues Consumer Debt Warning, News.BBC.Co.UK, at http://news.bbc.co.uk/
1/hi/business/3281871.stm (Nov. 19, 2003) (last visited Dec. 10, 2004).
240 See Efrat, supra note 15, at 166. Professor Efrat hypothesizes that the need for a fresh start policy is greater in societies where the government does not regulate credit rates or availability, where the government actively promotes entrepreneurship, where the welfare programs are small, and where private financial institutions have relatively lax standards for granting credit. See id. at 165–66. He argues that the U.S. fresh start policy is very justified in this context, and also that more countries should enact more lenient systems of debt forgiveness as they move toward the United States regarding these factors. See id. at 167–68.
241 See Efrat, supra note 3, at 82–83 (describing how, in Italy and Greece, bankruptcy is available only to merchants or businesses). Under one scholar’s characterization of Continental systems, the most restrictive or “conservative” camp is comprised of systems that provide no debt forgiveness to consumers at all. Id. The “moderate” camp is comprised of nations that offer debt forgiveness to financially distressed consumers, but not as a matter of course, and the least restrictive or “liberal” camp, headed by the United States, consists of countries that provide a relatively prompt bankruptcy discharge as a matter of course. See id. at 84–87.
242 Remarkably, the Greeks use little credit. Greek Economy-Weekly Review, Athens News Agency, Mar. 15, 2003, available at http://www.hri.org/news/greek/ana/2003/03-03-15.
ana.html (last visited Dec. 10, 2004).
243 See Efrat, supra note 3, at 82–83; see also Metzger & Bufford, supra note 4, at 154; Hon. Richard L. Bohanon & William C. Plouffe, Jr., Mongolian Bankruptcy Law: A Comparative Analysis with the American Bankruptcy System, 7 Tulsa J. Comp. & Int’l L. 1, 6 (1999); Kevin P. Block, Ukranian Bankruptcy Law, 20 Loy. L.A. Int’l & Comp. L.J. 97, 99 (1997).
244 In a few of these places, such as Brazil and Venezuela, an individual is only eligible for bankruptcy if he or she is engaged in business activity as a merchant. In many of these places there is also little consumer debt available. Perhaps these laws make sense in their context. See Antonio Mendes, A Brief Incursion into Bankruptcy and the Enforcement of Creditor’s Rights in Brazil, 16 NW. J. Int’l L. & Bus. 107, 111 (1995); Efrat, supra note 3, at 84. In the Czech Republic, the debtor must enter into a settlement agreement with her creditors. See Helmut Gerlach, Bankruptcy in the Czech Republic, Hungary, and Poland and Section 304 of the United States Bankruptcy Code, Proceedings Ancillary to Foreign Bankruptcy Proceedings, 22 Md. J. Int’l L. & Trade 81, 93 (1998). Conversely, Chile and Egypt offer the debtor no discharge at the conclusion of the proceedings. See Ricardo Sandoval, Chilean Legislation and Cross- Border Insolvency, 33 Tex. Int’l L. J. 575, 577 (1998).
245 See Efrat, supra note 3, at 84–85. Professor Efrat notes that, in these conservative nations, bankruptcy is a creditor-biased mechanism, more akin to a debt-collection proceeding that a debt-forgiveness framework. Thus, there is no need to discharge the debt. See id. at 84. In Italy, for example, discharge is for merchants only and it takes five years to get a discharge, while it takes ten years in Greece. See also White & Chase LLP, supra note 146, at 335.
246 The U.S. Bankruptcy Code of 1978 allows certain debts to be wholly or partially discharged.
247 See Efrat, supra note 3, at 82–83. For example, one source claims that the purpose of Italian bankruptcy law is to satisfy the creditors’ rights and remove the insolvency company from the market. See Giorgio Cherubini, Recognition of an Insolvency Scheme of Arrangement in Italy 41, available at http://www.insol-europe.org/publications/cva_
italy.pdf (last visited Dec. 4, 2004).
248 See Efrat, supra note 3, at 81.
249 See id. at 85–86. This category also includes the Asian countries of India, Pakistan, Japan, Singapore, and the Philippines, as well as Israel, South Africa, Kenya, and Uganda. See id.
250 See id. at 84. This attribute has a fundamental impact on debtors seeking relief, as they have the burden of convincing the judge to grant relief. Efrat reports that there are three basic reasons why debtors in this strata choose not to file for bankruptcy: social stigma, ignorance of debt forgiveness outcome, and the high costs and unpredictable results associated with convincing a judge. Id. at 86–87. This is an attribute of Indian law as well as the law of the Philippines, Singapore and Japan, and the African nations listed above. See id. at 85–86.
251 See id. at 84.
252 See id. at 86.
253 See Efrat, supra note 3, at 85; see also Hans Petter Graver, Consumer Bankruptcy: A Right or a Privilege? The Role of the Courts in Establishing Moral Standards of Economic Conduct, 20 J. Consumer Pol’y 161, 170 (1997).
254 See Efrat, supra note 3, at 85.
255 See Graver, supra note 253, at 170; see generally Consumer Law in the Global Economy: National and International Dimensions 287 (Iain Ramsey ed., 1997) (presenting essays on bankruptcy law in foreign states).
256 See Efrat, supra note 3, at 88; see also Christoph G. Paulus, The New German Insolvency Code, 33 Tex. Int’l L. J. 141, 143–44 (1998). Contra Kilborn, German Approach, supra note 14, at 279.
257 See Kilborn, German Approach, supra note 14, at 280–81 (noting that a debtor cannot turn down employment and must work in a job outside the person’s field if that is all that is available).
258 See Paulus, supra note 256, at 144.
The Gesamtvollstreckungsordnung includes a discharge rule—not the Anglo-American rule but the Swiss rule: It keeps the creditors away only as long as the debtor does not achieve a certain income and wealth level. . . . After the closing of the [bankruptcy] procedure, the debtor will have to earn as much as possible for seven years and hand over this income to a trustee, who will divide it among creditors.
Id. at 143–44.
259 The debtor can keep 100% of the first $17,000 in income. See Kilborn, German Approach, supra note 14, at 286. After that, income is shared but the debtor can never keep more than about $27,500 per year. Id.
260 Martin, supra note 16, at 75.
261 See Efrat, supra note 3, at 96.
262 See Kilborn, German Approach, supra note 14, at 260–61; See Kilborn, French Law on Consumer Overindebtedness, supra note 14, at 5–9.
263 See Kilborn, German Approach, supra note 14, at 260–61; See Kilborn, French Law on Consumer Overindebtedness, supra note 14, at 5–9.
264 See Efrat, supra note 3, at 82–83.
265 See Kilborn, German Approach, supra note 14, at 269. In a 1986 report regarding personal indebtedness, legislators acknowledged the need for a consumer bankruptcy discharge, but concluded that “a discharge after the Ango-American model is out of the question.” Id. In discussing French attitudes, Professor Kilborn notes that the French word for business bankruptcy comes from the French word—faillite or the Latin word—fallere, which mean to cheat, deceive, or trick. Kilborn, French Law on Consumer Overindebtedness, supra note 14, at 1. The even more distrusted consumer bankruptcy process, a recent enactment in any event, was called a deconfiture, meaning to “diminish by boiling down, or to squander.” Id.
266 When I say “personal responsibility,” I do not mean the notion that is floating around in the U.S. Congress today, namely that bankruptcy is a moral issue and that people should not take on more debt than they can afford to repay. See Todd J. Zywicki, The Past, Present, and Future of Bankruptcy Law in America, 101 Mich L. Rev. 2016, 2025–27 (2003). Rather, I refer to the notion of whether society is already meeting one’s needs, through national health care, good benefits for the poor and unemployed, and so on.
267 Kilborn, French Law on Consumer Overindebtedness, supra note 14, at 5–9; Kilborn, German Approach, supra note 14, at 260–61. In each of these articles, Professor Kilborn chronicles the rise in consumer credit, as well as the resulting need for better personal bankruptcy protection.
268 See Martin, supra note 179, at 78.
269 See id.
270 See id.
271 See id.
272 See id. at 82.
273 See, e.g., infra notes 277–308 and infra notes 402–430 and accompanying text.
274 Because of this, some scholars consider these composition systems rather than reorganization systems. Two economists recently completed a study of bankruptcy and insolvency laws and infrastructures around the world. See Clas Wihlborg & Shubhashis Gangopadhyay, Infrastructure Requirements in the Area of Bankruptcy Law, in Brookings-Wharton Papers on Financial Services 281 (Robert E. Litan & Richard Herring eds., 2001). Positing that strong creditor remedies, as well as strong rehabilitation systems, should save more firms, they compared countries on several considerations, starting with whether a county’s laws could be considered more debtor friendly or more creditor friendly. See id. at 291. Their study actually purports to be much broader, studying the economic role of insolvency procedures and their affect on efficient allocation of resources, economic growth, and the depth and duration of financial strain. See id. at 284. They defined a creditor orientation as one that recognizes the claims of creditors to a great extent in insolvency, see id. at 295, and a debtor orientation as one that allows debtors to retain a stake or control in insolvency, see id. at 293, although no equity is left in the firm. See id. at 291. They also rated each country or region’s attitudes toward security, particularly floating liens that create a security interest in all cash flow generated by a business, and examined the scope of security interests under various countries’ laws. See id. at 294–95. They argued that countries that allow floating liens or charges and that position the secured creditor’s interests over unsecured claims of labor and the government, for example, should create more certainty for lenders and thus promote lending and growth. See id. at 295, 307. The authors note that, in Latin America, labor claimants are highly favored, which could explain why there is little lending in Latin America. On the other hand, the authors acknowledge that the same favoritism toward labor is present in France, see id. at 301, but there is no dearth of lending there.
Countries found to be very sympathetic to creditor interests in these ways were all the English common-law countries, including the United States, and Scandinavia. See id. at 296–97. Sympathetic countries include Germany, Japan, Netherlands, Switzerland, Scotland and South Africa. Countries hostile to security on these factors include Belgium, Luxemburg, Greece, Spain, and most of Latin America. See id. at 300.
275 See Dr. Wolfgang Lueke, The New European Law on International Insolvencies: A German Perspective, 17 Bankr. Dev. J. 369, 369 n.1 (2001).
276 See id. Lueke states that, with respect to secured interest, in cases opened under the IPR, the IPR provides that “[s]uch a right will not be affected by the opening of the proceeding.” Id. at 386–87.
277 See Martin, supra note 179, at 80.
278 See id. at 82.
279 See Curtis J. Milhaupt, On the (Fleeting) Existence of the Main Bank System and Other Japanese Economic Institutions, 27 Law & Soc. Inquiry 425, 431–33 (2002).
280 See Martin, supra note 179, at 81.
281 See id.
282 See Paulus, supra note 256, at 145.
283 See id. at 147.
284 See Wihlborg & Gangopadhyay, supra note 274, at 293. Part of the reason it is considered more debtor friendly than U.S. law is because of the very strong rights of secured creditors under U.S. law, which are balanced by Chapter 11 and Chapter 7 bankruptcies. Secured creditors do not have these strong rights in France. Id. at 296. In fact, French bankruptcy laws could be considered hostile to secured creditors.
285 See Richard L. Koral & Marie-Christine Sordino, The New Bankruptcy Reorganization Law in France: Ten Years Later, 70 Am. Bankr. L.J. 437 (1996). The laws require greater financial reporting so that companies in distress are identified early, and the companies themselves recognize when they are in need of assistance. All financial reports are filed with the clerk of the Commerce Tribunal who, using computer programs designed to identify signs of weakness in a company, brings defaults to the attention of the president of the Commercial Tribunal. If the company does not address the defaults, the president of the Commerce Tribunal has the power to call the company’s President into chambers for a “frank personal discussion.” I can imagine that companies would prefer to avoid this discussion. Courts in the United States do not have the oversight ability given to the courts in France, and hence no early intervention. See id. at 446. The court can also arrange for mediation between the company and its creditors before judicial remedies are needed. See id.
286 See id. at 444. France has historically protected the rights of workers, which explains the involvement of the court in reorganization plans. Dating back to 1673 with the “Ordinance de Colbert” and the original Commercial Code of 1807, France has had an attraction for state intervention. The courts play a role much more inclined to protect the economic function of society, rather than a means for creditors to regain their debt.
287 See id.
288 The new German Insolvency Code explicitly states, in section 1, that one of the Code’s objectives is the reorganization of insolvent debtors. See Christoph G. Paulus, Germany: Lessons to Learn from the Implementation of a New Insolvency Code, 17 Conn. J. Int’l L. 89, 89–91 (citing the Insolvenzordnung [Insolvency Act], v. 5.10.1994 (BGB1. I S.2866), Section 1 [hereinafter “InsO”]) (2001).
Before we get too excited about this significant change, we should recognize that this does not mean reorganization in the U.S. sense of staying in business. Section 156(1) of the InsO states that “ [a]t the report meeting the insolvency administrator shall report on the economic situation of the debtor and its causes. He shall assess any prospect of maintaining the debtor’s enterprise as a whole or in part, indicate any possibility of drawing up an insolvency plan and describe the effects of each solution on the satisfaction of the creditors.” See Paulus, supra note 256, at 148 n.49 (citing InsO, Section 156(1)). Section 157, however, states that “[a]t the report meeting the creditors’ assembly shall decide whether the debtor’s enterprise should be closed down or temporarily continued.” See id. at 148 n.50 (citing InsO, Section 157). Thus, a reorganization that leaves the debtors operations intact over the long haul seems outside the contemplation of this new law.
289 See Paulus, supra note 256, at 142 (citing Konkursordnung [Bankruptcy Act], v. 10.2.1877 (RGBI. S.351)).
290 See id. (citing Verordnung uber die Gesamtvollstrecknung (Gesamtvollstreckungsverordnung) [Collective Enforcement Act], v. 6.6.1990 (GBI.DDR I S.285).
291 See id. at 141–42.
292 See id.
293 See Paulus, supra note 256, at 149 n.13 (citing InsO, Section 1).
294 See id., at 142. Professor Paulus explains in another article that “a few years after the wall came down, an enormous and politically significant number of East German households had become insolvent to a high degree due to common Western sales practices to which former GDR inhabitants had never been exposed before. Thus, the German legislature was bound to do something for the needs of these families.” Paulus, supra note 288, at 90.
295 See Broude et al., supra note 6, at 518–19. In fact, many of the important decisions made by the German Bankruptcy courts are actually delegated to a graduated law clerk who is paid less, and presumably has far less experience, than the judges themselves. See id. at 534–35.
296 See Paulus, supra note 256, at 146–47 (stating that a trustee that is independent of the interests of either the debtor or the creditors, is usually appointed in an InsO case for the purpose of running the debtor’s business, but that if the creditors still trust the debtor, “they may agree to the personal management of the debtor.”).
297 Wihlborg & Gangopadhyay, supra note 274, at 300.
298 See Paulus, supra note 256, at 146 (citing InsO, Section 56(1)).
299 See Wihlborg & Gangopadhyay, supra note 274, at 301.
300 See Paulus, supra note 288, at 93 (noting that the largest creditors have the right to appoint an administrator that they choose and know and trust). As Professor Paulus explains, there is no particular reason why these big creditors should not have the right to work with someone whom they know and trust, given that they are the ones paying most for the debtor’s insolvency and thus have the most to lose. But:
this theoretical picture gets distorted when these creditors start to act irresponsibly, responsibility meaning here that they should keep in mind that they are given all these rights and powers in order to increase the efficiency of the new law, and not in order to achieve some windfall advantage.
See id.
301 Id. at 91–92.
302 See Paulus, supra note 256, at 148 n.50 (citing InsO, Section 157).
303 See Paulus, supra note 288, at 91.
304 See id. at 91–92.
305 See id.
306See Broich, Bayer, von Rom, supra note 101 (noting that debtors-in-possession are rare in Germany, though the law allows them).
307 See Paulus, supra note 288, at 90. As Paulus notes, in addition to ignoring concepts such as debtor-in-possession, and presumptions of rehabilitation over liquidation, courts and creditors interpret the new laws as narrowly, and as consistently, as possible with the law replaced. See id.
308 See id.
309 See Cullum et al., supra note 233.
310 Stephanie Gruner, Seeking a Second Chance: Is Failure Still a Dirty Word?, Wall St. J., June 21, 1999, at A1. This makes more sense than one might think. In some countries, executives can be imprisoned for failing to stop operating a failing company as soon as it is clear that it is failing. In Germany, for example, one can be sent to jail for deliberately and recklessly keeping a company in operation once it is losing money. Id. at A3. In other countries, there is personal liability to directors and officers of a company that is allowed to operate while it is losing money. Needless to say, laws like these do not encourage risk taking.
Tough attitudes toward financial failure make great sense in more socialist societies. The government protects people by at least providing the basic necessities of life. These basics are provided by taxing private industry enough to keep most people in the middle classes. None of this encourages entrepreneurialism nor necessitates a strong debt forgiveness system, though it does provide more safety nets than the U.S. system. As the EU embraces a more market-based economy, it will be interesting to see if attitudes change. It also will be interesting to see if average citizens become more forgiving, both in society and in business, in order to support and create a more market-based economy.
311 See White & Chase LLP, supra note 146, at 31.
312 Id.
313 See id. According to this study, most EU member states have legal procedures aimed at rehabilitation, but they appear to be unsuccessful or unpopular with the business community, due to negative, complex, and expensive procedures, a lack of awareness of the options, as well as slow adaptation to new systems. Id. at 356.
314 Id. at 354. The study went on to say that “[i]n Latin countries, the word “faillite” (“fallimento”, “quiebra” . . .) holds a very negative connotation. It seems that these cultural elements would also require a sound reflection in order to involve these three communities.” Id.
315 See id. at 356; see also Bethany Blowers, The Economics of Insolvency Law; Conference Summary, Fin. Stability Rev. 153, 153 (Dec. 2002), available at http://bankofengland.co.
uk/conferences/fsr/fsr13.htm (last visited Nov. 22, 2004) (reciting the remarks of Paolo di Martino, an Italian attorney, stating that bankruptcy law must “be able to select between good and fraudulent debtors”).
316 The implication is that fraud in bankruptcy is a major issue, although there is no reason to believe that this is the case. Given the extremely small number of fraudulent debtors that are present even in the lenient U.S. system, this goal seems oddly misplaced. It continues to focus on the negative rather than promoting forgiveness and future economic activity. These goals seem particularly misplaced when compared to U.S. metaphors about the fresh start. For example in the famous case of Local Loan v. Hunt, the U.S. Supreme Court described the Bankruptcy Act as: “a new opportunity in life and a clear field for future effort unhampered by the pressure and discouragment of preexisting debt.” 292 U.S. 234, 244 (1934). Commentators have claimed that bankruptcy provides “the opportunity to free a family from living hell, permitting it to attain a new and brighter world, no longer oppressed by the clouds of fear, degradation, and discouragement . . . .” Papke, supra note 76, at 212.
317 See supra notes 284–287 and accompanying text.
318 See infra notes 380–414 and accompanying text.
319 See infra notes 415–421 and accompanying text.
320 See infra notes 426–464 and accompanying text.
321 See infra notes 453–463 and accompanying text.
322 See infra notes 465–510 and accompanying text.
323 Douglas G. Boshkoff & Yongxin Song, China’s New Bankruptcy Law: A Translation and Introduction, 61 Am. Bankr. L.J. 359, 359–60 (2001). Under China’s Civil Procedure Law, private enterprises may reorganize, but state-owned enterprises need government approval in order to file for liquidation or reorganization. See id. at 361; see also Xianchu Zhang & Charles D. Booth, Chinese Bankruptcy Law in an Emerging Market Economy: The Shenzhen Experience, 15 Colum. J. Asian L. 1, 12 (2001).
324 See infra notes 464–509 and accompanying text.
325 See Pauline Ma, A New Chinese Bankruptcy System: Made for Business or for the State?, 11 Austl. J. Corp. L. 192, 205(2000).
326 See infra notes 380–414 and accompanying text.
327 See infra notes 392–414 and accompanying text.
328 See infra notes 380–391 and accompanying text.
329 See infra notes 359–379 and accompanying text.
330 See infra notes 359–379 and accompanying text.
331 See Ken R. Minami, Comment, Japanese Thought and Western Law: A Tangential View of the Japanese Bengoshi and the Japanese American Attorney, 8 Loy. L. A. Int’l & Comp. L. J. 301, 302 (1985).
332 See id. at 307.
333 See Yosiyuki Noda, The Character of the Japanese People and their Conception of Law, in The Japanese Legal System 302 (Hideo Tanaka ed., 1976).
334 See Minami, supra note 331, at 305.
335 See Noda, supra note 333, at 303.
336 See id.
337 Associated Press, Japanese Ponder Shame Culture That Leads to Suicides over Debt, Post and Courier (Charleston, S.C.), at http://www.charleston.net/stories/030703/wor_07jap
an.shtml (Mar. 3, 2003) (last visited Nov. 22, 2004).
338 See id.
339 See Halld�r Stef�nsson, Media Stories of Bliss and Mixed Blessings, in The Worlds of Japanese Popular Culture 165 (D. P. Martinez ed., 1998).
340 See id.
341 Id.
342 Id.
343 Ron W. Harmer, Comparison of Trends in National Law: The Pacific Rim, 23 Brook. J. Int’l L. 139, 157 (1997).
344 Id.
345 Id. at 158.
346 Brooke Schumm III, Comparison of Japanese and American Bankruptcy Law, 9 Mich. Y.B. Int’l Legal Stud. 291, 291 (1988).
347 See Associated Press, supra note 337.
348 See Omamori-Good Luck Charms, at http://www.oren.jp/japan_22.htm (last visited Nov. 5, 2004). Perhaps while it is acceptable to the Japanese to transplant foreign popular cultural trends into their society, it is not, however, appropriate to transplant foreign systems of law into Japanese society. The new Japanese bankruptcy laws are based on the United Nations Commission on International Trade Law (UNCITRAL) model law. Kazuhiko Yamamoto, New Japanese Legislation on Cross-border Insolvency as Compared with the UNCITRAL Model Law, 11 Int. Insol. Rev. 67, 69 (2002). The traditional foundation of Japanese aversion to law and the omni-present culture of shame may prevent the new system of law from ever being used by the Japanese in a way that is comparable to other countries.
349 See Noda, supra note 333, at 302.
350 See id. at 309.
351 Minami, supra note 331, at 306.
352 Id.
353 Id.
354 Id.
355 Id. at 306–07.
356 Minami, supra note 331, at 307.
357 Id. at 314 n.93.
358 See Noda, supra note 333, at 302–03.
359 See Arnold L. Redman & N.S. Gullet, An Empirical Study of the Impact of Foreign Ownership on the Values of U.S. Commercial Properties, 11 J. Fin. Strat. Decs. 53, 53 (1998). Perhaps this perception is the result of widespread Japanese real estate investments in the 1980s. For instance, in 1985, Japanese investment in U.S. real estate was $1.8 billion. Within one year, this number climbed to $5.7 billion. By 1988, Japanese investment totaled $16.5 billion.
360 See Mann, supra note 106, at 1084 n.103 (noting that U.S. household savings rates now hover between 0% and 1%, but that the Japanese rates are around 28.5%). Other sources suggest that Japan’s savings rate is now around 11.2%, lower but still among the highest in the world, along with France at 15.6% and Belgium at 13.9%. See Mizen, supra note 2, at 2.
361 See Sungwoo Kim & Steven Morrison, A Fallacy of Composition: Saving Is Good for an Individual, Yet Very Harmful for a National Economy, Exploring Economics, at http://www.
economics.neu.edu/exploring/index.php?pid=8&eid=77 (last visited Nov. 19, 2004).
362 See id.
363 See id.
364 See, e.g., Japan Economy on Track for Another Grim Year, Honolulu Advertiser, at http://www.honoluluadvertiser.com/specials/outlook2002/japan.shtml (Jan. 20, 2002) (noting the frugality of Japanese tourists in Hawai’i due to the economic downturn in Japan). Banks even started lending at virtually no interest to try to get people to spend money and borrow money but to no avail. This is just too foreign for the Japanese who like to buy with cash but only if they feel comfortable with the amount they have saved. Because the economy was so soft, this refusal to spend at all made the economy screech to a halt. But see Mann, supra note 106, at 1086 (noting that despite these unquestionably high savings rates, Japan does have a great deal of consumer debt in its economy).
365 During the Tokagawa period (1603–1868), feudal lords exploited tenant’s surpluses and left tenants with very low standards of living. See Shin-Ichi Yonekawa, Recent Writing on Japanese Economic and Social History, in Econ. Hist. Rev. 107, 108 (1985). Japan also engaged in non-agricultural endeavors in this period, including rice marketing and financing, land transport, and coastal shipping. Id. at 109. During the Meiji period that followed (1868–1912), Japan attempted to nurture a modern industrial economy. Id. at 110. This movement was drastically behind similar movements in the United States and Europe, however. Id. It also had a different flavor, resulting from Marxist influences, that retained militaristic influences on industry. Id. Although the resulting government-run businesses were not successful, this left valuable lessons for the more capitalist systems that followed. Id. at 111.
366 See Post-Occupied Japan—After WWII, at http://www.japan-101.com/history/history
_post_occupied_japan.htm (last visited Nov. 6, 2004).
367 See id.
368 See id.
369 Mark Thornton, The Japanese Bubble Economy, at http://www.lewrockwell.com/thorn
ton/thornton24.html (May 23, 2004) (last visited Nov. 6, 2004). A clear example of a bubble economy comes from the dot com mid-1990s, where the natural price of a company’s stock and the artificial selling price differed significantly. Thus, in this short time, a large spike or bubble would occur, until it ultimately burst based on the artificial valuations which had previously propped it up. See Economy: Japan’s Economy Enters an Era of Globalization, at http://
www.sg.emb-japan.go.jp/JapanAccess/economy.htm (last visited Nov. 29, 2004).
370 See Thornton, supra note 369.
371 See Mann, supra note 106, at 1057.
372 See id.
373 See id. at 1074. Carrying a balance involves telling the sales clerk that the item will not be paid for immediately, a step many Japanese are unwilling to take for smaller purchases and even many larger purchases. In reality, then, most Japanese credit cards have been used like a U.S.-style debit card. See id. at 1074–75.
374 See id. at 1080.
375 See id. at 1081.
376 See Mann, supra note 106, at 1081.
377 See Arthur J. Alexander, Business Failures Rising in Japan as New Bankruptcy Law Takes Effect, 22 Japan Econ. Inst. Rep. (June 9, 2000), at http://www.jei.org/Archive/JEIR00/
0022w5.html (last visited Nov. 9, 2004).
378 See id. The theory behind changing the law was that if these companies could pay back their debts, rather than just ceasing operations, this might save the failing banks and the entire system. See id.
379 See id.
380 Doing Business in Japan � 7.01 (Zentaro Kitagawa ed., 2001). The system that was in place was simply a private agreement (kashi bunsan) between the obligor and his creditors. See id. The obligor was a social outcast, and not worthy of the usual social considerations due to a member of society. See id. Private agreements began in the 1600s and continued until 1867. See id.
381Id. � 7.01[3] (2001); Bankruptcy Act, arts. 5, 12, 31, 33, 34, 42–44, 80–82.
382 Doing Business in Japan, supra note 380, � 7.01[2]
383 See Mann, supra note 106, at 1084–85.
384 See Doing Business in Japan, supra note 380, � 7.02.
385 Japanese law focuses on the civil law approach of accentuating the debtor’s insolvency to justify bankruptcy proceedings. Currently, Japanese law recognizes three bankruptcy causes: shiharai-funC (insolvency), shiharai-teishi (suspension of payments), and saimu-chCka (liabilities exceed assets). When a petition is filed with the clerk, the court does not confirm that there is in fact a cause that would support the petition. The obligor can rebut each type of cause if they do not want the bankruptcy adjudicated. For a more in depth overview of how Japanese Bankruptcy law operates and treats adjudication of Bankruptcy status see Asian Development Bank, Insolvency Law Reforms—Report on Japan, at http://www.insolvencyasia.
com/insolvency_law_regimes/japan/index.html (last visited Nov. 22, 2004); Shinchiro Abe, Recent Developments of Insolvency Laws and Cross-Border Practices in the United States and Japan, 10 Am. Bankr. Inst. L. Rev. 47, 49–51 (2002). As in the United States, a trustee is appointed to take over all non-exempt assets. See Minhi shikkC HC [Civil Execution Act], Law No. 4 of 1979), arts. 131, 132, 152, 153, cited in Doing Business in Japan, supra note 380, � 7.06[1].
386 See Efrat, supra note 3, at 102. It will be granted, in the judge’s discretion, only if the judge finds that the debtor is honest and unable to pay his or her debts. See id. Grounds for denial of a discharge include fraudulent conveyances prior to the case and making false statements to the court. See Minji saisei ho [Civil Rehabilitation Act], Law No. 225 of 1999, arts. 366–69.
387 See Doing Business in Japan, supra note 380, � 7.08[3] n.14.
388 Efrat, supra note 3, at 100–01.
389 See Mann, supra note 106, at 1084.
390 See Doing Business in Japan, supra note 380, � 7.01[2].
391 See id.
392 See id.
393 See Shinichiro Abe, The Japanese Corporate Reorganization Reform Law of 2002, 22 Amer. Bankr. Inst. J. 36, 36 (2003); Kent Anderson, Small Business Reorganizations: An Examination of Japan’s Civil Rehabilitation Act Considering U.S. Policy Implications and Foreign Creditors’ Practical Interests, 75 Amer. Bankr. L.J. 355, 360 (2001).
394 See Abe, supra note 392, at 36 n.6 (citing Wagi ho [Composition Act], Law No. 72 of 1922 [hereinafter Composition Act]. This was the reorganization law most often used before the recent enactment of the Civil Rehabilitation Act on Dec. 14, 1999. See Minji saisei ho [Civil Rehabilitation Act], Law No. 225 of 1999 [hereinafter Civil Rehabilitation Act]. For the statistical figures, see Anderson, supra note 392, at 360 (citing 1 Saiko Saibansho Jimu Somukyoku [Supreme Court General Secretariat], Shiho Tokei Nenpo, Minji gyosei hen (Annual Report of Judicial Statistics, Civil and Administrative Cases Volume)) (1990–1999).
395 See Kaisha kosei ho [Corporate Reorganization Act], Law No. 172 of 1952 [hereinafter Corporate Reorganization Act]. The Corporate Reorganization Act has been described as a rigid and unforgiving process designed for the rehabilitation of large publicly-held corporations. See Theodore Eisenberg & Shoichi Tagashira, Should We Abolish Chapter 11? The Evidence fom Japan, 23 J. Legal Stud. 111, 113–14 (1994).
396 See Civil Rehabilitation Act, supra note 393.
397 See Abe, supra note 392, at 36. This is essentially an out-of-court, private workout arrangement. Because it requires the approval of all creditors to the proposed workout plan, it is not used much. Id.
398 See Anderson, supra note 392, at 360–61 (stating that the CRA is best seen as an extension or revision of the Composition Act).
399 See id.
400 See id. at 363–64. The Corporate Reorganization Act had yet to be modernized when the CRA was enacted, making the CRA the most recent policy statement about business reorganization policy in Japan. See id.
401 See id. at 363.
402 See, e.g., Broude, et al., supra note 6, at 560 (stating that France also has no insolvency requirement).
403 See Civil Rehabilitation Act, art. 21. Now, a mere apprehension of either balance sheet or equitable insolvency is sufficient to allow one to file a successful petition. See id. The reason for the change was that the drafters wanted to avoid an insolvency requirement that could make it too late to rehabilitate. See Anderson, supra note 392, at 367.
404 See Civil Rehabilitation Act, arts. 21(1), 33. There must be a chance that the plan will actually be approved and a showing of good faith. See id. There is a time limit for filing a plan, but it is not a rigid one. See Anderson, supra note 392, at 391. Unlike the Composition Act, which requires a plan at filing, “the regulations accompanying the CRA provide that, unless special circumstances exist otherwise, a plan should be filed within two months of the deadline for submissions of proof of claim, that claims deadline generally being between two and four weeks after commencement.” Civil Rehabilitation Act, arts. 18(1), 84 (emphasis added). Furthermore, it is the court that determines the time frame for submitting a plan. “Debtor shall prepare and submit to the court a draft rehabilitation plan within the period stipulated by the court.” Anderson, supra note 392, at 391 (citing Civil Rehabilitation Act, art. 163(1)).
405 The court, however, has the discretion to appoint a dizzying variety of professionals in a case, including supervisors, examiners, trustees, receivers, representative officers, and creditors’ committees. See Anderson, supra note 392, at 373–79 (describing the role of each of these professionals in detail).
406 See id. at 373.
407 See id.
408 See id. The court can appoint a supervisor to monitor the debtor. The statute is vague in terms of the powers of the supervisor, other than that a supervisor will oversee the debtor and make sure the debtor does not undertake specific acts, as determined by the court, without the consent of the supervisor. Civil Rehabilitation Act, art. 54. The supervisor has two affirmative powers: 1) the court can grant the supervisor a right of avoidance to challenge fraudulent and refilling transfers, id., art. 56, and 2) the supervisor has a subpoena-like right to demand reports directly from the debtor and its officers and managers. Id., art. 59.
409 See id. The powers of the examiner are not as far reaching as those of the supervisor in that the examiner does not have the subpoena and avoidance powers. But, the examiner is capable of examining the debtor. Id., art. 62). The major duty of the examiner is to provide a report to the court in a stipulated time. Id.
410 See Abe, supra note 392, at 36. The amendments to the Corporate Reorganization Act went into effect on April 1, 2003. Id.
411 Id.
412 See Civil Rehabilitation Act, art. 51; Anderson, supra note 392, at 380 n.148. But, the CRA does provide that a court can temporarily limit a secured creditor’s right to sell a debtor’s property at a judicial sale, if the debtor applies for such an order, pays the creditors potential costs up front, proves that the delay will not hurt the creditor, and also proves that the stay of such action is in the best interests of creditors. Civil Rehabilitation Act, art. 31(1)(2).
413The debtor has the burden of proving that the creditor is not entitled to the asset or the stay, unlike under Section 362 of the U.S. Bankruptcy Code, in which the debtor gets an automatic stay and the creditor must prove a host of facts in order to get the stay lifted. See 11 U.S.C. �� 362(d)(1), 362(d)(2). The narrowness of this exception demonstrates the powers of secured creditors in reorganization cases generally, including cases instituted under the CRA.
414 Civil Rehabilitation Act, art. 148(1). This essentially amounts to a redemption under U.S. bankruptcy law, see 11 U.S.C. � 722, and is always permitted in a Chapter 11 as well as a Chapter 7. Unfortunately, most U.S. debtors and, I suspect, Japanese debtors, do not have the cash to actually buy out the secured party’s interest in such collateral in most cases. While this is not a drastic displacement of the secured party’s rights by U.S. standards, and probably of little use to a cash-poor debtor, it is the first example in Japanese history of reducing a secured party’s claim in a bankruptcy case. See Anderson, supra note 392, at 384. This provision could be useful in Japan’s current deflationary and stagnant economy, where many types of collateral have not held their value. If nothing else, the provision may provide leverage—for the first time—against the secured party within a bankruptcy case. See id.
The amendments to the Corporate Reorganization Act made the process far simpler overall than it once was. See Abe, supra note 392, at 36 (stating that it was used between four and fifty-seven times per year during the past twenty years). The bankruptcy court need not find that a company has a prospect of reorganization under the new Corporate Reorganization Act, which is more favorable to debtors than the CRA, and which may facilitate earlier filings. The Corporate Reorganization Act also gives better protection for post-petition claims, thus promoting post-petition financing. See id. at 37. Finally, while the Corporate Reorganization Act is not a debtor-in-possession system per se, it does allow the court to appoint members of the debtor’s management in lieu of a trustee, meaning the debtor chief executive officer, its chief financial officer, etc. See id.
415 Anderson, supra note 392, at 363. It is hard to imagine the U.S. government doing such a show to promote the use of Chapter 11, but the Japanese economy is in deep trouble.
416 Mark West, Dying to Get Out of Debt: Consumer Insolvency Law and Suicide in Japan 14–15 (2003), available at http://www.law.umich.edu/centersandprograms/
olin/abstracts/discussionpapers/2003/west03015.pdf (last visited Nov. 22, 2004); see Francoise Kadri, Millions of Ordinary Japanese on Brink of Financial Ruin as Debts Mount, Agence Fr.-Press, Mar. 24, 2002, available at 2002 WL 2369590; Yuri Kageyama, Debt, Loan Sharks and Culture of Shame a Recipe for Suicide, Japan Times, Mar. 13, 2003, at 15; Marina Kamimura, As Japan’s Economy Stumbles, Suicides Near Record Levels, CNN.Com, http://www.
cnn.com/WORLD/asiapcf/9809/13/japan.suicides (Sept. 13, 1998). Suicide is tied directly to financial failure, and few people know that they can file for bankruptcy instead. See Gautaman Bhaskaran, Suicide State, The Hindu, May 12, 2002, available at 2002 WL 20190290. There are scores of newspaper articles reporting on this problem, although this story is among the most poignant. It ties the high suicide rates directly to the economic slump and outlines the government’s attempts to alleviate the problem through education. The article reports on Japan’s well-known tradition of life-time employment and company loyalty, as well as the trend toward suicide when job loss occurs. Japan’s suicide rate is the highest in the industrial world, over 80 per day. This source attributes a large portion of such deaths to financial problems, a phenomenon unknown to U.S. society. See id.
417 Stigma can be explained by looking at psychological literature that claims that, the more a society values independence, the less worried it is likely to be about contract breaches in general, and failures to pay specifically. Cultures that highly value dependence over independence are more likely to want to keep their word at all costs as a way of saving face. Davangshu Datta, Uncertain Times, The BS Weekend, October 26, 2002, available at 2002 WL 100052313.
418 Milhaupt, supra note 279, at 434–35.
419 See Curtis J. Milhaupt, A Relational Theory of Japanese Corporate Governance: Contract, Culture, and the Law, 37 Harv. Int’l. L. J. 3, 4 (1996).
420 See id.
421 See id.
422 See Wihlborg & Gangopadhyay, supra note 274, at 305. For example, in Indonesia and Thailand, new restructuring laws and procedures were implemented after the Asian crisis. See id. at 306. These new changes have had virtually no effect in assisting viable companies to restructure or in closing down nonviable firms, because there is a deep-rooted belief that creditors should not be able to take over firms that owner-managers have built up over time. Id. This obviously creates no incentives for firms to attempt to improve their businesses as there is no way for a creditor to effectively foreclose on assets and no threat of take-over.
423 See infra notes 423–510 and accompanying text. Thus, there is much less to say about the bankruptcy laws of Hong Kong and China; see also Roman Tomasic et al., Insolvency Law Administration and Culture in Six Asian Legal Systems, 6 Austl. J. Corp. L. 248, 248 (1996) (noting that the Hong Kong and Chinese laws in place are old and their purpose is to kill the company, not revive it).
424 Leslie Burton, An Overview of Insolvency Proceedings in Asia, 6 Ann. Surv. Int’l & Comp. L. 113, 114-15 (2000).
425 See Tomasic et al., supra note 422, at 252 (stating that China has no personal bankruptcy system). China is also developing a consumer culture. The Knight Ridder news service ran a recent story about Mercedes dealerships and Gucci stores popping up all over China. Tim Johnson, China: Asia’s New Money Machine, Albuquerque. J., Feb. 15, 2004, at B8.
426 See infra note 484–493 and accompanying text.
427 See Burton, supra note 423, at 114.
428 Tomasic et al., supra note 422, at 255.
429 Burton, supra note 423, at 114.
430 Id. at 115; See Philip Smart & Charles D. Booth, Corporate Rescue: Hong Kong Developments, 10 Am. Bankr. Inst. L. Rev. 41, 42 (2002).
431 See Burton, supra note 423, at 114–15.
432 See id. at 115.
433 Charles D. Booth, Hong Kong Corporate Rescue: Recent Developments, 15 Am. Bankr. Inst. L. Rev. 24, 24 (Nov. 2000). Interestingly, the bill provided that provisional supervision be available to both insolvent and solvent companies. Id.
434 See id.
435 See id.
436 See Philip Smart & Charles D. Booth, Provisional Supervision and Workers’ Wages: An Alternative Proposal, 31 HKLJ 188, 188 (2001).
437 Id.
438 Smart & Booth, supra note 429, at 43. The law actually requires such companies to “pay off in full (or set up a trust account with a licensed bank containing sufficient funds to pay off in full): (a) all wage claims owed to its employees; and (b) all entitlements arising under the Employee Ordinance (e.g. severance payments) owed to its ‘former employees.’” Id. Because the words “former employees” are interpreted narrowly, this requires companies to not only set aside the funds for those already laid off, but also to calculate and pay in advance the same amounts for workers that will be laid off in the restructuring effort. Id.
439 Electronic Interview with Charles D. Booth, Associate Dean, University of Hong Kong (Dec. 2, 2004). In compulsory liquidations, the workers’ main protection comes from what is called the “protection of wages on insolvency fund.” A possible solution to the current impasse, proposed by the Secretary for Financial Services and the Treasury in September of 2002, is to require that in a provisional supervision, companies be required to pay up front (or deposit in a trust account) an amount equivalent to the amount that would be payable by this fund in a compulsory liquidation, rather than to pay the entire amount of all entitlements in full. Id.
440 Id. at 42–43.
441 See id.
442 Id. Though exercising this veto power might cause the bank in question to suffer bad publicity, the current draft does allow a primary secured creditor to prevent a provisional supervision from happening. Id. at 44.
443 See Charles D. Booth & Philip St. J. Smart, Retroactive or Prospective?: Determining the Scope of Hong Kong’s New Insolvency Law, 8 Int’l Insol. Rev. 27, 32 (1999).
444 Id. The bill also provided that all bankrupts who were adjudicated bankrupt prior to April 1, 1998 would be discharged from bankruptcy on April 1, 1999. See id.
445 Id. at 32 n.24.
446 Id. at 32.
447 See Id.
448 See Kelvin Chan & Chow Chung-yan, Bankruptcies Fall to Their Lowest Level in Two Years, S. China Morning Post, Dec. 20, 2003, at 3.
449 Id.
450 Id.
451 Id.
452 Id. As in the United States, there is some indication that filings increased after the discharge rules were liberalized in 1998, though the entire increase is unlikely to be attributable to this fact. Id.
453 Hong Kong Bankruptcies and Jobless Rates Hit Record, The Asian Banker J., Sept. 20, 2002, at 4.
454 Id. The authors note that this amounts to 1.34 credit cards per person. Id.
455 Tomasic et al., supra note 422, at 282–83.
456 Id. at 283.
457 Id.
458 Id. Often, the purpose of a bankruptcy in Hong Kong is to provide access to compensation for employees, following a business closure, from a wage insolvency fund. Id. at 282. Workers in Hong Kong tend to fall into two attitudinal categories based on their age. Those over 50 tend to be tied into Chinese culture and beliefs, and think of business relationships as long term commitments. Younger workers are often more influenced by Western culture, and rarely view business in this long-term way. They are not afraid to use the legal system if they think it will help them. Thus, the Confucian tradition is dwindling. Chinese influence is limited because most insolvency practitioners are trained in the British common law tradition. Id. at 283.
459 Burton, supra note 423, at 117.
460 Id.
461 Id. The relationship between Hong Kong and China concerning bankruptcy is complicated. See id at 120. At the moment, China does not recognize Hong Kong bankruptcies. See id. China is now the biggest investor in Hong Kong, and as a result there is a large amount of money owed to Hong Kong from Chinese businesses. Id. at 116.
462 Tomasic et al., supra note 422, at 255–56.
463 Andrew Duncan, A Brief Overview of Insolvencies in Hong Kong, 30 BCD News & Comment 21 (1997).
464 Tomasic et al., supra note 422, at 256.
465 Id. at 282.
466 See The World Fact Book Website—China, http://www.cia.gov/cia/publications/fact
book/geos/ch.html (last visited Dec. 14, 2004). This is particularly striking when compared to U.S history reaching back only to 1776 A.D.
467 Id. (providing a July 2004 estimate).
468 See Asian Dev. Bank, The Development of Private Enterprise in the People’s Republic of China 63–65, available at http://www.adb.org/documents/studies/PRC_Pri
vate_Enterprise_Development/prc_private_enterprise.pdf (Mar. 5, 2003) (discussing five types of private entities and how “private” is defined in China both by the state and by economists).
469 See id.
470 See, e.g., Stephen H. Diamond, The PetroChina Syndrome: Regulating Capital Markets in the Anti-Globalization Era, 29 J. Corp. L. 39. 47 (2003) (describing the PetroChina initial public offering).
471 See Allan Zhang, Hidden Dragon: Unleashing China’s Private Sector, at http://www.
pwcglobal.com/extweb/newcolth.nsf/docid/3D15C57A6D220BB985256CF6007B9607, (last visited Nov. 22, 2004). It is important to note that this data is provided by PricewaterhouseCoopers. The firm may have a pecuniary interest in portraying the investment climate in China as being better than it is in reality.
472 See id.
473 See id.
474 Id.
475 Id.
476 See Zhang, supra note 470.
477 Christopher A. McNally, China’s State-Owned Enterprises: Thriving or Crumbling? 1 (2002).
478See id. at 1.
479 Id. at 5. This write off is a very small amount of the US $422 billion total non-performing loans that burden China’s state owned banks. See A $45 Billion Shot In The Arm, The Economist Global Agenda, at http://www.economist.com/agenda/displayStory.
cfm?story_id=2328008 (Jan. 6, 2004). These loans are a product of the banks’ lending strategy that was driven by the need to prop up the bankrupt SOEs and the workers who depend on them. See id.
480 See Zhang, supra note 470.
481 Id.
482 Id.
483 A $45 Billion Shot In The Arm, supra note 484.
484 See Zhang, supra note 470. China will continue to depend on SOEs for a large part of its economic productivity. See id. But, private enterprise is an increasingly important part of the economy. China’s leaders are cognizant of the necessary role that these private businesses will have to play to maintain the country’s growth. See id.
485 See Ma, supra note 325, at 205.
486 See Feng Chen, Chinese Bankruptcy Law: Milestones and Challenges, 31 St. Mary’s L.J. 49, 60 (1999). “Bankruptcy law should play an important role in adjusting social structure, but bankruptcy cases are rarely in court in China.” Id. “The first bankruptcy case was heard in 1987.” Id. “In the first six months, there were 98 cases at the national level.” Id. Overall, 16,632 cases were heard by the court between 1986 and 1999. Id. Most of these cases involved privately-owned enterprises, collectively owned enterprises, and joint-venture enterprises. Id. A great disparity exists between failing enterprises and the number of bankruptcy cases filed. Id. “This disproportion may be attributed to three main factors: (1) immense pressure on government leaders, (2) strong opposition to bankruptcy from banks, and (3) an entrenched ‘reliance’ psychology in society.” Id. Chen describes reliance as a phenomenon where the working class is considered the “leading class” by society, and is thus entitled to be taken care of by the government, especially workers in SOEs. See id.
487 Ma, supra note 325, at 205.
488 Id.
489 Id. at 206.
490 Id.
491 Id.
Chinese government policy is very conservative and will not allow significant SOEs to go bankrupt and judges can’t make bankruptcy decisions without government approval. In addition, many practitioners agree that “the legal system is too raw” and that judges “do not understand the bankruptcy law’ due to their lack of ‘specialization and experience.” Perceiving that courts are ill-equipped to deal with bankruptcy disputes, creditors suspecting or knowing that an enterprise is insolvent will therefore attempt to act without courts’ direction.
Id.
492 B.A. Robinson, Confucianism: Founded by K’ung Fu Tzu, Ontario Consultants on Religious Tolerance, at http://www.religioustolerance.org/confuciu.htm, (July 12, 1995).
493 Ma, supra note 325, at 206.
494 Id. at 207. A challenge faced in drafting bankruptcy law in China is convincing creditors “that even though preserving harmonious relationships has been important, their economic interests might be better served if they resort to legal mechanisms” of bankruptcy. Id.
495 See id.
496 Immanuel Gebhardt & Kerstin Olbrich, New Developments in the Reform of Chinese Bankruptcy Law, 12 Austl. J. Corp. L. 109, 109 (2000) (stating that this law contains China’s most detailed stipulations on bankruptcy).
497 Ma, supra note 325, at 208.
498 Id. at 207.
499 Chen, supra note 485, at 60.
500 Ma, supra note 325, at 208. Chinese workers are considered the leaders of the country. Chen, supra note 474, at 59. Workers sacrifice higher earnings for years believing that they will receive 90% of their wage per year upon retirement. Id. If the SOE goes bankrupt, workers could lose everything. Id.; see Zhang & Booth. supra note 323, at 13 (describing SOEs as more like municipalities than private companies, where their workers are concerned).
501 Ma, supra note 325, at 208–09.
502 Gebhardt & Olbrich, supra note 495, at 109. In the Shenzhen District, the debtor is eligible for bankruptcy if it has suffered serious losses or has been unable to pay its debts as they come due. Zhang & Booth, supra note 323, at 7.
503 Zhang & Booth, supra note 323, at 9.
504 Id. at 7.
505 Id.
506 See Ta-kuang Chang, The Making of the Chinese Bankrutpcy Law: A Study in the Chinese Legislative Process, 28 Harv. Int’l L.J. 333, 333–34 (1987) (describing the entire legislative process in detail); Gebhardt & Olbrich, supra note 495, at 152 (describing the intense pressure Prime Minister Zhao received to pass this law for economic reasons); Zhang & Booth, supra note 326, at 2.
507 Boshkoff & Song, supra note 323, at 360.
508 See Zhang & Booth, supra note 323, at 2.
509 See Boshkoff & Song,supra note 323, at 361; Ma, supra note 325, at 206; see also Gebhardt & Olbrich, supra note 495, at 109–10 (discussing the need for reform); Zhang & Booth, supra note 323, at 2–3 (same).
510 Ma, supra note 325, at 206.
511 See id. at 207. Issues surrounding how fired employees will be taken care of also remain as stumbling blocks. Unlike U.S. bankruptcy law, which is non-judgmental about business bankruptcy, Chinese bankruptcy law attempts to lay blame for a business failure, or at least assess responsibility. Boshkoff & Song, supra note 323, at 361. The Chinese law allows criminal sanctions for poorly-managed enterprises. Id.
512 See Associated Press, supra note 337. In fact, Japanese businessmen are being strongly encouraged by the Japanese government to use this new law, both on television as well as on the web. It would be extremely hard to imagine the U.S. government promoting Chapter 11, yet there are cultural factors at work in Japan that make selling the new bankruptcy law necessary. The traditional Japanese shame culture prevails. Id.
513 Id. One of the most shameful things one can do is not pay one’s debts. See West, supra note 415. Suicide is often preferred to bankruptcy, even when the law is favorable to management and to business. Japan has one of the highest per capita suicide rates in the world. See id. at 9–10.
514 See, e.g., Pamela Pun, Top Bank “Names and Shames” Debtors in Adverts, The Standard (Hong Kong), at http://www.thestandard.com.hk/news_detail_frame.cfm?articleid=51898&
intcatid=2 (Nov. 3, 2004).
515 See supra notes 30–83 and accompanying text.
516 See supra notes 34–83 and accompanying text.
517 Metzger & Bufford, supra note 4, at 153 (noting that when a country attempts to create a market economy, bankruptcy laws are among the first capitalist laws to be enacted).
518 See supra note 2.
519 See Efrat, supra note 3, at 92–94.
520 See Business Suicides: Japan’s Death Trap, Bus. Week Online, at http://www.busi
nessweek.com/print/magazine/content/02_22/b3785141.htm (June 3, 2002).
521 See Wihlborg & Gangopadhyay, supra note 274, at 306.
522 See id.
523 Good examples include the debtor-in-possession model now in place in Japan, Germany and Mexico, but not widely accepted in any of these places.
524 Examples of such cultural components include jobs in France, honor and saving face in Japan, and efficiency in Germany and Australia. Ripe areas for development based on cultural concerns include the breadth of the discharge, the breadth of the automatic stay, the priority scheme, and whether a repayment plan is required, as well as many other rich areas of discussion.