[*PG1]THE ROLE OF HISTORY AND CULTURE IN DEVELOPING BANKRUPTCY AND INSOLVENCY SYSTEMS: THE PERILS OF LEGAL TRANSPLANTATION
Abstract: In this Article, Professor Nathalie Martin examines societal attitudes toward debt and financial failure in the context of two global trends, the liberalization of bankruptcy and insolvency laws, and the increased availability of consumer credit around the world. The Article begins with a description of the history of the U.S. economy, its risk-oriented capitalist ethos, its consumer culture, and its resulting consumer and business bankruptcy laws. The Article next briefly addresses the personal bankruptcy systems of Continental Europe, noting that in some places, U.S.-style bankruptcy systems have been enacted but not necessarily accepted. Professor Martin then discusses Japanese and Chinese cultural attitudes toward debt, and briefly discusses new laws being proposed or passed in Japan, Hong Kong, and mainland China, some of which are based in part upon U.S. laws. Based on this and other examples, she concludes that cultural attitudes play a tremendous role in the efficacy of bankruptcy and insolvency systems. She further concludes that, as more and more consumer and business credit becomes available around the world, the countries affected will need to enact effective and accepted discharge and fresh start principles, but that these systems cannot simply be transplanted from the United States. Such transplantation is likely to be ineffective and thus gradual education and changes in laws and credit availability will be needed in order to avoid the extensive social costs that could result from too much credit in systems that do not accept financial failure.
Does culture shape law or does law shape culture? Throughout history, culture has taken the leading role by informing society of [*PG2]what laws are necessary and appropriate.1 Today, however, global economics are rapidly changing the world, and credit—particularly consumer credit—is being offered in greater amounts and to greater numbers of people in more countries than ever before.2 Commercial borrowing is also on the rise. One question raised by these increases in debt is whether there will be sufficient safety nets in place to help people and entities that are unable to pay back all this new debt.
Many governments with developing economies are aware of the need for more forgiving insolvency systems, and are implementing such systems.3 In most cases, however, these new proposed systems do not arise from existing cultural conditions. Rather, the laws are transplanted from elsewhere and the cultural views are expected to change with the laws. Many new bankruptcy laws have been transplanted from the United States, which has a very different cultural attitude toward debt forgiveness.4 Although these imported systems have been strangely out of place in other societies, the transplantation continues.5 This Ar-
[*PG3]ticle raises the question of whether these attempts at transplantation are likely to create the desired results of fueling a market economy and promoting economic growth and well-being.
The current U.S. bankruptcy system grew directly out of the United States’ unique capitalist system,6 which rewards entrepreneurialism as well as extensive consumer spending.7 It makes sense that a society in which dollars rule would have a forgiving personal bankruptcy system in order to keep consumer spending high, and an equally forgiving business reorganization system to encourage risk taking and economic growth.8 Both systems are part of a larger scheme to keep economic players alive and active in the game of capitalism. U.S. bankruptcy systems are among the country’s few social programs and they address many of society’s ills.9 Thus, they are broad and form an integral part of the social system from which they sprung.10
[*PG4] As globalization takes place, more and more countries believe that creating a viable bankruptcy system will help fuel a market economy.11 As a result, many countries have attempted to create a reorganization scheme for failing enterprises like Chapter 11 of the U.S. Bankruptcy Code (Chapter 11), in which existing management stays in place and manages the reorganizing company.12 These systems are perhaps the most common U.S. legal exports today.13 Many countries are also liberalizing their consumer bankruptcy systems.14 Because consumer credit has become much more available in Western Europe and Japan, as well as parts of the developing world, more forgiving bankruptcy systems are a necessity.15 They cannot be imported wholesale, however.
Insolvency systems profoundly reflect the legal, historical, political, and cultural context of the countries that have developed them. Thus, even countries that share a common legal tradition, such as the United States, England, Canada, and Australia, display marked differences in how they approach both business and personal bankruptcies.16 Countries with different legal traditions, such as those within Continental Europe and Japan, currently have even more divergent bankruptcy systems, though many are moving toward the U.S. models.17
[*PG5] Given the vast cultural differences around the world, and the history of each country’s economy and attitudes about money and debt, there is no one-kind-fits-all bankruptcy system for enterprises or individuals.18 New insolvency systems must instead reflect how individual nations have experienced the growth of market economies, and how, philosophically, countries have viewed debt. Bankruptcy systems are social tools. As such, they are value-laden and must be drafted with care to reflect the particular values of a culture. Yet the extensive availability of credit requires a face-saving way out of financial failure. Providing such a way out is a challenge many nations will face as credit is used more extensively in the new modern economy. This Article attempts to aid this transition in some small way, by helping inform the decisions made within developing systems.
Part II of this Article explains the symbiotic relationship between capitalism and bankruptcy laws, the theories behind these laws, and the history and political systems upon which they are based.19 This Section also describes modern credit practices and attitudes toward debt and repayment.20 It then briefly describes the U.S. bankruptcy systems that developed out of this economic history.21
Part III discusses divergent attitudes toward debt in other parts of the world, using England, parts of Continental Europe, and parts of East Asia as examples.22 While many of these countries and regions have imported U.S.-style bankruptcy laws to some extent, all have far less forgiving cultural views toward debt and debt forgiveness than does the United States.23 Given these pronounced differences in attitude, this Section concludes that the mere import of U.S.-style reor[*PG6]ganization and personal debt forgiveness systems is unlikely to create the desired economic effect.24
Part IV describes the global trend toward credit proliferation and concludes that countries must carefully examine cultural views and attitudes before allowing credit to spin out of control in their countries.25 If it is too late, and credit is already widely available despite very negative stigma toward failure, this Section advocates large-scale education efforts in order to keep people from becoming indigent, or even suicidal, following mounting debt.26 This Section ultimately concludes that while importing a more forgiving bankruptcy system may help stem these problems, without changes in cultural attitudes, these new laws may have little impact.27
This Section outlines the history of the United States’ growth economy and the unique entrepreneurial spirit that led to an equally unique bankruptcy system for both businesses and consumers.28 It also discusses the development of consumer and credit culture and the laws that have developed from these unique quirks of history.29
Relatively speaking, U.S. society can be characterized as capitalistic and consumeristic, although the extent to which the United States should embrace these two ideologues has been controversial throughout our history.30 Early discussions of bankruptcy policy were divisive, in part because early bankruptcy policy helped to shape the U.S. economic identity.31 The expansion of capitalism and spending [*PG7]resulted in some failure, followed by the creation of the first U.S. bankruptcy system.32 This Section reviews the economic culture from which this bankruptcy system arose.33
Alex de Tocqueville’s “new model man” portrayed the American as a child of the commercial revolution that should progress quickly toward commercial and industrial maturity.34 This model saw economic prosperity, technical development, education, and expanded cultural opportunities as the lynchpins of a successful society.35 On the other hand, the agricultural sector of society rejected these big-business ideas as a threat to its ideal nation of small producers and laborers who earned an honest living working the soil.36 The agrarian sector saw the new merchant and financial capitalists as:
parasites who drop their buckets into wells dug by others. . . . Unbounded by any connection to honest labor, their profits could accrue to such a level as to enable the capitalist sector to upset the delicate counterpoise of interests that sustain a free and virtuous social order, and substitute a morally vacuous dynamic of market transactions and profit calculations that respects the social identity of neither person nor property.37
[*PG8]In this context, the battle over appropriate bankruptcy laws began. The market capitalists saw the development of a credit-based economy as absolutely essential.38 Conversely, the agrarian sector of society saw extensive credit as a vice.39 The more a person wished to create a free-mar ket capitalist economy, the more he supported the free availability of credit, as well as a systematic means of dealing with financial failure.40
By the early 1800s capitalist interests began to win out over agrarian interests, and a greater number of agrarians began producing food for sale rather than mere consumption.41 Artisans in turn moved away from customized markets and toward standardized goods for a larger market. More and more U.S. citizens entered business as merchants of one form or another.42 Burgeoning market-oriented production and surging demand for food and consumer goods fostered great economic growth. In the decades following the War of 1812, U.S. citizens produced more cotton, grain, livestock, textile goods, coal, and lumber than previously thought possible.43 A greater number of U.S. citizens began, at last, to have disposable income to spend on house wares, nicer homes, fancier furnishing and clothing, and unimproved land.
The expansion of the United States’ market economy, however, depended heavily upon “the credit system”- an intricate tangle of obligations that extended throughout the country’s financing, production, distribution, and consumption.44 The United States saw itself as a land of great potential, and was thus taken by optimism and a willingness to build and spend far beyond its actual wealth.45 Thus, the antebellum economy was structured as much around borrowed money and promises to pay, as it was around rivers, roads, and canals.46
[*PG9] Few merchants could enter business without credit.47 Entrepreneurs rarely paid rent, wages, supplies, or transportation costs in advance, nor did they demand cash from their own customers.48 A study of the court records of debtors who filed for bankruptcy under the Bankruptcy Act of 1841 shows that the use of credit was common by the mid-1800s.49 Indeed, many merchants not only paid debts many months after they were incurred, but also allowed their own customers to pay them under even slower payment schedules.50 Needless to say, this does not make particular business sense, but the free market economy was new and many wanted to participate.51
The availability of credit was seen as central to reaching economic potential in a capitalist system.52 In fact, one scholar called “systemized credit” the one characteristic of capitalism that distinguishes it from all other economic orders and, as the Albany Republican Committee noted in 1837, “the credit system has extended our commerce all over the world—peopled our wilderness—built our cities and villages—founded our colleges and built our schools. It has given
[*PG10]us national wealth and individual prosperity.”53 In short, credit was in large part what defined capitalism as well as wealth.54
While credit was seen as necessary, it also had its hazards. Where there is credit, there is also default, and the use of credit unquestionably made early U.S. citizens vulnerable to the shifting currents of the overall economy, and intricately tied them to the financial health of the firms with which they did business.55 This may explain why many early market capitalists in the United States favored a systematic and forgiving bankruptcy system to address the issue of default.56 Ironically, a system of distributing a debtor’s available assets and discharging his or her remaining debts was ultimately seen as a characteristic of economic modernity, “the result of the complex development to which modern society has attained.”57
People took risks, and the bankruptcy system facilitated this risk by design. The drive to be self-employed, and thus to be successful in business, caused a great deal of financial failure in the mid-1800s.58 The economy was friendly to any capitalist effort, as the goal was to create a vibrant market economy as quickly as possible.59 As young men tried their luck at business, many learned about success, as well as failure, in the pursuit.60 Interestingly, early bankruptcy merchants included women as well as men, indicating that women participated in the marketplace even as early as the 1700s.61
[*PG11] A legal culture of tolerance toward non-payment developed, in order to encourage people to continue entrepreneurial pursuits.62 The relative lenience of U.S. bankruptcy law, as compared to law on the European continent, for example, shocked some, including Alex de Toqueville, who commented on the “strange indulgence” shown to bankrupts in the United States.63 He claimed that in this respect, “the Americans differ, not only from the nations of Europe, but from all the commercial nations of our time.”64
[*PG12] The U.S. system also developed from the country’s distinctive partisan political system, and the unique way that both debtor and creditor interests were balanced in that system, along with the early and prominent role of attorneys as the primary professionals in its development.65 In his account of the role of politics in the developing U.S. bankruptcy law, bankruptcy historian David Skeel explains that once creditor groups formed trade organizations that promoted the passage of a federal bankruptcy law, populist interests joined forces as well, forcing a compromise between debtor and creditor groups not seen in England or elsewhere.66 Because Republicans tended to favor creditor interests, and Democrats or Populists tended to favor debtor interests, the compromises that resulted were the product of the unique, U.S. two-party system.67
Moreover, from the start, private attorneys played a very significant role in U.S. bankruptcy cases and in the reform process.68 As the law took shape, general practitioners began to specialize in bankruptcy cases, thereby perpetuating the system.69 As Professor Skeel recounts, “government agencies have a tendency to become self-perpetuating. Once Congress establishes a new agency and creates jobs for a group of new government officials, these same officials will later serve as the primary bulwark against elimination of the agency. In a sense, the agency becomes its own political constituency.”70 As Skeel explains, while the bankruptcy bar is private rather than governmentally-run, it [*PG13]has played an analogous, self-perpetuating role.71 This is one explanation for why the system changes, but never by leaps and bounds.
Thus, a number of unique characteristics have created the U.S. bankruptcy system. These characteristics include a strong societal desire to create a commercial economy, a resulting extensive use of credit, a desire to balance creditor and debtor interests in developing the law, a unique two-party political system that helped create this balance, as well as a highly unusual and prominent role for private attorneys in the bankruptcy process.
The above discussion focuses primarily on the development of business and commerce and the resulting business debt. Current U.S. attitudes toward personal or consumer bankruptcy, however, developed far more recently, under circumstances no less unique. The United States was pulled out of the Great Depression by World War II, which created jobs for virtually everyone who was not in the armed forces.72 Due to rationing of most consumer products, and stopped production for others, most people saved their wages.73 After the war, the United States experienced a period of inflation, after which consumer demand for various household goods and services increased dramatically.74 Three things fueled these increases in demand: a pent-up desire for things that were unavailable during the war, large savings accounts, and the baby boom.75
U.S. policy at the time promoted spending to the fullest extent possible. As one consultant announced shortly after the war, “the greatest challenge facing American business was convincing consumers that the hedonistic approach to life is a moral, not an immoral one.”76 This strategy apparently worked well, as Americans began purchasing to be happy, and building social experiences around the act of acquiring.77
[*PG14] As inflation subsided, the housing and auto industries expanded and the United States began exporting a huge variety of goods, including farm products. This resulted in large trade surpluses since Europe and Japan, the main U.S. trade partners, had little to export.78 The economy grew in a strong and stable fashion in the early 1950s.79 Capital was plentiful, and consumer goods appeared everywhere in record numbers. Chains like Sears and Montgomery Ward sold products cheaply, and more and more household electronic goods were being manufactured.80
U.S. citizens with ready cash on hand began to believe that they needed these gadgets, that they were a sign of modernity and prosperity, and that buying them would fuel the economy. Thus, a consumer class was born.
Since then, though the U.S. economy has sagged at various times, U.S. wages have made domestic production uncompetitive in many industries and thus upset trade balances.81 Still, consumer credit has been rising steadily for decades.82 Over time the United States has learned to consume too well. While it can manufacture and produce many products and services worthy of export, the voracious U.S. desire to consume makes it unlikely that Americans will ever produce as much as they use.83 As a culture, Americans love to spend, and are even encouraged to do so when the economy flags, despite record household credit and record low savings rates.
Another historical event that drastically changed the debtor-creditor system in the United States was the home ownership pro[*PG15]gram introduced by President Roosevelt in the New Deal Legislation.84 Before 1930, home loans had short terms and were used primarily by the wealthy, because one was required to put down 50% of the purchase price in order to get a home loan.85 As a result of these conditions, only about 45% of the homes in the United States were owner-occupied.86 Roosevelt sought to foster stability and security during the depression by making it much easier for the average person to buy and keep a home.87
This was accomplished through the formation of the Home Owners Loan Corporation (HOLC), the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA). The FHA, created by the National Housing Act of 1934, did not make mortgage loans but rather insured them.88 Because the FHA began insuring these loans, lenders were much more willing to make loans with lower down payments and at lower interest rates.89 This made mortgage loans more available to the middle class than ever before.90 Owning a home became a nearly universal dream for U.S. citizens after World War II.91 As late as 1940, half of all young adults between the ages of twenty and twenty-four lived with their parents.92 In the fifteen years following the war, home ownership shot up to [*PG16]62%.93 No one individual was more responsible for this change than William Levitt,94 who built new Cape Cod homes and sold them for $7,990 in the late 1940s, with little or no money down and a 4.5% interest rate.95
These events forever changed the face of U.S. consumerism and consumer credit. They ultimately revolutionized the home finance industry in three ways: by making 20% down payments the norm, rather than the previous 50% required;96 by stretching home loans out over twenty-five or thirty years, as compared to the three years at which commercial banks were lending; and finally, by amortizing the loans rather than having them end with balloon payments.97 As a result of these and other more recent changes, 68.6% of U.S. citizens now own their homes,98 a percentage higher than most other coun[*PG17]tries in the world.99 The New Deal Legislation unquestionably led to this result and, along with the advent of private mortgage insurance, now allows U.S. citizens to buy a home with 0% down.100 These conditions lead to a generally higher disposable income for U.S. citizens than most other citizens in the world.101
Low down payment loans in the United States have led to another uniquely U.S. phenomenon, the home equity loan. Home equity loan indebtedness has substantially increased in a short period of time, from $60 billion in 1981 to $357 billion in 1991.102 These types of loans are pushed non-stop through the media in the United States, yet are virtually unheard of in Europe.103 In fact, European concepts of land ownership are completely different from U.S. concepts. The ownership of land and tenant rights in England had their origin in the feudal system imposed by William I with far more land owned publicly and far more people owning homes and businesses on leased land. Thus, in comparison to the United States, there are far fewer home equity loans in Europe and the rest of the world and thus less overall indebtedness.104
[*PG18] Lending found its true cornucopia in the United States, however, with the introduction of the charge card in the 1960s, followed by the credit card in the 1970s and 1980s.105 Since then, there has been no turning back.
U.S. citizens are considered profligate in their personal lives as well as their business lives, particularly in comparison to other world citizens.106 While the last subsection attempts to explain how these habits developed, this subsection examines how U.S. society views debt today, and what current legal, cultural, and economic factors have led to the country’s “compulsively” consumeristic behavior.107 It also examines the financial and other life conditions of most individual bankruptcy debtors in the United States and discusses whether there is a different bankruptcy or debt culture for U.S. business debtors, as compared to individual consumer debtors.
Consumer spending is considered one of the most important indicators of economic health in the U.S. economy. 108 Despite the [*PG19]credit industry’s claims that consumers are abusing credit, credit industry advertising encourages people to use as much credit as they can get, for every use imaginable or no particular use at all.109 Some advertisers rely on nostalgia to get people to borrow as much money as possible. For example, in a mailer for a home equity loan, United Pan Am Mortgage writes:
[r]emember the days when dad worked, mom managed the home, and there was still enough money for a house, cars, vacations . . . even college? It’s sure not like that anymore. Today, with single parents or even with both parents working, it’s hard to make ends meet, let alone have some of the good things life offers. We think you deserve more and we can help. . . . A friendly phone call will get the ball rolling on putting a lump sum in your pocket. That’s right—have the extra cash to make those home improvements you’ve been putting off, take that vacation you’ve been dreaming about, give yourself peace of mind, knowing your son or daughter’s tuition is covered.110
The advertisement goes on to tell the recipient whom to call to get a home equity loan to solve all of life’s problems, demonstrating that, despite popular belief, you can buy both happiness and peace of mind.111
[*PG20] U.S. popular culture oozes with references to spending and happiness. In the tongue-in-cheek novel, Shopaholic Ties the Knot, Becky Bloomwood notes how her whole life will change when she and her beau own the vintage cocktail cabinet she spots in an antique shop:
Just think, if we had one of these in the apartment it would change our lives. Every night Luke and I would mix martinis, and dance to old-fashioned songs, and watch the sun go down. It’d be so atmospheric! We’d have to buy one of those old-fashioned record players with the big horns, and start collecting 78s, and I’d start wearing gorgeous vintage tea dresses.112
As a result of relentless and unyielding admonitions to spend, as well as other cultural factors, U.S. citizens have more debt of all kinds than all persons of all other parts of the world.113 Consumer debt, second mortgages, foreclosures,114 and personal bankruptcies are all at an all-time high.115 The average household carries $8,000 in credit card debt116 and record numbers of U.S. citizens now carry more than one mortgage.117 Between 1979 and 1997, personal bankruptcies in[*PG21]creased by more than 400%.118 The upsurge in the mid-1990s was particularly shocking because this was a period of widespread economic recovery.119 History partially explains why this debt picture looks so different from that of the rest of the world. Add a volatile economy and job market, and the credit industry’s voracious appetite for more lending, and the statistics are not surprising.120
While some people insist that the stigma of bankruptcy is gone,121 empirical research suggests that it may not be that simple.122 In their empirical study, The Fragile Middle Class, scholars and empiricists Sullivan, Warren, and Westbrook conclude that bankruptcy is a treatment of a financial problem but is not itself the disease.123 They conclude that unemployment or underemployment, illness, and divorce are the primary causes of bankruptcy in the United States, but that huge amounts of consumer debt in general, and credit card debt in particular, lower U.S. citizens’ threshold for collapse when financial disasters strikes.124
[*PG22] Credit card use in the United States has risen steadily every year since the cards were introduced.125 In the fifteen years from 1980 to 1995, the amount of outstanding revolving credit jumped seven-fold.126 Credit card debt doubled in just four years, from $211 billion in 1993 to $422 billion in 1997. Both the number of cards and the balances increased dramatically in this time period, yet 3.5 billion credit card solicitations were sent out thereafter in 1998, portending continuing increases.127 One historical event explains the rise in credit card debt, namely deregulation of consumer interest rates, which has made credit card lending more profitable than any other form of lending.128 The more cardholders a company has, the more money it makes, even if this is accomplished by lowering lending standards.129
Sub-prime lending, meaning lending specifically to people who are living on the edge, is the most profitable niche in lending.130 Yet traditional banking has declined in profitability, making it necessary for lenders to make ends meet in other ways. A popular long-term strategy is to get college students hooked on credit cars early, giving away free t-shirts and requiring no income.131 Some 83% of undergraduate students have at least one credit card, a 24% increase since 1998, and 21% of undergraduates who have cards have high-level balances between $3,000 and $7,000.132
[*PG23] The existence of all this consumer credit does not mean that people do not feel guilty when they fail to keep up with their payments. Studies show that most people feel bad when they are unable to pay their debts,133 despite deep societal ambivalence about consumer debt.134 Economists recommend that increased consumption is necessary to economic growth.135 In mainstream U.S news media, such as the Wall Street Journal, consumer spending is equated consistently with happiness and health.136 For example, in an article titled Consumers’ Attitudes Brighten, the author claims that “[c]onsumers’ spirits picked up a bit in early December, an encouraging sign for retailers hoping for a strong holiday season.”137 The story then claims that “consumer sentiment” and “consumer attitudes” have improved, causing economists to conclude that the waning economy might be improving.138
The nature of the U.S. economic system, however, makes some financial failure a certainty. The dynamics of capitalism, combined with a thin social safety net, guarantee that some families will fail:
[*PG24][w]ithout universal health insurance to protect every family from the financial ravages of illness and without higher levels of unemployment compensation to cushion the effects of a layoff, each day, in good times and in bad, some families will fall over the financial edge. And in a market that provides virtually unlimited amounts of consumer credit, some people will accumulate a debt load that eventually takes on a life of its own—swelling on compound interest, default rates, and penalty payments until it consumes every available dollar of income and still demands more. Just as the poor will always be with us, so will the bankrupt middle class.139
A more protective consumer bankruptcy system seems to be directly related to the size of the social safety net and the availability of consumer credit.140 The United States admittedly offers more families sanctuary in bankruptcy, while at the same time offering a wide open consumer credit economy with no limit on lending or interest rates, and few protections from the economic consequences of other problems such as job loss, illness, accidents, and family breakdowns.141 None of [*PG25]this makes bankruptcy pleasant, although at least it is available.142 While there may be more people filing for personal bankruptcy in the United States than ever before, the “sting of failure is still sharply felt by those who must publicly declare that they are bankrupt.”143 And, while some U.S. citizens may try to buck the trend and consume less, strong societal pressures keep most of Americans spending.144
When it comes to stigma, however, business bankruptcy in the United States is an entirely different matter.145 There seems to be less stigma associated with a failing business in the United States than with [*PG26]a personal bankruptcy, probably due to the U.S. notion that some risk is good and necessary to a well-functioning capitalist economy. The United States considers business failure to be negative but not morally wrong. Americans rarely throw corporate officers in jail for failing at business. In fact, in some industries, like the high-tech or dot-com industries, going through a business failure actually can be seen as a badge of honor, proof that the entrepreneurs were willing to take the kinds of risks necessary to fuel capitalism.146
In other industries, the United States seems to recognize as a society that one-time events can cause business failure, or that sometimes a change in market conditions cannot be predicted and is better softened by Chapter 11 if the company is at stake. In any case, Americans do not like business failure, but they find it more acceptable than personal bankruptcy.147 This distinction appears to be shared throughout most of the world. Unlike the rest of the world, however, the United States also recognizes that personal financial failure can be caused by business failure, and thus provides systems to help both failing businesses and failing individuals.148
The bankruptcy systems that have resulted from the history, politics, and culture discussed above are also unique. First and foremost, they allow each bankruptcy debtor a choice about whether to attempt to pay back creditors or to just give up and walk away from debt.149 This choice is generally not available in other parts of the world.150 Moreover, as discussed below, businesses that are reorganizing can continue to operate through a Chapter 11 reorganization proceeding that is not overseen by a court-appointed administrator.151
Personal bankruptcies in the United States take one of two general forms. One can either give up all of one’s non-exempt assets152 in ex[*PG28]change for an almost immediate discharge of most of one’s unsecured debts,153 or one can choose to pay off creditors, either in whole or in part, over a period of three to five years, in which case one does not need to give up non-exempt assets as long as one pays at least the value of those non-exempt assets to creditors under the payout plan.154 Again, the debtor, rather than creditors, makes this choice.155 The payout-style bankruptcy also allows one to cure, stretch out, and sometimes reduce, secured debt that has gone into default, thereby forcing new payment terms on the secured creditor, who is precluded from repossessing his or her collateral as long as the plan payments are made.156 Additionally, Chapter 7 bankruptcy is almost entirely non-interventionist because, assuming there is no objection from a creditor to a debtor’s discharge, the debtor is granted a discharge automatically.157
The U.S. personal bankruptcy system is unquestionably the most forgiving in the world, and strongly encourages persons who have failed [*PG29]financially to get back into the economy and try again.158 In many states, the exemptions are extremely generous, sometimes allowing individual debtors an unlimited amount of equity in a home.159 Research suggests that states with higher exemptions, which allow an individual debtor to keep more assets free from creditor claims, have the highest levels of entrepreneurship in the country, again establishing the connection between business activity and an incentive to take risks.
The theory behind a Chapter 11 reorganization case in the United States is that a business enterprise160 is often worth more to a creditor alive than dead.161 In other words, a business may be able to pay creditors more by continuing to operate its business, paying creditors a distribution over time from its future profits, rather than simply liquidating its assets and paying creditors from the liquidation proceeds. Alternatively, a debtor can sell its business as a going concern while in Chapter 11, leaving enough time to sell property so that a good price can be realized for the business enterprise, and then use the proceeds to pay creditors through what is called a liquidating Chapter 11 plan.162 In either case, the business is operated for a time while in Chapter 11 in order to avoid the waste that could occur if a business with accumulated goodwill was simply liquidated at the first sign of financial failure.163 For [*PG30]the benefit of stakeholders (such as creditors, equity holders, or owners) and employees, it is sometimes more efficient and less wasteful to allow the business to reorganize its affairs, either through restructuring its debt, by obtaining new equity owners, or both.164 While this theory is not without its critics,165 the overwhelming worldview today is that some system for “rescuing” ailing businesses is a pre-condition to maintaining a vibrant, capitalist economy.166
The shocking difference between U.S.-style reorganization and most others around the world is that current management of the failing company normally stays in place with no administrator directly [*PG31]overseeing the system.167 The historical development of this unique system derives from the first reorganizations in the railroad industry, one the first big businesses in the United States.168 At the time that Munroe Railroad and Banking, Co. defaulted on its obligations to its lenders, there was no mechanism in place to address this failure, other than the lender’s right to foreclose and the court’s equitable right to appoint a receiver to take over the debtor’s assets.169 Because piecemeal sale of the debtor’s assets would result in great financial loss to all, the court merged these two legal concepts and ordered that the lender sell the assets all at once, pursuant to a going concern sale, rather than piecemeal.170
Amazingly, this tiny innovation in foreclosure practice, which took place in the narrow context of failing U.S. railroads, led to a new way of looking at reorganization and value. Lenders continued to threaten foreclosure, but did not always follow through. Moreover, courts began appointing a receiver in each case, who would watch over and protect the debtor’s property and request an injunction against creditor collection efforts.171 This process was known as equity receivership and allowed the business to continue in operation while the parties attempted to negotiate a favorable resolution of the debt.172 Ultimately, after many twists and turns, the current Chapter 11 system emerged from this humble start.
Bankruptcy cases, of which Chapter 11 is one kind, are presided over by a specialized bankruptcy court that is part of the federal judicial scheme.174 The law in place is the Federal Bankruptcy Code,175 although some principles used in bankruptcy cases arise from state [*PG32]law.176 When an enterprise is in Chapter 11, it normally operates its own business through its pre-filing management.177 No trustee is ordinarily appointed. As soon as a debtor files a voluntary Chapter 11 case, an automatic stay goes into effect, effectively stopping all collection activity against the debtor or any of its property of any kind.178 The stay is broad and powerful and even things that one would not think would be stayed are indeed stayed.179 For example, secured creditors are prohibited from taking any action to repossess collateral that they could repossess if not for the bankruptcy.180 Even the government is precluded from collecting on its claims.181 Virtually all en[*PG33]terprises,182 and even individuals,183 are eligible for Chapter 11 and there is no requirement that the debtor be insolvent in anyway.184 Chapter 11 can be used as a strategic measure to stop lawsuits, to stop foreclosures, or for whatever purpose the debtor chooses.185 Practically speaking, one of the most beneficial features of Chapter 11 is the captive audience that the debtor-in-possession has in its bankruptcy judge, who is available in record time to hear any emergency that could affect the debtor’s chances at rehabilitation.186
The debtor’s goal in the case is to emerge from Chapter 11 with its debts restructured and also reduced in amount in most cases. This goal is achieved by obtaining approval of a Chapter 11 plan outlining how, to what extent, and over what time period debts will be repaid.187 Creditors are allowed to vote on the debt restructuring plan, thus allowing them to choose whether to go along with the debtor’s plan, propose their own plan, or choose to liquidate the debtor’s business.188 If the debtor can get most creditors to vote in favor of the plan, it can be forced on the dissenting creditors who also will be bound by it.189 Sometimes the debtor can approve a plan, even if most creditors vote against the plan, although this is rare.190
Secured creditors are normally paid in full with interest up to the lesser of the amount of the loan or the value of the collateral. If the [*PG34]debt is undersecured, all the deficiency claims become unsecured claims.191 Some creditors, such as taxing authorities and employee claims, are entitled to special priority192 and must be paid in full in the plan.193 Unsecured creditors are often paid a distribution over time and are very rarely paid in full. The amounts not paid are discharged at the end of the case and never paid.194 There is no set amount of distribution that unsecured creditors must receive, but the debtor needs the unsecured creditors’ votes and thus often offers as much as it can afford to pay.
Existing equity can retain their ownership of the debtor firm, but only if the unsecured creditors agree, or if unsecured creditors are paid in full.195 In a sense, creditors get to choose, through their voting rights,196 whether to go along with the reorganization plan, or alternatively, to liquidate the debtor’s business. In reality, however, the debtor usually retains control over the case and the plan process throughout the case, and has the exclusive right to file a plan for at least the first four months of the case and often much longer.197 This leaves many creditors feeling like hostages in a debtor-friendly proceeding, but a case cannot go on forever.198 From this it seems clear that a business that is losing money will be liquidated almost immediately because the case is not likely to succeed at reorganization, and any delay will hurt creditors.199
U.S. bankruptcy systems did not emerge randomly or in a vacuum, but through conscious modern and historical decisions about the role of credit and money in U.S. society. These attitudes and conditions are unique and are not present in other countries, including those countries currently adopting U.S.-style systems. This may limit the effectiveness of imported systems, and should lead countries that are adopting new systems to study other systems as well, and to consider local culture when enacting new laws.
Around the world, people are less forgiving about debt forgiveness than they are in the United States.200 In some parts of the world, not paying debts is the ultimate disgrace.201 In other parts of the world, there simply is no personal bankruptcy system,202 and little in the way of business reorganization either.203 Despite this, many countries are starting to move toward a U.S. bankruptcy reorganization model for businesses, and some are also replicating forgiving personal bankruptcy laws.204 Given the unique cultural, economic, and historical development of the U.S. system, however, this may be impractical. This Section describes cultural attitudes toward debt in a few other parts of the world that are currently in the process of importing U.S.-style bankruptcy laws. It suggests that history cannot be the sole driving factor in determining which bankruptcy system and philosophy a country develops, by describing the very different system and attitudes of England,205 from which the original U.S. bankruptcy system arose. By way of further example, it then describes attitudes toward debt and bankruptcy in parts of continental Europe, as well as Japan, as a contrast to the U.S. [*PG36]attitudes previously discussed. The laws of these countries also are briefly examined in order to discuss the role of both transplantation, as well as local culture, in enacting such laws.206
Because of its long history of commerce, England never had to sprint to catch up or otherwise create a quick market economy.207 While, initially, U.S. and English bankruptcy laws were quite similar, by the 1800s, English law had a very different emphasis and flavor in regard to its treatment of debtors than early U.S. bankruptcy law.208 England’s first bankruptcy laws were created in 1543.209 The preamble to this law described the bankruptcy debtor as an anti-social, immoral character who regularly took advantage of others.210 The law itself was designed solely for the benefit of creditors and was virtually criminal in nature.211 Bankruptcy was something creditors did to the debtor, an involuntary social condition to which a naughty user of credit was subjected against his will.212 Not surprisingly, then, early English bank[*PG37]ruptcy laws were filled with numerous penalties and punishments for non-payment, the most well known of which was to “suffer as a felon, without the benefit of clergy,” a polite phrase for the death penalty.213 While few were actually subject to death for failing to pay their bills, debtors’ prison was common,214 as was being shunned by society in Dickensian fashion.215
There was no debtor discharge, though there was plenty of credit, even as early as the 1600’s.216 The first debtor discharge was [*PG38]introduced in the Statute of Anne in 1705, but this provision was only in place for three years.217 The debtor discharge later became part of the permanent law, but was granted upon application only, rather than automatically, after the debtor proved that he had been honest and had cooperated with creditors.218 Until 1705, a bankruptcy discharge was only available to merchants, as credit was seen as unnecessary and even a fraud if obtained outside the commercial context.219 Unlike the early U.S. economic climate, in which every man was seen as a potential merchant who could help grow the economy, early English society accepted credit only as a necessary evil.220 While laws themselves became more lenient over time, this attitude toward debt and credit never really changed.
Even today, English people are sensitive about financial failure.221 They generally consider such failure to be a failure of character and consider it extremely negative if a person, or even a business, fails financially. Strictly personal bankruptcies, resulting from too much credit card debt or the loss of a job or good health, have been rare in the past because there was little consumer credit, and government programs helped people if they lost employment or needed health care.222 Now there is more credit and more personal financial failure.
While England and Wales only had 0.47 personal bankruptcy filings for every 1000 individuals in 1997 (as compared to 5 personal [*PG39]bankruptcy filings for every 1000 that same year in the United States),223 these are still considered major embarrassments, even if they result from the failure of a business.224 Executives in a company that fails can have a very difficult time finding another job and are often shunned socially.225 Thus, despite all the new credit available, the English marketplace comes down hard on those who have gotten into financial difficulty. The attitude is “once a bankrupt, always a bankrupt.”226 The government is likely to be unable to tell people how to think or whom to invite to parties, even through drastic legal change.
Henry Kissinger once noted that when he wants to talk to Eurpoe, he’s not sure whom to call.227 While this may be changing, now that the EU is working on unifying currency and laws, Europe still consists of many diverse cultures, has a huge variety of insolvency systems, and contains a host of diverging philosophies about debt.228
As a rule, financial failure on the continent carries significantly more stigma than in the common law countries, and the personal bankruptcy laws are less forgiving than those in the common law [*PG40]countries.229 Reorganization laws are far more varied and reflect other societal concerns.230 European governments are attempting to reduce the negative stigma associated with business failure in order to fuel entrepreneurial spirit.231 Many countries, as well as lawmakers of the newly formed EU, are looking to the United States for ideas.232
Personal bankruptcy systems on the continent vary significantly, but have become far more forgiving in the past decade, following the deregulation of consumer credit.233 Consumer credit usage varies widely on the continent, with consumers in some countries such as Sweden using it heavily, while Italian and Greek consumers use it much less frequently.234 Overall, though, credit use is rising and savings rates on the continent are declining.235 European banking and economic officials have expressed concern over this trend.236 As a result, some have simply stepped up efforts to educate the public about the hazards of credit use.237 Others have liberalized bankruptcy and [*PG41]discharge laws, in order to ensure that social problems are not exacerbated by the increases in credit.238
Not all European countries have forgiving bankruptcy systems, however, and some have no systems for consumers at all.239 For example, in the bankruptcy-restrictive countries of Italy and Greece,240 individuals generally are not eligible for bankruptcy protection unless they are engaged in business.241 In other words, there is simply no bankruptcy system for consumers.242 Even for individuals engaged in business, a discharge is not granted until many years after bankruptcy is declared, and in a handful of the most restrictive places, no discharge is granted unless creditors are ultimately paid in full.243 This is [*PG42]certainly an unusual interpretation of a discharge, at least from a U.S. perspective.244 The underlying theme of bankruptcy in these jurisdictions is that bankruptcy is a creditor-oriented mechanism and is not designed to serve the interests of financially distressed consumers.245
The lack of such a system could have grave societal implications in the face of consumer credit deregulation. In the past, countries without a personal bankruptcy system generally did not have access to consumer credit. This equilibrium is now out of balance. Where there is an economy with consumer credit, such as in Italy, there is simply no way out.246 If one gets in trouble with consumer debt, one remains in trouble, perhaps indefinitely.
Other European countries are more forgiving and provide some form of discharge. In Norway, Sweden, Denmark, Finland, Austria, Germany, France, Spain, and Portugal,247 the judge has the discretion to decide whether a discharge is justified.248 While the particular standard for granting a discharge varies from place to place, the burden is on the debtor to prove that the discharge is justified in moderate camp jurisdictions.249 In many places, the judge may grant a bankruptcy discharge only if the person is unable to pay the debts.250 For example, in Denmark, the debtor must be hopelessly indebted and the circum[*PG43]stances must justify granting a discharge.251 In Norway, a debtor must be permanently unable to pay.252 In Sweden, in order to get a full or partial discharge, the debtor must affirmatively prove that “the debtor has no hopes of paying his or her debts in the foreseeable future.”253
Most European laws grant a discharge of indebtedness only after a repayment plan, similar in some respects to Chapter 13 under U.S. law.254 In Germany, for example, the debtor must make an effort to increase his or her income for the benefit of creditors,255 and also must pay over all seizable income to creditors for six years.256 Moreover, creditors receive all of the debtor’s income over a certain amount, a provision that arguably creates the wrong incentives.257
In all the systems discussed in this Section, there has been movement toward liberalizing the laws, though none are as forgiving as that of the United States, England, and the other common law systems.258 Until recently, it was not clear that the continent needed forgiving bankruptcy systems, given its extensive social systems and fairly rigid requirements for borrowing.259 But, extensive growth in consumer credit makes such debt forgiveness necessary, particularly in light of [*PG44]existing stigma about financial failure.260 Fortunately, as a whole, European governments seem interested in making sound public policy to protect citizens, and not merely to fuel economies for their own sake.261 Hopefully these concerns will keep credit from proliferating beyond the respective systems’ ability to address failure in a constructive way. Some countries, such as Italy, have not yet balanced these concerns and may face social problems as a result.262
Scholar Jason Kilborn, who has studied and translated the new personal bankruptcy systems of France and Germany, has noted the deep resentment and distrust held by French and German citizens toward lenient consumer bankruptcy laws.263 While these attitudes will surely change over time, they reflect long-standing notions of immorality and personal responsibility,264 as well as different credit practices, both of which bear heavily on the acceptance of, and need for, consumer bankruptcy.265
As with personal bankruptcy systems, not all continental countries have reorganization schemes. In fact, until recently, most coun[*PG45]tries did not have such a scheme.266 With the fall of communism and Europe’s desire to create a more competitive market economy, however, reorganization laws have become popular new legislation. Most of these systems are still very different from the U.S. Chapter 11 model.267 In most places, there is no “automatic stay” that protects the debtor and its assets upon the filing.268 Additionally, in most places the debtor must be insolvent in order to apply for reorganization and also must have some likely chance of success at reorganizing.269 The stay, if there is one at all, normally kicks in after the court sorts out all of these problems and issues an order declaring the company in bankruptcy or reorganization.270
Under most schemes, the debtor’s management is replaced with a neutral third party trustee, who will run the company while it is attempting to restructure and control the case and plan proposal process.271 In some reorganization schemes, secured creditors are not precluded or stayed from gaining possession of their collateral, and thus can thwart the reorganization process if they wish.272 For example, in [*PG46]the new EU Council Regulation of Insolvency Proceedings (IPR), the secured party retains the right to dispose of assets and obtain satisfaction from the proceeds of those assets.273 Indeed, in some countries, labor claims are so strong that they also are not stayed and can veto any plan the debtor proposes as well.274
Many schemes, like the U.S. scheme, provide that creditors can vote on the plan of reorganization and thus decide if the business should be allowed to reorganize or should instead be liquidated.275 Many, though not all, countries’ laws also allow the majority to bind the dissenting minority to the terms of the plan.276 In some places, big institutional creditors, such as lenders and banks, control the case and essentially decide the business’s fate.277 In most places, secured creditor claims are not changed in either amount or payment terms, causing one scholar to conclude that these are not really Chapter 11-style reorganization schemes, but rather “composition” plans.278
Compared to U.S. bankruptcy laws, many countries’ laws read like penal codes. Fraud and criminal activities are discussed at length, leaving one to believe that there is almost a presumption of criminal activity or fraud when a business fails to pay its debts.279 Other provisions suggest that limited liability is not as limited as it is in the United States; thus, more debts pass through to parents, owners, and even mangers.280 Finally, in some countries, if the managers let the company run for longer than is reasonable without seeking rehabilitation assistance or closing down, the mangers can be imprisoned for wasting creditors’ assets.281
[*PG47] French reorganization law, at one end of the continuum, is considered the most rescue-oriented in the world, even more so than Chapter 11.282 The goal of the French system is not merely to facilitate reorganization, but to encourage it, through early interventionist mechanisms that force or strongly encourage businesses to seek rehabilitation early enough that businesses and jobs are not lost.283 France has a strong history of state intervention into corporate affairs, which has carried over into modern reorganization laws.284 This process favors saving job-generating enterprises at almost any cost.285
German reorganization law lies at the other end of the spectrum in some respects. It now allows for, but certainly does not favor, the use of a debtor-in-possession. In 1999, Germany enacted rescue legislation, with the stated purpose of promoting reorganization over liquidation.286 Prior to this time, the only insolvency law used in Ger[*PG48]many was a liquidation statute, the Konkursordnung.287 While another prior law, the Vergleichsordnung, allowed rehabilitation,288 the concept of reorganizing rather than liquidating a troubled business had never really been accepted in German culture and thus the Vergleichsordnung was never used.289 Thus, prior to the adoption of the new German Insolvency Code (InsO), all businesses were simply liquidated.290
German lawmakers, if not German society in general, now believe that liquidation is not the best solution to some industry or business problems.291 The enactment of the InsO was motivated by recessions and general problems with the economy, as well as the need to help acclimate and protect Eastern European individuals and businesses, who had been “overwhelmed by Western consumer standards.”292 Unlike most parts of the world, German insolvency cases are presided over by a specialized bankruptcy court.293 In most cases brought under the InsO, a trustee, called an administrator, operates the debtor’s business, although at least in theory, a debtor-in-possession is possible.294
Reality may operate quite differently, however. Whatever the new Code actually says about the plan’s possible affect on creditors, credi[*PG49]tors—particularly secured creditors—always have and still do control insolvency proceedings.295 In fact, although the new Code states that the administrator appointed in each case shall be independent and thus not biased toward any particular party in the case, prior to the enactment of InsO,296 it was common for the administrator to be chosen by the lead or primary secured lender in the case.297 This has not changed under the InsO.298 Thus, despite the technical requirement of an independent administrator, the main or lead bank can often choose an administrator who is friendly to its interests.
Additionally, despite clear language in the InsO stating that one purpose of the InsO is to “reorganize insolvent debtors,” this concept is far from universally accepted. One scholar wrote after the enactment of the InsO that German insolvency law does not favor rehabilitation over liquidation, and leaves that decision squarely in the hands of creditors.299 Even the explicitly provided-for reorganization contemplated by the InsO is not what a U.S. lawyer might picture; this is not a reorganization in which the business restructures its debts and continues in operation over the long haul. Section 157 of the InsO states that “[a]t the report meeting the creditors’ assembly shall decide whether the debtor’s enterprise should be closed down or temporarily continued.”300 Thus, a reorganization that leaves a debtor operational on a long-term basis appears outside the contemplation of this new law.
Finally, the debtor-in-possession provisions in the InsO are also likely to get little play. The concept of a debtor-in-possession has been criticized and mistrusted by most of German society for such a long time that it may never be unearthed regardless of what the law says.301 Professor Paulus tells an amazing story about the Holzman Construc[*PG50]tion Company bankruptcy, in which Holzman had the most experienced and well thought-of insolvency attorney appointed to the board of the company, so that they could go forward under the best of circumstances with the very first debtor-in-possession case under the new law.302 The government was so opposed to the concept of a debtor-in-possession that they found a way to bail Holzman out completely so that there would be no bankruptcy and thus no debtor-in-possession.303 After this initial stage of rejecting the debtor-in-possession model, German companies (including Holzman itself) began to use the debtor-in-possession model, but it is still the very rare exception to the rule.304
Again, history and culture may be more important in determining how cases are handled than the actual law. As one scholar notes, people who were accustomed to the old law are likely to stick to what they have become accustomed to and act as they always have, regardless of which law is on the books.305 Thus, two years after the InsO went in to effect, the new law is still widely objected to, if not ignored.306
While one might predict that personal bankruptcy would carry more stigma than business bankruptcy in most of continental Europe (particularly since some countries do not permit a discharge for people who are just consumers), the line between individual financial failures and business ones is blurred on the continent. Failure is failure, pure and simple, and the stigma is significant.307
Until recently, there was little consumer credit, and thus little need for a consumer bankruptcy system. This is all about to change as consumer credit becomes widely available to a huge percentage of the population over the next decade. This could leave many societies with excessive debt and no way to discharge it. Even if discharge systems are enacted, societal views about debt may keep them from being used. In many failed businesses throughout Europe, including Eng[*PG51]land, the stigma is so pronounced that executives, and even employees and suppliers, often disappear entirely.308
On the business side, European governments are already doing all that they can to enact rescue-style reorganization systems, in order to allow more failing businesses to survive in troubled times.309 As an official EU source stated:
Europe must re-examine its attitudes toward risk, reward and failure. Thus, enterprise policy must encourage policy initiatives that reward those who take risks. Europe is often reluctant to give a second chance to those entrepreneurs who failed. Enterprise policy will examine the conditions under which failure could acquire a less negative connotation and it could be acceptable to try again. It will encourage member states to review bankruptcy legislation to encourage risk-taking.310
A recent EU study examined stigma and financial failure in the then fifteen EU member states, as well as the United States, to determine how to reduce stigma about financial failure, for the benefit of the overall EU economy.311 Given the extent of the negative stigma, the study concluded that, even if domestic legislators adopt laws that [*PG52]promote a fresh start, “there is a need to introduce a European cultural campaign promoting the fresh start . . . .”312
Yet Europeans appear conflicted on whether to actually promote a fresh start. This study, as well as numerous other sources, focuses extensively on separating the fraudulent from the non-fraudulent debtors, and providing rehabilitation rights only for the worthy.313 There is no indication, however, that fraud will be a problem.314 While the goals of the EU in modernizing and liberalizing the insolvency laws of member countries seem sensible, it is unclear whether this will work. Long-held and strong cultural values may stand in the way, despite the best intentions of lawmakers. This has clearly been an impediment in Germany, where rescue culture has not been accepted in society. In France, by comparison, where rescue culture is entirely consistent with long-held beliefs about the importance of saving jobs, rescue culture and business reorganization has been well accepted and frequently utilized.315
Of all of the East Asian countries, Japan has borrowed the most from U.S. bankruptcy systems and also has developed the most complex bankruptcy systems.316 Its systems are thus discussed below in some detail. To a large extent, Japan’s attempted transplantations [*PG53]have failed to overcome strong cultural attitudes against bankruptcy.317 Hong Kong is less traditional and could probably accept modern bankruptcy laws much more readily.318 Ironically, it has not modernized its business bankruptcy laws due to its own unique cultural concerns.319 China’s proposed bankruptcy laws also borrow significantly from U.S. systems.320 These laws are far more lenient about business failure than existing Chinese laws.321 Given China’s traditionally communist economy, it faces unique challenges as it attempts to adopt bankruptcy laws that will promote a market-based economy.322 Given strong cultural beliefs that bankruptcy is bad luck and will follow a family forever,323 China may face problems similar to those of Japan in gaining acceptance of more lenient bankruptcy laws.
In the past few years, Japanese spending habits, as well as Japanese bankruptcy and insolvency laws, have gradually become more similar to their U.S. counterparts.324 Drastic measures have been taken to promote business rehabilitation in order to aid Japan’s ailing economy.325 Personal bankruptcy has also become more accessible.326 These are necessary developments, given that credit has recently become more available to the Japanese, which has in turn increased borrowing.327 Yet the Japanese avoid using these initiatives for cultural reasons.328
Western legal notions are unfamiliar to the Japanese mind, heart, and soul. Traditional Japanese culture emphasizes the group over the individual, similarity over difference.329 Thus, the Japanese feel that it is embarrassing and shameful to need to resort to the law.330 In fact, the Japanese believe that everyone would be better off if there was no law, and no need for the law.331 Naturally, then, use of the court system is viewed as a last resort. Informal mediation and negotiation is encouraged and used primarily for dispute resolution.332 If these tactics fail and formal proceedings are necessary, it is assumed that both parties will neither win nor lose.333 The objective of the court system is not to declare a winner or loser, but rather to construct a harmonious compromise for both parties.334
Japanese culture has often been referred to as a culture of shame.335 This characterization encompasses everything from the adverse attitude toward the need for laws, to suicide over debts, and economic failure.336 In the 1990s, a new element was added into the mix of Japanese culture. The government and aristocracy began a campaign of kokusaika, meaning the internationalization of Japanese style and culture.337 This trend introduced more foreign influences into Japan than ever before.338 Yet cultural trends of other countries are never fully integrated into the cultural fabric of Japan.339 Instead, they maintain their foreignness and are even thought of as elite, exotic, and cosmopolitan.340
[*PG55] With the modern trend of globalizing culture and business, Japan began in early 2001 to reform its bankruptcy laws. In the past, bankruptcy proceedings in Japan have taken place only after an extensive and informal process of confidential discussions with the court as to reorganization without insolvency.341 This included informal contact with creditors.342 The emphasis of these informal discussions was on rescue, not through any “formal legal process . . . [or] the application of an insolvency law.”343 Unfortunately for the individual or individuals at the head of a financially troubled business, the culture of shame that pervades Japan makes bankruptcy a personal failure, not a business failure.344 This characterization of bankruptcy in Japan often leads to tragedy for the individual, be it suicide or isolation from family and community.345 Bankruptcy is a type of devastation not unlike “sickness, shipwrecks, fires, painful childbirth, and other vicissitudes.”346
The reluctance of the Japanese to use the new formal insolvency law and their propensity for the more informal discussion is firmly rooted in the negative Japanese attitude toward law.347 As law and ethics are inseparable to the Japanese, a contract breach or a formal bankruptcy proceeding are as personal as character flaws.348 Rather than a legal system of rights and duties, the Japanese follow the concept of giri.349 Giri is loosely translated to mean “a duty or the state of a person who is bound to behave in a prescribed way toward a certain other person.”350 Giri is not legally enforced, but socially and cultur[*PG56]ally enforced as part of personal honor.351 Again, the idea of shame or guilt attached to behaving in a way that is contrary to giri builds the foundation of law and society in Japan.352 The well-known Japanese notion of “losing or saving face” also flows from the concept of giri.353 Following giri is thought to be intuitive, not learned, and therefore, formal rules of law are resisted by the Japanese as counter-intuitive.354 Lawyers themselves appear to play a different role in Japan than in the West, as the word lawyer in Japanese, bengoshi, translates loosely as mediator rather than litigator.355 The law itself is analogized to a sacred sword—it is displayed but preferably never used.356
While some U.S. citizens stereotype the Japanese as profligate spenders,357 in reality the Japanese are among the biggest savers in the world.358 Japan’s economy, the second largest in the world, began to fail in the early 1990s because of overall business failure that in turn threatened the entire banking system.359 This was caused in large part because the Japanese traditionally prefer saving over spending and have refused to buy commensurate with Japan’s growing economy.360 The Japanese government begged citizens to spend money to fuel their crashing economy.361 Unlike U.S. citizens, who were too happy to oblige when asked to do the same after September 11, 2001, the Japa[*PG57]nese refused. As a group, they are less willing to spend, particularly in tough economic times marked by industry failures and job loss.362
Like U.S. spending habits discussed previously, these habits were created through historical events.363 After World War II, Japan built its economy on standardized mass production.364 This was wildly successful, creating a large trade surplus with the United States, the world’s largest consumer, and creating a large middle class.365 Japan’s success in this area caused it to enter the stock or “value” market very late, and probably to enter this area too quickly, without public understanding or support of the financial industries upon which the value market is based.366 This created a bubble economy367 which burst in the 1990s, and the effects of which are still felt today.368
This trend may be changing, however, particularly in the area of credit card use. The Japanese currently carry much more cash than [*PG58]U.S. citizens and do not use credit cards nearly as extensively.369 Additionally, while about half of all U.S. citizens carry a balance on their credit cards, only about 10% of the Japanese do so.370 This is in part because most Japanese cards are not set up for this type of use. In most cases, the Japanese are required to decide at the checkout counter if they want to pay off the item in one billing cycle or carry the debt for a longer period.371 Recently, a new product was made available to the Japanese that did not require this up-front decision and disclosure, and thus allowed the customer to decide later if he or she wanted to pay off the item or carry it as a balance.372 This financial product has been very successful for the issuers because a shocking 90% of the items purchased on these cards have not been paid off in a cycle, but instead carried as revolving credit.373 At least one scholar predicts that the use of revolving credit is likely to increase drastically as a result of the availability of this product.374
Despite the past unwillingness of individuals to spend, Japanese businesses spent and borrowed extensively. Due to the lack of profits, and extremely lax banking regulations and borrowing requirements, many businesses are failing. After a record number of corporate bankruptcies,375 in 1996, the government embraced rescue culture with a vengeance, starting a rapid initiative to revamp business reorganization laws to make it easier to reorganize and keep a company from folding.376 The government planned to unfold a new reorganization law for smaller businesses in 2001, but as the economy continued to flag, it stepped up efforts and actually finalized and passed the new reorganization law ahead of schedule.377
As in many other parts of the world, bankruptcy was not initially available to individuals in Japan, but only to merchants.378 Eventually, a personal bankruptcy system was enacted that could be used by any natural person, whether a merchant or not.379 From the beginning, creditors in Japan had the right to decide whether to allow a merchant to stay in business or to liquidate his business.380 Today, individuals are able to obtain a discharge fairly routinely, causing at least one scholar to conclude that Japanese personal bankruptcy law is not drastically different than personal bankruptcy law in the United States.381 But, in many ways, Japanese bankruptcy law is stricter than U.S. bankruptcy law. A bankruptcy case can be maintained only if the debtor is unable to pay debts as they become due.382 Moreover, the discharge is not automatic, but must be applied for.383 In addition, it takes ten full years to get the discharge, during which time the debtor is forbidden from many business activities, including being a director of a corporation or a kabushiki kaishi.384
[*PG60] Personal bankruptcy is rare in Japan, with just 0.7 filings per 1,000 residents in 2000, compared to 5.2 filings per 1,000 residents in the United States.385 This is not surprising, given the spending habits of the Japanese,386 as well as the societal stigma assigned to such behavior. The social implications arising out of the bunsan, or customary law of insolvency, are clear from the expression chawah hitotsu ni hashi ichizen, which literally means “one rice bowl and one pair of chopsticks.”387 The phrase refers to the full exemptions to which a debtor was entitled under customary law.388 The phrase suggests that a person who has filed for bankruptcy is entitled to virtually nothing, and is “a disgraced person no longer worthy of the usual social consideration due a member of society.”389
Japan has a number of reorganization systems, and they are not mutually exclusive.390 This complex system includes the prior Composition Act,391 the Corporate Reorganization Act,392 and the recently enacted Civil Rehabilitation Act (CRA).393 Japan’s Commercial Code also provides for an out-of-court workout procedure known as a “Cor[*PG61]porate Arrangement.”394 While the Corporate Reorganization Act was designed for large publicly traded companies, and while the Composition Act techinically is the predecessor for the new CRA for small business reorganizations,395 a company need not be large to use the Corporate Reorganization Act, nor small to use the CRA.396 In fact, Japan’s massive Sogo Department Store recently filed a case under the CRA, probably because it is simply more debtor-friendly and easier to use than the Corporate Reorganization Act.397
Compared to both the Composition Act and the Corporate Reorganization Act, the CRA was a radical departure from existing law.398 Unlike virtually all other schemes in existence at the time outside the United States,399 the CRA does not contain an insolvency requirement.400 Like most other systems, a case will only be accepted if there is a chance of reorganization.401
In theory, the business is run by a debtor-in-possession under the CRA.402 The extent to which the company is actually run by a debtor-in-[*PG62]possession, however, varies from district to district.403 In the Osaka and Sapporo districts, courts usually follow a U.S.-style reorganization scheme, leaving the debtor-in-possession in place and appointing overseers only as an exception.404 In Tokyo, however, courts generally follow the old Composition system and appoint a supervisor in every case.405 In Nagoya, courts seem to follow the English system and appoint examiners, including business professionals, such as accountants, to run the company in every case.406 Needless to say, there is still ambivalence in Japan about the concept of a debtor-in-possession, but this was a tremendous step toward embracing the debtor-in-possession concept.
Not long after the CRA was passed, the Corporate Reorganization Act was amended to make it more user-friendly as well.407 The most radical thing about the new Corporate Reorganization Act is that it binds both secured and unsecured creditors.408 Because of a strong belief in betsujo ken, or the right of separation for secured creditors, no prior Japanese bankruptcy or insolvency law had ever affected the rights of secured parties.409 Even the new CRA does not affect the rights of secured creditors,410 though it does allow debtors to reduce the debt [*PG63]owed on property by essentially paying its value into the court, thus wiping out the secured party’s security interest in that particular item.411
The passage of the CRA, as well as the recent amendments to the Corporate Reorganization Act, appear to be a successful attempt at liberalizing the law in order to promote rehabilitation. Having said that, one would assume that Japanese society now accepts business failure as part of life in Japan. This does not appear to be the case. Bankruptcy of any kind is still a major embarrassment. The government has recently gone so far as to promote the use of the CRA in a prime-time television show describing its many positive uses and attributes,412 which itself demonstrates society’s resistance to this idea.
At a time when the Japanese government is doing everything it can to reduce the stigma associated with financial failure, Japanese consumers finally appear to be loosening up and spending more. The use of revolving consumer credit appears to be on the rise, which may help fuel the economy. It also may result in more financial failures for consumers, which could actually cause more social problems.
[*PG64] Despite more consumer credit in the system, the Japanese have not relaxed their views on financial failure, for either businesses or consumers. Despite the huge amount of debt companies have taken out recently, stigma over a failed business is higher in Japan than virtually anywhere else in the world. Executives of failed companies in Japan often do more than disappear. Financial failure is the ultimate societal disgrace and suicide is a common way out.413 As higher consumer debt levels become more common, failures will increase and so may suicide rates. It is unclear whether merely liberalizing laws can stem this tide.414
Japanese culture is complicated, with many unspoken rules and hierarchies.415 People have the expectation of being in the same job for life and cannot face job loss without losing face.416 Yet, saving face is the ultimate societal necessity. Neither law nor propaganda may be capable of changing these views. In most parts of Asia, including Japan, informal agreements are as enforceable as formal ones, if not more so.417 Explicit insolvency laws, like explicit contract laws, and explicit corporate and securities laws, play a far smaller role than those in the Western world.418 Informal insolvency procedures are of[*PG65]ten preferred to formal systems because the formal rules often conflict with the value systems of the society.419 Thus, simply changing the laws will not necessarily change financial and legal practices, or attitudes toward financial failure.
Neither Hong Kong nor China has developed bankruptcy systems as elaborate as the Japanese bankruptcy laws.420 Hong Kong has a modern individual bankruptcy law, but does not have a business reorganization system.421 China has no personal bankruptcy system, but is developing a rescue system for ailing businesses.422 As is the case in Japan, cultural issues may keep the Chinese from using these new laws.423
As one would expect from an English colony, Hong Kong’s insolvency laws have always looked somewhat similar to those of England.424 What is harder to anticipate is that Hong Kong still has no corporate reorganization process, and has taken few steps to modernize its business bankruptcy laws. Hong Kong’s current insolvency laws [*PG66]are based loosely on law from England that dates back to 1929.425 Not surprisingly, these laws are archaic, harsh, and pro-creditor.426
Proposed changes to the Hong Kong insolvency laws dealing with corporate or business reorganization have failed to pass.427 Liquidation, which is referred to as “insolvency,” is the only option for corporations.428 For almost a decade, scholars and legislators have been attempting to pass a corporate rescue regime in Hong Kong, but to no avail.429 The scheme, named “provisional supervision,” was originally drafted to operate much like an English “Administration.” Under a provisional supervision, a specialist or trustee runs the company and proposes a voluntary arrangement, that creditors vote upon within six months.430 As in an English Administration, creditors control the proceeding.431 None of the drafts of the yet-to-be-passed provisional supervision contemplate a debtor-in-possession system.432
The first drafts of the new procedure were vehemently opposed by labor groups, who currently receive the first dollars out of a liquidating company under the liquidation procedure set out in section 166 of the Companies Ordinance.433 These groups feared that the new provisional supervision would be less favorable to their interest and thus opposed the bill.434 Thereafter, in order to appease these interests, the draft law was changed to require any company in provisional supervision to pay off in full, in advance, all wage claims and severance payments for all workers laid off in the past, or to be laid off in the future, in the context of the reorganization.435 Many scholars [*PG67]and legislators see this requirement, which is still contained in the current proposed draft bill, as a major obstacle to successful rehabilitation, or even attempted rehabilitation.436
Another sticking point in the current legislation has been the treatment of secured creditors. In earlier drafts, secured creditors voted with all other creditors on the arrangement, and thus could be forced to accept a plan they did not like, and could lose the benefit of their superior position in their collateral.437 While the current draft no longer contains these disadvantageous provisions, the pendulum may now have shifted too far in the secured creditor’s favor.438 Secured creditors holding a security interest in all, or substantially all, of a debtor’s assets now have veto power over the provisional supervision and can, for four to seven working days following a petition, terminate the provisional supervision completely.439 None of this has become law, however, so all provisions are still up for grabs. Moreover, Hong Kong has a long history of handling insolvency and financial distress through informal means, such as out-of-court workouts, and this trend is likely to continue whether the provisional supervision passes or not.
While business bankruptcy law in Hong Kong has not been modernized, the bankruptcy process for individual debtors, which is called “bankruptcy,” has been relaxed and modernized.440 In the past, due to the discretionary discharge provisions, many debtors received no discharge and the shortest time in which one could obtain a discharge was eight years.441 For example, for the ten-year period from 1983 through 1992, roughly 2,400 people filed for personal bankruptcy in Hong [*PG68]Kong and only twenty-five received a bankruptcy discharge.442 In effect, the discretionary discharge made bankruptcy a life sentence for most.443 During the post-filing period and before a discharge, a debtor cannot obtain additional credit. Effective April 1, 1998, many, if not most, individual debtors can obtain a discharge within four years.444
Unlike in some parts of East Asia, Hong Kong citizens have not been afraid to exercise their bankruptcy rights.445 In November of 2003, there were 939 bankruptcies in the City of Hong Kong.446 There were 1,417 during October of the same year.447 These numbers show that filings were down from the prior year, when there were 2,441 in November of 2002, and 3,193 in January of 2003.448 These numbers are astronomical compared to the ten years prior to this time, showing an increase in filings of over 1,000%.449 While some of this increase can be attributed to liberalization of the individual bankruptcy discharge, increases in consumer credit, particularly credit cards, may also explain these increases.450 As of March of 2002, there were nearly 7 million residents of Hong Kong, and 9.38 million credit cards in circulation.451
Culture appears to play a much smaller role in Hong Kong’s attitudes towards bankruptcy, especially compared to China.452 Because Hong Kong laws are based on English law, the law lacks local culture elements unique to Hong Kong.453 Although there are remnants of Chinese ideals in Hong Kong, such as the desire to pay creditors out of moral obligation, these Chinese traditions are diminishing due to the transient nature of Hong Kong’s population.454 Moreover, most bankruptcies in Hong Kong involve foreign companies rather than purely Chinese ones. Assets in Hong Kong tend to be people, rather [*PG69]than large capital assets, and money goes in and out of Hong Kong quickly, requiring quick court action in bankruptcy cases.455
Not surprisingly, then, filing for bankruptcy in Hong Kong does not carry as much stigma as in many other Asian countries, in part because Hong Kong’s community is internationally-oriented and transient.456 Some large bankruptcies in the 1980s made the idea more common, and therefore more acceptable.457 Among the traditional Chinese people who live in Hong Kong, the stigma is still present, and bankruptcies from Chinese owned business are rare.458
Like the mainland Chinese, Hong Kong citizens would rather avoid courts, preferring to work things out on their own.459 The robust Hong Kong economy also has made bankruptcy reform less of a necessity.460 When businesses do fail, the banks have been willing to bail many out. Many people believe, however, that reform is badly needed in Hong Kong.461 Moreover, Hong Kong citizens are more likely to embrace and to use modern bankruptcy laws than the citizens of either China or Japan. Confucianism and other traditional forces play a smaller role in modern, long-colonized, market-based Hong Kong.462
Unlike colonized Hong Kong, mainland China has a long history of economic and social isolation, and a history reaching as far back as [*PG70]221 B.C., the year it gained its independence. 463 China is also one of the world’s largest countries by land-mass, and is the world’s most populated country with a population of 1,298,847,624.464 In recent years, China has undergone a surprising shift from a state controlled economy to an economy where a growing percentage of enterprises are privately controlled.465 In fact, well over half of all China’s businesses are now privately owned.466 Moreover, China is working hard to encourage foreign investment in its businesses.467
In the past, the communist government of China has fought to limit any capitalist influence in the economy.468 Now, due to a growing realization that capitalism may produce more efficiently in many sectors than the regime’s State Owned Enterprises (SOEs), the Communist Party of China is accepting and even encouraging capitalism.469
This acceptance of private enterprise did not occur suddenly. Through the assumption of power of the Communist Party until the 1980s, the authorities actively crushed capitalist enclaves.470 In 1982, the government “rehabilitated” capitalist entrepreneurs in an effort to increase economic activity.471 “At the 16th party congress, not only were the ‘red capitalists’ invited to join the Communist Party, some private entrepreneurs were even made delegates.”472 The Communist Party also vowed to “promote the healthy development of the non-public sector” and to “better safeguard private property.”473
[*PG71] China’s SOEs are concentrated in heavy industrial operations and have incurred large debt loads. These industries have been restructured with massive layoffs and corporate restructuring in an attempt to increase efficiency.474 Restructuring efforts are yielding limited results. Even with the Chinese government’s doubtful official statistics, the SOEs’ losses exceeded profits for the first time in 1996.475 Moreover, China’s large state banks have written off US$15.3 billion in non-performing loans to SOEs.476
Private enterprise is developing rapidly despite a difficult regulatory environment and continuing government discrimination.477 By 2002, the private sector generated around 60% of China’s output while using only 20% of the country’s resources. The SOEs produced only 40% of output while consuming 80% of resources.478 The private sector is producing eight out of ten new jobs.479 China’s overall economy is growing by 8% and this rate is expected to continue into 2005.480 The Chinese Communist Party is committed to maintaining this growth over the next two decades and the private sector will have to play an integral part in this growth.481
Culture plays a substantial role in Chinese laws, especially its bankruptcy laws.482 Considering its population, China has a low level of reported commercial bankruptcies.483 In Chinese society the no[*PG72]tion of bankruptcy has long been condemned as “bad luck,” meaning “broken fortune.”484 If a father owes a debt, his sons or grandsons would be responsible for it; bankruptcy implies a life of burden for generations to come.485
The Chinese historically have a low regard or disbelief in judicial power.486 Creditors focus on guanxi (relationships) as opposed to their entitlements to payment.487 As is further discussed below, bankruptcy cases in China have been controlled by the government, not by independent courts, causing citizens to distrust the system.488 Confucianism also continues to have great influence on commercial activities. Confucian ethical teachings include the following values, which are held in high respect by the average Chinese person and are visible in Chinese business practices and their use of law: Li, includes “ritual, propriety, etiquette, etc.”; Hsiao, “love within the family: love of parents for their children and of children for their parents”; Yi, “righteousness”; Xin, “honesty and trustworthiness”; Jen, “benevolence, humaneness towards others, the highest Confucian virtue”; and Chung, “loyalty to the state”.489 Confucianism “encourages balance and harmony.”490 “Unless there is no other choice, people should keep their friendships and relationships intact,” rather than pursue court inter[*PG73]vention; under Confucianism, it is also “anti-moral” to force a debtor into involuntary bankruptcy.491
Socialism and communism also have a great affect on attitudes and culture in China and the resulting bankruptcy laws.492 The most developed and most significant Chinese Bankruptcy laws focus on SOEs.493 It is very difficult to place an SOE into bankruptcy and government permission is needed.494 SOEs are property of the state, and bankruptcy is viewed as a leadership failure, a loss of face for the government.495 Yet, scores of SOEs operate at a loss.496 Naturally, if a large number of SOEs were to be closed down at one time, many people could simultaneously lose their jobs, and no national provision has yet been enacted to address this problem.497 If SOEs are given free access to bankruptcy, a domino effect is also feared because many SOEs are deeply indebted to one another.498
Private enterprises are permitted to file a liquidation case, which can later become a reorganization case, under Chapters 16 and 19 of China’s Civil Procedure Law.499 If the case is accepted by the court, then a stay of collection efforts goes into effect.500 While all cases begin as liquidations, a case can proceed, through the actions of a Creditors Assembly, so that creditors can vote on a reorganization plan that will [*PG74]be approved if it is accepted by two-thirds of all unsecured creditors.501 Priority treatment is given to wage claims first, and then to taxes.502
In 1986, China passed a controversial law that permitted the bankruptcy of SOEs.503 These cases all start as liquidations, but can then become reorganization cases.504 The goals in enacting this new law were to encourage more efficient management of SOEs and to liquidate unprofitable businesses.505 Lawmakers continue to call for reform of this law, however, because it leaves the decision about whether a company can file for bankruptcy in the hands of the government, rather than courts or creditors.506 Courts are still not independent, and the community continues to have a lack of trust for judicial bodies.507 Moreover, despite the clear purpose of the new law, the government still views it as a loss of face if an SOE fails, and thus limits access to the new system.508 Clearly, the desire to compete in a global capital market cannot overcome ancient cultural and societal beliefs.
As many traditional societies are learning, changing the law and getting people to use the new law, are two very different things. Japan, for example, pushed for early passage of its new Civil Rehabilitation Law, one of the few debtor-in-possession systems in the world. It was enacted ahead of schedule to try to help breathe life into Japan’s floundering economy. While it has been used to some extent, the government would like to see it used much more.509 Shame over debt [*PG75]is still prevalent. With more debt in the system, a recessionary economy, and more business failures, debt-related suicides have been on the rise. 510 While Japan’s Economy Minister has called for a change in both laws and attitudes about debt repayment, it is far easier to change the laws than the attitudes.
As China prepares to approve and unfold its reorganization scheme, it may be faced with similar problems. The Chinese also consider it a shameful thing to not pay one’s debts, a misfortune that would follow one for the rest of his or her life.511 Culturally, like the Japanese, the Chinese are taught to value relationships over money and self-promotion.
None of the Asian countries discussed have high corporate bankruptcy rates. The reasons are both cultural and opportunity-driven. Sometimes the law is not helpful. Much of the time, cultural factors make bankruptcy taboo. In China, businesses can continue to hide behind state ownership even if they are not profitable. No one loses face. Where this is unavailable, such as in Japan’s capitalist market, then suicide is one way out; for some it is preferable to using the new laws. Japan and other countries with a strong culture of shame must find a way to balance economic goals, such as fueling the economy through more and more credit, with the serious ramifications of over-indebtedness. In the end, bankruptcy systems must be drafted to meet a country’s cultural, as well as economic, needs. Merely transplanting bankruptcy systems from other parts of the world, particularly culturally dissimilar places, is ineffective. The resulting laws are misunderstood, distrusted, and underutilized.
As the above discussion of U.S. policy demonstrates, bankruptcy’s fresh start, as well as the reorganization through a debtor-in-possession, grew from the roots of U.S. capitalism.512 First came the creation of an [*PG76]entrepreneurial economy, followed by an active consumer economy. 513 The conditions for such a system were present from the beginning of the economy, and the bankruptcy systems grew directly from them.
Today, other countries are attempting to create more vibrant market-based economies, in part by developing new insolvency systems.514 At the same time, citizens of the world are also being exposed to more and more credit—often more than they can back.515 One fairly obvious way to reduce the pain and suffering that could result from this new credit economy is to enact lenient discharge and reorganization laws to address the financial failure that will inevitably occur. This is certainly the global trend.516
This Article suggests that creating more forgiving insolvency systems may make economic and social sense, but still may not be accepted in some societies. On the other hand, attitudes toward bankruptcy in the United States changed once bankruptcy became more common, so perhaps long-held cultural views around the world will change as well. Only time will tell. In the meantime, governments and lawmakers must realize that imported bankruptcy systems are not being implanted on to blank cultural slates, such as the U.S. economy and social system of the 1700s and early 1800s. Many existing cultures are far more complicated. To those governments, I suggest the following cautious approach to developing new insolvency systems.
First, recognizing that new bankruptcy systems take some time to be accepted, governments and lawmakers should think very carefully and cautiously about how and when to deregulate credit systems. They should try to limit available credit to that which citizens can handle on their incomes, and not try to assume that extensive credit and purchasing power necessarily represents the good life. For a society that does not accept debt forgiveness, even if it is legally permissible, this could be a dangerous trap. The social consequences could include losing the family home, other possessions, and even family members themselves.
Second, assuming that it may be too late to carefully consider how credit is regulated, because it already has been extended in amounts higher than many can pay, governments and lawmakers [*PG77]should try to educate the public about responsible credit use, as well as the debt forgiveness benefits that the law provides. Such education is being attempted in both Europe and Japan, although many consumers report that they are unaware of the debt forgiveness now allowed by law. Others still refuse to use these laws because doing so is dishonorable.517 Education efforts should continue in an effort to destigmatize, as well as avoid isolation, voluntary exile, and suicide from over-indebtedness.
Finally, governments that are working on new bankruptcy systems should avoid the wholesale transplantation of any system, but in particular, should avoid transplanting U.S. systems without giving thought to the individual components of such laws. U.S. debt culture appears to be different from that of most of the rest of the world, and more moderate approaches may transplant with greater success. Transplanted aspects of U.S. bankruptcy law have been ignored in practice in Germany, Japan, Eastern Europe, Indonesia,518 and Thailand,519 as well as other parts of the world. They are simply too confusing, contextual, and complicated to make sense in their new homes, and also are based on social and cultural assumptions that the new host countries do not share.520 This causes more problems than it solves by suggesting that the social problems caused by over-indebtedness have been solved when they have not. Rather than import any systems wholesale, countries should attempt to borrow from many systems and ensure that the new law reflects both the economic needs of the society, as well as the unique cultural components of the society.521