I’m asking because personal banckruptcy, frequently discussed on this board, doesn’t exist in France. Well…for some time, there has been a way to have your debts discharged in some cases, but it’s relatively recent and not at all always possible. Generally speaking, if you owe money your creditors will be able to get after you till your death and beyond ( by getting after your estate).
So I was wondering if it has been possible to declare backruptcy for a long time in the USA, and if it’s a common concept in other countries, or rather an exception.
Bankruptcy has existed in the English legal tradition since the 16th century, and the American colonies inherited that body of law and many had bankruptcy statutes at one time or another. Upon the formation of the Union, the Constitution authorized Congress to enact “uniform laws on the subject of bankruptcies,” which they did, beginning shortly after ratification.
Spain doesn’t quite have a process of “personal bankruptcy”, but a physical person can declare himself insolvente, that is, unable to pay. Mind you: doing that falsely is a crime (as in “dealt with in the criminal courts and may lead to imprisonment”).
Estates are responsible for discharging debts, debts don’t go “poof” when someone dies. Inheritors can renounce the whole inheritance, if the debts are more than they think the other stuff is worth.
One of the changes which happened as part of the mortgage changes linked to the Spanish housing bubble is that, where previously the main difference between a mortgage and a personal loan was that the house itself was the guarantee for the loan, many of the mortgages written during those years did not have such a clause. People who suddenly found themselves unable to pay were handing over the keys, but banks often did not accept a “voluntary handover” (I’m not sure why, in theory that should be less costly than getting the keys through a judge’s order) and they were going after the non-payer’s other goods; the judges were failing in the banks’ favor because the mortgages were written in such a way that the borrower was responsible for full payment no matter what. Then there was a case in Navarre (one of the regions where that kind of mortgage wasn’t legal) where the judge failed in favor of the non-payer, since his mortgage did have that clause (as ordained by regional law) and lawyers in the rest of Spain, apparently failing to understand the whole concept of “Spain doesn’t have a single legal system” went into hysterics…
And the government eventually stepped in and came up with a law saying “if someone hands the keys to the bank holding their mortgage, the bank has to suck it up”. So now you can hand the keys for one mortgaged item over without having to also sell everything else you own: many people have done it for a vacation home they could no longer afford, which means that right now is a superb moment to short-buy one (the concept of “short sale” didn’t exist either, and from what I understand it’s faster with the banks that accept them here than it is in the US).
But the “surendettement” procedure isn’t at all a bankruptcy. It’s an attempt to “reorganize” debt (that may include longer durations for repayment, dropping interests or such things). You still have to pay it back, though. And you must fit some criteria (in particular it doesn’t apply if your income is too low and there’s no way you can repay your debt within a reasonable time frame). Finally, theoretically at least, the creditors can refuse the proposal.
Is there really a difference? If you declare yourself insolvente, are your debts completely erased and can you start again from scratch, in particular?
No, you are insolvente for a specific debt. Usually it is not a process initiated by the physical person but a response to a judicial process initiated by debtors or to a fine imposed by a judge; it does not erase any other debts, and that particular debt will only be forgiven if the judge decrees it so. For an extreme example, if you’ve received a penalty of “200,000€ or 6 months of prison*” in a trial and you declare yourself insolvente, what happens is that you go to prison: note that it’s not debtor’s prison (if the debt was to another physical person or company, jail would not be an option), it’s that since the penalty was “A or B” and A can’t be… then you’re taking B. In the case of the mortgages, the borrower is insolvente for the mortgage and the debt is not being erased: it’s being paid by handing over the goods purchased with the loan.
Then again, we also have a completely different credit record system from the US: while someone who’s declared himself insolvente at any point will have a big black mark, the assumption when someone has no credit history is that he’s low risk; in the US, the assumption for people with no credit history is that they’re high risk. Any comparison between the Spanish and American credit systems is going to be apples and spaghetti.
actual example from a recent newspaper article. Speeding that much in a spot with big “SPEED RADARS” signs is not good for your wallet’s health.
In the US, debtor dying is a separate situation from a debtor declaring bankruptcy. As long as the debt was not previously discharged in bankruptcy, when a debtor dies, creditors can pursue the debt against the estate (just like in France or Spain, it sounds like).
In the US there are two common forms of personal bankruptcy, Chapter 7 and Chapter 13 named after the relevant legal code, I suppose. There are a couple other versions, Chapter 11 and Chapter 12 that are not as commonly used.
A Chapter 13 bankruptcy is a court supervised reorganization of debt and may include lowering of interest rates, extending repayment terms, etc… While under bankruptcy protection creditors must cease collection actions and work through the court.
A Chapter 7 bankruptcy leads to the discharge of most (but not all) unsecured debt.
With the main difference seeming to be that in the US (at least in NY & MA, not sure if it holds true for all states) when the estate is used up any remaining creditors are out of luck. The heirs do not inherit any remaining debt.
In Germany personal bankruptcy is a pretty recent development (introduced in 1999) and involves sticking to a court-mandated austerity and repayment plan for six years.
Before 1999 you only got clear of a debt after the civil statute of limitations term for that debt (30 years in most cases) - and only with respect to that debt. Your debtor could garnish your income exceeding a subsistence level depending on number of dependents for these 30 years.
The only time I imagine that might happen is if the heirs do not want the estate liquidated to pay the creditors. So if Grandpa owes 50,000 qatloos, and his family farm is worth 45,000 qatloos, the family farm has to be sold to pay the debts.
OK. So, from the examples given, I guess that the answer is that it has existed for centuries in the common law system (which frankly, I find very surprising. I would have thought that at this time, they wouldn’t have been very forgetful with indebted people), while it never existed in civil law based systems, and has been introduced in the relevant countries only very recently and only in very limited ways.