Банкеръ Weekly


Personal Insolvency Act - Salvation or Plague?

By the end of March, the National Assembly of Bulgaria is expected to make a draft version of the Law on Bankruptcy of Individuals (Personal Insolvency Act). The BANKER found out that at the moment the move involves the efforts of experts in three committees - the Legal, the Budget and on Finance as well as the one on Economic Policy and Tourism. According to informed sources, the experts charged with drafting the text have examined similar laws that apply in about 30 other countries.

The adoption of the bankruptcy proceedings for individuals will have an effect that few people may have expected. From the moment, talks were initiated in the public domain on the need for such a regulation, the impression was created that it would give a second chance to those mired in debt. Or, put another way, it will ease their situation. But this is a very serious delusion for which the BANKER is warning now.

In Europe and in most developed countries there is no law that penalizes creditors in favour of non-performing debtors, whether they are citizens or companies. Because the assumption is that the borrowed money was taken with a commitment to return it within a specified period with the rightful remuneration for the lender. If not, the debtors must liquidate their property and the money received is to satisfy the creditor. And how much the creditor will receive determines the only authority to resolve disputes - the court. This is the meaning of the insolvency proceedings, which we all know from the corporate practice.

This practice does not currently exist for individuals, and therefore the Code of Civil Procedure has set a

non-sequesterable minimum

which, despite their obligations must remain for them in order to survive. It applies to property, income and estate. This means that every member of a family is entitled to a certain housing area, which no one can take away from him or her. This area is defined by a decree of the Council of Ministers. Hardly many people have been interested in what is written in the respective decree, since when has it been valid and whether it has been amended or altered. But it describes the true protection that can be used by people against whom there are enforcement procedures. The practice in the EU is that a special law or any other legal procedure of bankruptcy of individuals is applied, the notion of non-sequesterable minimum is done away with.

What does this mean? If a family of four is currently indebted, under the Civil Procedure Act now nobody can take away from them a certain housing area - which comes to 75 square metres. Whatever the size of non-performing debt of this family may be, the family is entitled to keep their home if it does not exceed the area in question.

But after an adoption of the law on personal bankruptcy, if it comes to

insolvency proceedings

things will look quite differently. All the debtor's assets will be written in and will pass under the control of a court-appointed person - a trustee, receiver, no matter what name may be given to this person by the law. The court will determine the maximum amount per month that a bankrupt citizen can spend. All the rest of his income and proceeds from the sale of his property goes to repay his debts. In other words, the property of the person is taken away, sold and the money is paid to creditors. A debtor and his family (if it does not disintegrate) may go to live with relatives or in a rented flat. Everyone can decide whether this situation will be better than the now existing one. Moreover, if the sold property is not enough to cover the obligations of the citizen, they are deferred and the court determines

a minimum installment

that the person has to make every month within a specified period of time or until he/she pays off all obligations. The period in different countries varies from five to ten years. But let us assume that the Bulgarian legislator will be sympathetic to people who have problems to service their debts, and determine that people must repay, say, for no longer than three years, after which all outstanding liabilities are settled automatically and the person is already immune to creditors. During all these years an indebted citizen, figuratively speaking,

will be living on the edge:

he or she can not get a new loan or buy goods on a principle of deferred payment. Furthermore, if he or she takes some money from a friend or a relative and this is detected by the court, the receiver or the trustee find, the citizen that will undergo administrative sanctions, such as the extension of bankruptcy period. In general, all costs which the debtor incurs over the threshold set by the court, entail serious consequences for him. The same will be true in case of arrears on the installments set by the court.

One should not assume it would be easy to hide property if a citizen transfers it to relatives before announcing insolvency. In the Personal Insolvency Act it will be most probably written that all transactions concluded within one, two or more years before the date of insolvency will be declared invalid. Property for which these transactions took place, will be returned to the bankruptcy estate pool, which will be managed an by a trustee or a guardian, and the money received will go to repay the obligations of the bankrupt citizen.

Maybe when people realize all these details, they will think again if they really want the existence of such a legal procedure allowing the bankruptcy of individuals, and if the current legal system is more advantageous.


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