Shenzhen Mulls China’s First Personal Bankruptcy Legislation
China may soon have its first personal bankruptcy legislation, with a draft regulation released on Tuesday by the southern city of Shenzhen providing a way out for individuals saddled with debts they cannot pay off.
China enacted an Enterprise Bankruptcy Law in 1986, but did not include a personal bankruptcy ordinance, leading some law experts to say the country only has “half a bankruptcy law.” The Shenzhen draft rules could change that for people living in the business hub that cannot afford payments on their debts, allowing them to apply for restructuring or liquidation and have part of their debts forgiven by creditors. China’s central government backed the establishment of a personal bankruptcy system in a document issued last year.
“Those ‘honest and unfortunate’ debtors will have a chance to get out of their debt predicaments and make a fresh start,” said a statement (link in Chinese) by the city’s legislature published alongside the draft regulation (link in Chinese). The legislature added that the legislation would help ease the worries of entrepreneurs and the self-employed, and strengthen the city’s market exit mechanism.
If the legislation is approved, debtors who find it impossible to repay debts can file for bankruptcy restructuring or liquidation, or conciliation. Creditors who hold matured debts worth at least 500,000 yuan ($70,200), individually or combined, can also apply to bankrupt their debtors. Properties essential to debtors’ basic livelihoods will be exempt from liquidation.
In general, after creditors agree on a restructuring or liquidation plan and a court declares bankruptcy, debtors will be forbidden for three years from luxury spending such as buying cars or real estate, and from working in certain corporate executive positions. After three years, they can apply for exemption from their remaining debts.
The policy comes after years of debate on whether and how China should set up a personal bankruptcy law system. Many observers argue the country urgently needs to allow personal bankruptcy, as more and more individuals fall into debt amid easy access to consumer credit and sluggish economic growth. Data from China’s central bank showed that outstanding household loans jumped 15.5% year-on-year to 55.3 trillion yuan at the end of 2019.
Lack of a personal bankruptcy law system also means business owners and the self-employed, along with their families, face higher risks of being caught in debt crisis.
“Once their business encounters market risks, those market entities need to bear unlimited debt liability in the name of individuals and cannot enjoy the same bankruptcy protection as enterprises,” the Shenzhen legislature said in an explanation of the draft, adding that many lenders require business owners to use personal or family property as collateral when issuing loans.
Without an effective exit mechanism, debt-laden businesses in China often choose to simply flee, leaving creditors on the hook. This also makes life difficult for courts, which struggle to rule on debt disputes when they cannot find debtors or assets for compensation.
But others worry debt dodgers might take advantage of personal bankruptcy rules to ditch their obligations.
“The draft regulation has designed a series of policies to avoid malicious debt evasion,” according to the explanation. Debtors who fail to honestly report their assets or attempt other fraud will not receive exemption.
Contact reporter Guo Yingzhe (firstname.lastname@example.org) and editor Gavin Cross (email@example.com)
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