Interview: Time Is Right for China to Fix Personal Bankruptcy Legal Omission, Expert Says

China's economic slowdown has led to an increase in personal debt, causing pressure on borrowers and financial institutions due to a lack of a well-defined bankruptcy system to resolve financial issues. [para. 1] The absence of effective legal avenues for debt relief has led individuals to rely on debt intermediaries, which often indulge in illegal practices, exacerbating their debt troubles. [para. 2] Therefore, establishing a personal bankruptcy system is urgently needed. Such a system would provide a legal framework for debtors unable to repay their loans, allowing for asset liquidation or restructuring and offering relief to viable debtors, thus enabling them to restore their financial stability. [para. 3]

China's legal framework lacks provisions for personal bankruptcy despite the introduction of the Enterprise Bankruptcy Law in 2007. This gap has been a source of critique by legal experts like Li Shuguang, who believe it leaves the law incomplete and in need of amendment. [para. 4] While talks for amendments have been underway since 2021, the bankruptcy law structure has remained largely unchanged for nearly two decades. [para. 5] As household debt has soared, with a leverage ratio rising from under 30% in 2011 to 63.5% by the end of 2023, the demand for personal bankruptcy legislation has grown more urgent. [para. 6]

Experimenting with personal bankruptcy at a regional level began in Shenzhen in March 2021, followed by other regions like Zhejiang, Jiangsu, Shandong, and Sichuan. Although these pilot programs have provided valuable insights, challenges persist, including low case acceptance rates and the absence of a national law to unify these efforts. [para. 7][para. 8] Legal expert Li Shuguang advocates for personal bankruptcy as a crucial aspect of a market economy, proposing various legislative approaches to create or integrate personal bankruptcy laws within existing frameworks. [para. 10]

Li suggests that a national personal bankruptcy system would benefit individual debtors, financial institutions, and social equity. It would alleviate the risks associated with high leverage and encourage prudent lending practices. However, introducing such a system requires conducive conditions. [para. 11] Despite cultural perceptions that bankruptcy signals family failure, the need for modern bankruptcy laws is critical to remedy aggressive debt-collection practices and familial debt responsibilities. [para. 13] Other global examples, like the United States, Japan, South Korea, and regions like Hong Kong and Macao, provide learning opportunities for China. [para. 15]

Li acknowledges that when the Enterprise Bankruptcy Law was crafted in 2006, personal bankruptcy was considered, but ultimately excluded due to lack of understanding and readiness. However, since then, conditions have shifted, with advancements in the credit rating framework and the success of local pilots indicating that the time may be right for personal bankruptcy legislation. [para. 19][para. 21] The Third Plenary Session of the 20th Central Committee of the Chinese Communist Party recently endorsed measures to introduce a personal bankruptcy system, highlighting the readiness for its implementation. [para. 22]

A comprehensive bankruptcy law should cover individuals with legal capacity as a form of consumer bankruptcy. Those unable to repay debts should voluntarily file, fully disclose their financial situation, and adhere to legal responsibilities. More than 100 million individuals in China, affected by factors like illness or unemployment, could benefit from such a system. [para. 23][para. 24]

To ensure successful implementation, China needs clear legislation, a refined credit rating system, and reformed credit markets. Enhancements like a unified personal asset registration system, transparent payment tracking, and robust social safety nets are also necessary to support the personal bankruptcy framework. [para. 32][para. 34]