A quiet revolution has been creeping over Europe during the past three decades. Slowly but surely, national authorities have changed their attitudes and regulatory approaches to insolvency. All but gone are the days when an insolvent trader was immediately branded a fraudster and an insolvent consumer a reckless spendthrift. An explosion of risk-embracing lending practices accompanied by several pan-European economic crises have demonstrated to lawmakers that financial distress is not a moral shortcoming, but rather a natural part of modern, volatile economic life. Treating the unavoidable casualties of this volatility, rather than punishing those who fall prey to it, is the new order of the day.
While national policymakers are largely united in pursuing a new rescue and rehabilitation policy, they remain quite divided as to the specifics of how that policy should be best implemented. In a union of 28 Member States, legal divergences that interfere with or inhibit cross-border activity are especially undesirable and a topic of concern for EU authorities. The European Commission has been struggling with soft coordination of cross-border insolvencies since 2000, starting with an Insolvency Regulation focused on procedural coordination. It was all but inevitable that this would prove insufficient and a movement for at least a degree of substantive harmonization would follow. That movement began in 2012.
For the ensuing several years, the Commission’s efforts to begin harmonizing substantive insolvency law were concentrated on business restructuring. From the beginning, however, the initiative included the idea of offering a fresh start to individual entrepreneurs via a discharge of debt after a compromise resolution period of no greater than three years. The Commission has recently expanded this idea to encompass an exploration of similar treatment for all overindebted individuals, including consumer debtors.
The process thus far, however, has involved relatively little discussion or consideration of the most salient issues unique to personal—as opposed to business—insolvency cases. For both individual entrepreneurs and consumers, their status as natural persons raises particular concerns about the best ways to respect their creditors’ legitimate claims while rehabilitating these debtors for productive re-entry into the modern credit economy.
In a recent article, I seek to fill that void by surveying in detail the most critical divergences in law and practice among existing European personal insolvency regimes, including the laws adopted in 2015 and 2016. I then propose several detailed principles and rules for harmonizing these divergent practices in light of consistent international best practice recommendations, the goals of modern personal insolvency regimes, and the goals the Commission has expressed for its initiative.
The differences among personal insolvency regimes today are vast and critical. For example, national laws place very different controls on access to these relief systems, often excluding debtors with professional or business-related debts, restricting access to only those debtors whose financial situation is absolutely and clearly hopeless, or rigorously assessing debtors’ good faith, an undefined and ambiguous term that invites disparate treatment of similar debtors and denial of relief to many in need. Another salient series of differences concerns the requirements for obtaining the relief that these procedures offer. Most national laws require a payment plan to tap debtors’ future income as quid pro quo for a discharge, but the terms of these resolution plans differ dramatically among Member States. The Commission has signaled its firm preference for plans not exceeding three years, but despite some notable reforms moving several countries’ laws in this direction, most procedures today require plans of five years or even longer. More troubling are the disparate methods of determining how much of the debtor’s income is reserved for family support, with any excess to be distributed to creditors.
To bring a minimal degree of harmony to this cacophony, this article advances detailed principles and rules for a European Personal Insolvency Directive. These provisions reflect a modern perspective on personal financial distress resolution, as reflected in decades of recommendations by international experts. Considerable political hurdles potentially stand in the way of this progress, but three decades of trial and error indicate that this is the path that Europe should follow to strike the optimal balance between creditors, individual debtors, and a healthy and productive European economy.
Jason Kilborn is Professor of Law at the John Marshall Law School.