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Principles of EU Personal Insolvency Law?


Iain Ramsay


Twenty five years ago many EU member states did not have a law which permitted individual non-traders to obtain a discharge of their debts. However by 2014 almost all EU member states  have some form of discharge for this group.

In March 2014 DG Justice issued a recommendation (a form of soft law) on a new approach to business failure and insolvency.  In addition to proposals on restructuring,  a minimum standard of an  automatic discharge after no more than three years for ‘honest entrepreneurs’ is a central recommendation. Although the recommendation is not aimed at consumers it does invite (see Recital 15) member states to apply relevant provisions (such as the discharge) to consumers. This recommendation is part of the drive by the EU to promote entrepreneurialism (see eg here and here and here)  through the provision of  a non-stigmatising second chance. Entrepreneurialism also drove the liberalisation of the English discharge in 2002 to one year and recent German reforms which reduce the discharge period from 6 to three years (but only under restrictive conditions: see here).  The  EU recommendation does not define ‘entrepreneur’ but it is presumably equated with self-employment.

Meanwhile a variety of  expert reports (see hereherehere and most recently here)  addressing consumer over-indebtedness over the past decade have proposed a fairly consistent set of reform proposals for individual debt-adjustment in the EU: 3-5 year repayment plan as a condition of discharge with a simple and swift discharge for those with no likelihood of repayment; open access but controls on bad faith; automatic stays on enforcement action. An IMF paper by individuals involved  in European insolvency reform  as part of bailout packages suggests similar principles. These ideas are hardly revolutionary or even radical: the 1883 English Administration Order was based on not dissimilar principles . If these principles were adopted it would make the UK an outlier with its one year discharge period and the absence of a repayment plan as a condition of discharge.

These EU developments in consumer and business insolvency have run on parallel but distinct tracks. There is in fact significant overlap. Self-employment (which accounts for about 15 percent of total employment in the EU)  may simply describe an individual who was employed and  is in a precarious position with low income and few social protections. Self-employment may–or may not– be innovative and rewarding  (see here). Studies which draw a connection between liberal bankruptcy regimes and entrepreneurialism use self-employment as the proxy but do not draw conclusions as to the quality of the self-employment (see here). One  US study suggests little connection between generous insolvency laws and innovative entrepreneurship. The distinction between consumption and production debt may be blurred when an individual uses credit to invest in education, or uses a home to guarantee a business debt.  The question is whether the EU should propose a unified approach to individual insolvency with relatively easy access for both consumers and entrepreneurs.

Although increasing convergence does exist within the EU on personal (consumer and individual business) insolvency significant differences remain relating to  such issues as entry requirements (e.g. strict in Sweden, liberal in England) and the institutional process. The influential German model with a mandatory period of ‘good conduct’ through a repayment plan  may become viewed as a norm with a burden of proof on those promoting a more liberal regime. Yet the German system appears socially wasteful since the majority of insolvents have no repayment capacity (see here) and must simply wait out a period of purgatory before being permitted a return to the market. Other  European systems have developed swifter processes for those with no repayment capacity.






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