A%20comparative%20consumer%20insolvency%20perspective:%20Key%20lessons%20from%2030%20years%20of%20pitfalls%20and%20best%20practices

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A comparative consumer insolvency
perspectiveKey lessons from 30 years of
pitfalls and best practices

• Prof. Jason J. Kilborn
• John Marshall Law School (Chicago)
• jkilborn_at_jmls.edu

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Introduction

• Irish bill based all but exclusively on EW model
• Unique EW model likely not best for Ireland
• Other models in Europe (and US) enlightening

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Comparative Sources

• Expert Recommendations and the Evolution of
  European Best Practices for the Treatment of
  Overindebtedness, 1984-2010 (Deventer Kluwer,
  2011), ssrn.com/abstract1663108
• World Bank, Insolvency and Creditor/Debtor
  Regimes Task Force, Report on the Treatment of
  the Insolvency of Natural Persons (forthcoming
  2012)

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Two Main Policy Areas

• Consumer insolvency policy What goals are we
  pursuing?
• Lessons from empirical observation
• (1) weaknesses of negotiated solutions
• (2) negotiating in shadow of key alternative

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Insolvency Policy goals

• Why now? Why is IMF interested?
• How to evaluate proposed solutions

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Why now? Why IMF interest?

• Pandemic of crushing debt
• Structural problem
• Allowing this problem to persist unaddressed
  undermines national economic development,
  international competitiveness

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How to evaluate solutions?

• Tired slogans versus systemic goals
• Bi-lateral versus multi-lateral, societal view
• Broad benefits of safety release valve versus
  narrow (illusory) virtues of pacta sunt servanda

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• The FACT of debtors insolvency creates losses,
  deprives creditors of their rightsan
  insolvency system compels creditors to accept
  this truth and find a productive way forward . .
  .
• . . . for themselves and SOCIETY.

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Identified societal benefits

• Internalizing negative externalities of loose
  underwriting

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Identified societal benefits

• Internalizing negative externalities of loose
  underwriting
• Facilitating proper account valuation

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Identified societal benefits

• Internalizing negative externalities of loose
  underwriting
• Facilitating proper account valuation
• Reducing waste in fruitless enforcement

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Identified societal benefits

• Internalizing negative externalities of loose
  underwriting
• Facilitating proper account valuation
• Reducing waste in fruitless enforcement
• Reducing costs from illness, crime, welfare

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Identified societal benefits

• Internalizing negative externalities of loose
  underwriting
• Facilitating proper account valuation
• Reducing waste in fruitless enforcement
• Reducing costs from illness, crime, welfare
• Increasing production of taxable income

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Identified societal benefits

• Internalizing negative externalities of loose
  underwriting
• Facilitating proper account valuation
• Reducing waste in fruitless enforcement
• Reducing costs from illness, crime, welfare
• Increasing production of taxable income
• Enhancing economic activity, entrepreneurialism

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If healthy levels of activity and RISK are
desired,the optimal rate of insolvency is not
zero!
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If healthy levels of activity and RISK are
desired,the optimal rate of insolvency is not
zero!
Insolvency system functions as a backstop, safety
net for inevitable casualties
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Why, then, the obsession withmoral hazard?
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Why, then, the obsession withmoral hazard?
. . . still chasing chimeras . . .
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Default seldom solely debtors fault

• economic cyclesunemployment
• currency swingsasset devaluation
• globalizationexported banking risk (RMBS US ?
  Europe)
• health, divorce, childbirth . . . life is risky!

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Insolvency relief Auto insurance

• Dividing the costs of expected tragedy
• Dispersing the burdens of expected tragedy

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Moral hazard?

• Insolvency System
• Unfair penalty on responsible debtors who would
  never default?

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Moral hazard?

• Insolvency System
• Unfair penalty on responsible debtors who would
  never default?

• Auto Insurance System
• Unfair penalty on safe drivers?

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Moral hazard?

• Insolvency System
• Unfair penalty on responsible debtors who would
  never default?

• Auto Insurance System
• Unfair penalty on safe drivers?. . .
  accidents happenwith and without driver fault .
  . .

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Moral hazard?

• Insolvency System
• Unfair penalty on responsible debtors who would
  never default?. . . and default occurswith
  and without debtor fault . . .

• Auto Insurance System
• Unfair penalty on safe drivers?. . .
  accidents happenwith and without driver fault .
  . .

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Cure for moral hazardProper administration

• Keep egregious credit abusers out of system

• Keep egregiously bad drivers off the road

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Cure for moral hazardProper administration

• Keep egregious credit abusers out of system

• Keep egregiously bad drivers off the road

Over-reaction over-deterrenceare undesirable
in both cases
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• Insolvency relief is a trade-offfor deregulation
  of consumer lending
• Insurance for restoring equilibriumin open
  credit society
• Moral hazard inevitable slippage
• Dont sacrifice the many good benefitsfor want
  of unattainable perfection!

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Empirical observation on negotiated solutions

• The long, frustrating quest for alternatives to
  bankruptcy

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Leaving solutions in creditors hands?

• Business is business vs. moralistic judgment
• Whats the alternative?

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There be dragons!

• The tri-partite Irish approach in light of
  comparative experience

PIA DSA
Bankruptcy
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Personal Insolvency ArrangementStatus Quo
Masquerading as Solution

• One creditor easily has gt 50 secured debt
• That creditor thus has absolute veto, with no
  review for reasonableness or good faith
• No change from status quo banks CAN agree to
  voluntary modifications NOWdo they?
• US experience reveals inevitable failure

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A similar fate for DSA . . .

• 20 years of wrangling with unsecured creditors
• EW, Sweden, France, Germany, Netherlands

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A similar fate for DSA . . .

• 20 years of wrangling with unsecured creditors
• EW, Sweden, France, Germany, Netherlands
• Few assets, limited income, large debts, and
  moralistic creditor judgments negotiation
  proved pure formality in all but a few cases
• Distracts counseling resources/attention from
  truly negotiable cases!
• Sweden first to scrap mandatory stage in 2007

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Recipes for success?

• Trusted intermediaries

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Recipes for success?

• France
• More than 50 success, but trending down
• Not just for insolvent debtors? more and more
  insolvent Ds immediate discharge!
• KEY Banque de France pressure on creditors?
  rise in plan acceptance from 40 ? 65

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Recipes for success?

• Netherlands
• NVVK long history of plan negotiation
• Sharp downward trend to 9 after new Wsnp
• Reversal, back to 30, on 2 NVVK fronts

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Recipes for success?

• Netherlands
• NVVK long history of plan negotiation
• Sharp downward trend to 9 after new Wsnp
• Reversal, back to 30, on 2 NVVK fronts(1)
  hopeless cases routed immediately to Wsnp -
  concentrating resources on good candidates(2)
  structural negotiation with key creditors -
  (CJIBfines and penalties bureau)

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Plan broker for Ireland?

• MABS as trusted intermediary?
• No compulsion for creditors
• The alternative is no stick behind the
  door

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Cure worse than the disease?

• Debtors will agree to unworkable plansthat will
  eventually fail

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Key alternative Bankruptcy

• Overwhelming majority of Ds will have no
  realistic option other than bankruptcy? expect
  cries of debtor moral hazard when creditors
  reject reasonable proposed plans . . .
• KEY reasonable, consistent, uniform application
  of income payment orders? bills guidelines
  seem sensitive, but 5 years following 3-year
  recovery is too long reasonable needs per
  court discretion disaster

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Conclusion

• Half-measures ignore societal goals of insolvency
• Why parrot unique EW system?
• Why leave public policy to banks look where
  that has gotten us.
• One portal one solution, but . . .
• . . . fools errand to expect substantial
  returns to creditorspounds of expense for
  pennies of gain