Discharge in Bankruptcy: A Comparative Examination of Personal Insolvency Relief
Posted: 19 Jan 2009
Date Written: January 16, 2009
The purpose of this essay is to critically examine personal bankruptcy discharge in an historical and international comparative context. Formal discharge from the legal state of personal bankruptcy is being examined. As will be seen below, this is of course sometimes different to discharge from personal liability for debts as discharge from personal liability for debt can be obtained through mechanisms other than bankruptcy. These procedures fall without the parameters of this essay. It is then the formal procedures for discharge within bankruptcy law that are being considered in this essay. Recent changes in England and Wales to bankruptcy law discharge provisions have highlighted two schools of thought regarding the effects of those changes on debtor behaviour. These recent English legislative changes have, inter alia, reduced the period before automatic discharge from bankruptcy from three years to a maximum of one year.
In relation to formal discharge from bankruptcy there are, it could be argued, two schools of thought as to the length of the bankruptcy period before discharge occurs. The first school of thought promulgates that less onerous discharge provisions will and have encouraged irresponsible borrowing activities by debtors, thus causing a rise in the number of people seeking redress to the bankruptcy system. The second school of thought advocates the idea that the changes have not caused additional redress to the bankruptcy procedure themselves, but that the changes in the legislation have been accompanied by an increase in consumer credit availability generally and that this will lead to a natural increase in debt related failure.
This essay will seek to examine these competing contentions through an examination of discharge regimes in the major common law countries, namely: England and Wales, Scotland, America (including various states differing provisions), Canada, and Australia. It is broad truism to state that many civil law jurisdictions do not recognise the procedure of bankruptcy for consumer debtors and the normally attendant provisions for discharge from debt. It is not within the scope of this essay to consider the alternative procedures that these countries have in place of bankruptcy, that is perhaps for another place. This essay will demonstrate that behind the various jurisdictions' discharge provisions lies a legislative desire to ensure that an appropriate procedure is extant that is designed to facilitate the rehabilitation of the debtor by providing for a clean, refreshed financial re-start for the bankrupt. This re-start will usually occur in an unfettered manner in terms of future financial encumbrances unless the debtor has exhibited miscreant behaviour.
This philosophical approach to bankruptcy design is perhaps best known (using American insolvency parlance) as a 'fresh start' mechanism. The various jurisdictions under discussion have different discharge provisions. It is these differences and in particular the policy reasons for these divergent approaches that is being examined. It could be posited that discharge is directly related to the idea of rehabilitation and a fresh start for the debtor. The earlier the discharge, the sooner the individual is rehabilitated into the credit community. In this essay we will see how different jurisdictions approach this fundamental quality of a personal bankruptcy law.
In particular this essay will focus on the thesis that less onerous discharge provisions encourage more responsible lending practices. This is due to enhanced creditor prudence brought about by the notion that if a debtor can escape their liabilities with ease, a creditor will not encumber them with such onerous liabilities. The creditor will have the knowledge, and perhaps disincentive, that the debtor could escape liability for the debt easily. The creditor will therefore lend more cautiously to minimise the risk of loss.
Keywords: insolvency, debtor, creditor, discharge, comparative approaches, relief, rehabilitation, recovery
JEL Classification: K00
Suggested Citation: Suggested Citation