Are you ready for the implementation of the "personal bankruptcy system"?
[2] Recently, the "Shenzhen Special Economic Zone Personal Bankruptcy Regulations (Draft for Comments)" was released to the public. The core of these regulations is to establish a personal bankruptcy system, allowing natural persons whose assets are insufficient to pay off all debts or who are clearly unable to pay due to production, operation, or living expenses to apply for bankruptcy under certain conditions.
What is “personal bankruptcy”?
[4] According to the draft for comments, natural persons who reside in the Shenzhen Special Economic Zone and have participated in Shenzhen social insurance for three consecutive years, and whose assets are insufficient to pay off all debts or who are clearly unable to pay due to production, operation, or living expenses, may undergo bankruptcy liquidation or settlement. Additionally, creditors who individually or jointly hold claims of over 500,000 yuan in due debts against the debtor may apply to the court for bankruptcy liquidation of the debtor.
The most essential significance of the personal bankruptcy system is relief, with "honest" and "unfortunate" being the two key words for filing for bankruptcy. This means that only honest and trustworthy debtors who unfortunately fall into a debt crisis can obtain the protection of the personal bankruptcy system, which helps them extricate themselves from the debt crisis, re-participate in socioeconomic activities, and create more wealth.
Why Shenzhen?
The establishment of the personal bankruptcy system is related to the actual needs of Shenzhen.In Shenzhen, apart from self-employed individuals, a large number of natural persons have directly engaged in commercial activities in their own names in recent years. Statistics show that as of the end of January 2020, there were 3.298 million commercial entities registered and established in Shenzhen, of which 1.236 million were individually-owned businesses, accounting for 37.5%. In addition, a large number of self-employed commercial entities exist in the form of WeChat merchants, e-commerce operators, freelancers, and the like.
However, due to the lack of a personal bankruptcy system, once these commercial entities face market risks, they must bear unlimited debt liability in their personal names, cannot obtain bankruptcy protection equivalent to that of enterprises, and cannot achieve market exit and regeneration. Business risks are thus infinitely transferred to individuals and families, creating room for illegal financing channels such as usury and underground banks.
Therefore, establishing a personal bankruptcy system is intended to stimulate entrepreneurs' enthusiasm for starting businesses, encourage innovation, and tolerate failure. At the same time, improving the market exit mechanism and optimizing the business environment are also necessary for preventing and resolving financial risks and perfecting the social credit system.
Will it become a safe haven for "deadbeats"?
No.From the very beginning of the legislative process, some raised concerns that such a system would give debt-evading "deadbeats" room to dodge their obligations, but the draft for public comment had already taken this into account during its drafting.
According to regulations, from the start of bankruptcy, the bankrupt individual must undergo a minimum three-year and maximum five-year period of observation for debt discharge. During the bankruptcy process and the observation period, the bankrupt's various behaviors and rights are restricted, including limits on high consumption, inability to serve as a company executive, and provisions for non-dischargeable debts and non-eligible circumstances. For example, debts such as compensation for property damages arising from malicious torts cannot be discharged, and debts incurred from extravagant consumption or actions that significantly reduce assets cannot be discharged even after personal bankruptcy.
For debtors who maliciously evade debts, not only are they disqualified from applying for bankruptcy discharge rules, but they will also face legal liability. For instance, if a debtor intentionally conceals, transfers, damages, or improperly disposes of property, or fabricates debts or acknowledges false debts, the people's court will handle the matter according to law. If it constitutes a criminal offense, criminal liability will be pursued according to law.
Author's viewpoint:
The establishment of a personal bankruptcy system is imperative.Currently, many countries and regions with mature market economies around the world, such as the United Kingdom, the United States, Germany, Japan, as well as China’s Hong Kong and Taiwan regions, have enacted laws and regulations on personal bankruptcy. This year, in addition to the promulgation of the Civil Code in China, Shenzhen, as a special economic zone, also possesses unique institutional advantages. In January 2019, the Shenzhen Bankruptcy Court was officially established, marking the first bankruptcy court in the country. Meanwhile, the pilot program for centralized liquidation of personal debts has also played a catalytic role in advancing the legislative work on the personal bankruptcy system.
2. The personal bankruptcy system facilitates the establishment of the social credit system.The just-concluded Two Sessions passed China's first Civil Code, in which the contract section explicitly prohibits high-interest private lending. In fact, besides protecting individual businesses, the personal bankruptcy system has another important significance that complements the contract section: preventing financial risks. When the social credit system is lacking, various financial risks emerge, and the personal bankruptcy protection system will facilitate the establishment of a social credit system. Today's commercial society requires a comprehensive social credit system.
3. Personal bankruptcy still lacks institutional support at both the institutional and practical levels.Specifically, the personal credit system is a weak link. At present, China’s personal credit system still relies primarily on the banking credit system, and a comprehensive, society-wide management system for personal credit remains inadequate. Economic management and administrative controls over dishonest debtors are still incomplete. Therefore, although the personal bankruptcy system has good intentions, supporting measures should be implemented as soon as possible. Establishing a personal credit system early is not only a way to prevent the emergence of “deadbeats” but also an indispensable part of promoting healthy economic development.
