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Analysis & Opinion
30.03.10 Building A Debtor’s Paradise
By Tai Adelaja

After eight years of going back and forth, Russian lawmakers appear poised to reshape the country’s bankruptcy code, so that at-risk individual borrowers can get rid of their debts by declaring bankruptcy. Deliberations kicked off in the State Duma last Monday on a draft bill providing for a five-year personal debt-restructuring amnesty, which was submitted to the Duma by the Economic Development Ministry in November, capping years of futile attempts to push the law through.

If passed, the law would allow an individual borrower, who owes more than 50,000 rubles ($1,691) and is unable to repay it within six months, to seek bankruptcy protection unhampered by the pressure of preexisting debt.

According to the draft bill, bankruptcy procedures may be initiated in the arbitration court either by the creditor or by the debtor. However, a debtor must prove to the court that he can pay 10,000 rubles ($338) in monthly arbitration expenses. After an application is filed, the court would impose a moratorium even if debt recovery process is already in motion. The court can either grant a bankruptcy discharge, which releases debtors from personal liability for specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts, or order full repayments through bankruptcy proceedings.

The new bill received a much-needed boost last week, when Lyubov Sliska, the deputy speaker of the State Duma, said that deputies could approve it in the first and second reading before the Orthodox Easter recess. "We know that in economically developed countries, people are not afraid to live ‘on loan’ or ‘in debt’ because the institutions of consumer credit and bankruptcy are well established and successfully operated. This is a normal civilized procedure, which is understandable both to businesses and ordinary citizens. Unlike in our country, it does not arouse a sense of fear and horror in people,” Sliska said last week during a roundtable discussion organized by the State Duma to discuss the draft bill.

According to the deputy speaker, the number of individuals who filed for bankruptcies was 1.2 million in the United States, 240,000 in Japan and more than 100,000 in the United Kingdom.

Claude Montgomery, a partner and bankruptcy expert at Salans, a New York-based law firm, praised the accessibility provisions in the draft bill noting that “it is very important to guarantee ease-of-access to any individual willing to declare personal bankruptcy. One other safeguard the authors should put in the draft is an optimal time limitation, so that a borrower can only declare bankruptcy every seven years or so.”

Russia’s economic boom under then President Vladimir Putin spurred an unprecedented consumer-spending binge, facilitated by easy-to-get consumer credit. Before the 2008 economic crisis, Russia overtook many developed countries both in the volume of accumulated consumer debts and the number of defaults on debt repayment, a statement from the State Duma press office said. Between 2004 and 2008, the volume of individual borrowing rose 12 times to three trillion rubles ($101.8 billion) or nine percent of GDP, the statement said, adding that more than a third of Russian consumers resorted to bank credits over the same period.

However, the credit squeeze took a high toll on many debtors, pushing up the volume of bad debts considerably. By January 2009, the number of defaults on loan payment has climbed up 60 percent compared to the same period the previous year. While only 3.7 percent of borrowers defaulted on the loans before the onset of the crisis, by the end of 2009 the figures have doubled, reaching 6.75 percent. By January 1, 2010, unpaid consumer loans countrywide equaled 240 billion rubles ($8.1 billion), according to the State Duma press office.

However, experts say that the present economic downturn may be the best justification for passing a bankruptcy law to protect individual borrowers. “During this time of economic hardship, a bankruptcy law that protects individual borrowers will certainly help to unlock the earning power of consumers and enable the consumer industry to gain additional life and strength,” said Tim Stubbs, a partner and the head of the Russian Banking & Finance Group at Salans. “If consumers have to pay credit card companies, the banks or collection agents all their money, that money is leaked out of the economic system, whereas the money should remain in circulation to stimulate wealth for producers of goods and services.”

Stubbs said that individuals who have to declare personal bankruptcies usually still retain their ability to find jobs and pay for their day-to-day expenses, and without a bankruptcy law protecting them, their earning power would be lost to the economy.

Many economically developed countries, such as the United States, have long-established procedures for declaring personal bankruptcies; and in enacting the federal bankruptcy laws in 1998, the Congress said its declared goal is to give debtors a financial “fresh start” from burdensome debts.

In Russia, a bill dubbed the “legal aspects of the introduction in Russia of the institute of bankruptcy of physical persons” was first introduced in 2002, but it was so unpopular that deputies allowed it to die a natural death. The Ministry of Economic Development made another attempt to introduce the bill in 2006. However, the country’s nascent bank-lobby group scuttled all attempts to deliberate on the bill, arguing that its provisions were too lenient to the borrowers to the detriment of the banks.

The present draft bill has also faced opposition from interest groups with bankers saying it is ill-prepared and ill-equipped to handle the avalanche of court cases that the new law would inevitably trigger. “The main danger is that the draft bill contains many loopholes that canny borrowers could use to outsmart the system. Any bankruptcy law should be a mechanism to help those really in difficulties and not encourage borrowers to shark their responsibilities before creditors as the draft bill does in its present form,” Andrei Emelin, executive vice-president of the Association of Russian Banks, said. “The present draft bill will trigger mass individual bankruptcies if passed. Therefore it needs to be reworked to exclude any misrepresentation and misinterpretation by potential debtors.”

Montgomery agreed: “to put the law in line with those in advanced economies, there must be consistency of results so that both lenders and debtors can predict what is going to happen. In the United States, for instance, there are certain safeguards in place that help avoid abuses, such as hiding wealth, by debtors.”

Emelin said that, technically speaking, the country is not ready for the citizen bankruptcy law “because there are not enough judges, courts or even court clerks to make the law workable.”

Yevgeny Suvorov, chief consultant at the Supreme Arbitrage Court said that arbitrage courts would need to hire an additional 555 judges in order to cope with the number of cases the measure would engender.

“The arbitrage courts would need to consider 204,000 bankruptcy cases from individuals. This will require an additional 465 judges of the First Instance and 90 appeal court judges. That is the minimum to start with,” Suvorov said, RIA Novosti reported.

In addition to every judge having to consider 440 bankruptcy cases affecting individuals yearly, will be the need to provide more courtrooms or tribunals, he said. In the United States, for instance, there are 90 bankruptcy districts across the country. That means a bankruptcy court for each judicial district with each state having one or more districts.

Elena Dokuchaeva, vice-president of the National Association of Professional Debt-Collection Agencies (NAPCA) argued for a higher limitation of between 250,000 and 300,000 rubles which would help to contain the initial flow of claims and prevent arbitration system from imminent collapse. “We agree that Russia does need the law, but one should remember that apart from the interest of debtors, there are legitimate demands and expectations from the creditors as well,” Dokuchaeva said in e-mailed comments.

"According to the results of a recent public opinion poll by National Agency for Financial Researches (NAFI), 20 percent of Russians think there is no crime in taking money from a bank and not returning it. This is why it is necessary to prevent abuse of this law by dishonest debtors while protecting individuals," she said. Dokuchaeva also criticized the 50,000 ruble eligibility cap, arguing that it is too small an amount to warrant initiating bankruptcy procedures.

"The minimum monthly wage that a debtor is obliged to pay a bankruptcy manager is 10,000 rubles and this could stretch for an average duration 6 months. The monthly support of restructurization plan costs the same, and its duration may come up to 5 years. It is obvious that in this case the bankruptcy becomes pointless, making it even cheaper for a debtor to repay his debt."
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