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Personal bankruptcy: legal regulation in other countries and draft law in Lithuania

EcovisPersonal bankruptcy is a legal procedure when a natural person is declared insolvent and not capable to carry out his obligations, i.e. to pay his debts. Personal bankruptcy might be caused by many different circumstances: illness, loss of job, family circumstances, divorce etc. The main general rule is that an honest person under unsuccessful circumstances is not capable anymore to pays his debts.

Personal bankruptcy exists in many Western Europe countries also in United States of America, Canada and Australia.

The goal of the bankruptcy was very well determined by Supreme Court of the United States in its 1934 decision where it stated that: it (the bankruptcy) gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.[1]

The advantages of going bankrupt is that a person do not have to pay his debts or he can pay them later according to the plan based on his income (that depends how personal bankruptcy is regulated in every country), there is no need to deal with creditors, bankers or bailiffs, it’s a cheap (usually) and quite fast way to become debt free again. But there are also disadvantages, like bad image for the next credit, lost of belongings and properties, opinion of family, friends and relatives. Often personal bankruptcy is followed by stress, self-disappointment or even depression.         

Personal bankruptcy might be two different types: so cold “fresh start” when a person is discharged of all his debts and the second one is when a new plan of debts repayment is adopted. The type of the personal bankruptcy refers to the legislation of the country.

The Bankruptcy Code of the United States of America adopted by the Congress in 1978 determines the both types of personal bankruptcy: Chapter 7 bankruptcy allows debtors to discharge all or part of their debt ("liquidation": sale of a debtor's non-exempt property and the distribution of the proceeds to creditors) and Chapter 13 bankruptcy, debtors repay all or part of their debt based on a payment plan. The first one so called “fresh start” is a possibility for a person to start everything from the beginning without any debts. The second one is recommended for these who have a non-exempt property and want to keep it but they also must have a regular income sufficient for living and repayment of the debts according to new plan approved by the court. For example a person has a house or a car which he bought through a bank loan and he wants to keep this property.

A new start according to Chapter 7 is possible at least after 8 years since the person was already declared bankrupt on the base of the same Chapter. Chapter 13 can be applied only if the debtor was discharged under Chapter 7, 11 (Chapter 11 of the Bankruptcy Code provides (generally) reorganization, usually involving a corporation or partnership. According to Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time) or 12 (this chapter provides the adjustment of debts of a "family farmer," or a "family fisherman") more than four years ago; or the debtor received a discharge under Chapter 13 more than two years ago. Which personal belongings, house or car the debtor is allowed to keep depends on the state he is residing.[2]

In Canada personal bankruptcy procedure is regulated by the Bankruptcy and Insolvency Act[3] (hereafter – BIA). A person is eligible for the bankruptcy if he has at least 1000 Canadian dollars debts. According to BIA there are two ways a person can go into bankruptcy. The first one and more common way is when a person makes an assignment in bankruptcy (voluntarily go into bankruptcy). The second, and rarely used way, is for creditors to ask the Court to make an Order that a person is bankrupt. In both these cases a Trustee in Bankruptcy is required to administer the bankruptcy.

On 29 May 2000 European Council adopted a Regulation No 1346/2000 on insolvency proceedings (hereafter – Regulation)[4]. This Regulation is applied to insolvency proceedings, whether the debtor is a natural person or a legal person, a trader or an individual but it states that concidering the fact that substantive laws widely differ in different countris it is not practical to introduce insolvency proceedings with universal scope in the entire Community. That’s why this Regulation is confined to provisions governing jurisdiction for opening insolvency proceedings and judgments which are delivered directly on the basis of the insolvency proceedings and are closely connected with such proceedings. In addition, this Regulation contains provisions regarding the recognition of those judgments and the applicable law. But law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened (article 4 of the Regulation). A very important provision of this Regulation is that any judgment opening insolvency proceedings handed down by a court of a Member State which has jurisdiction shall be recognised in all the other Member States from the time that it becomes effective in the State of the opening of proceedings (article 16) and judgments which concern the course and closure of insolvency proceedings, and compositions approved by that court shall also be recognised with no further formalities (article 25).

Rules of personal bankruptcy in European countries are quite strict. Usually the procedure of the bankruptcy is relatively long (it can be 10 years in France, 6 years in Germany), there might be restrictions after the bankruptcy to get a loan or to start a new business, expensive cost of the procedure, information about personal bankruptcy is kept for many years etc.

Personal bankruptcy is not yet possible in Lithuania: time for the recovery of the debts is unlimited; there is no any legal possibility to reconstitute the solvency of natural person and to permit him to restart his economical activity. In March 2011 a draft law on the Bankruptcy of natural (hereafter – Law) persons was presented at the Lithuanian Parliament[5]. The purpose of this Law is to allow the restitution of the solvency of natural person, as well as of farmer and of natural person who is performing economic commercial activity according to law and to guarantee creditors requirements meeting under the order established by this Law. Main provisions of the Law:

  • Natural person might get bankrupt if the amount of his debts is 20 000 litas (25 minimum wages).
  • Only voluntary bankruptcy is possible, creditors do not have a right to initiate the bankruptcy of a natural person.
  • Natural person might get bankrupt once per 10 years.
  • During the procedure of the bankruptcy all debtor’s property shall be administrated by the Trustee

The Law does not provide a clear definition of personal bankruptcy but it determines that the process of the personal bankruptcy includes all procedures of the bankruptcy of natural person. The Law establishes these procedures:

  • Person’s application to the court on the opening of the bankruptcy proceeding.
  • Hearing of the application at the court.
  • Opening of the natural person’s bankruptcy proceeding.
  • Plan of the settlement of claims of natural person’s creditors and of the restoration of his solvency (the plan shall not last longer than 5 years, if the debts are not paid by this term they will be discharged).
  • Approval of the plan.

According to the Law information on the bankruptcy of the natural person would be available during 10 years on the internet site of the Enterprise bankruptcy management department under the ministry of Economy[6].

The Law is still under the discussions at the Lithuanian Parliament. It is already criticized because it doesn’t determine clearly who can get bankrupt, also a high amount of the debts (20 000 litas) is required which will not allowed get bankrupt for the main part of debtors. On the other hand strict conditions for getting bankrupt will prevent a misuse of the possibility to discharge the debts.


Giedre Uleviciute
Assistant to the Attorney at Law

ECOVIS Miškinis, Kvainauskas ir partneriai advokatų kontora
Mesiniu str. 5, LT-01133 Vilnius, Lithuania
Phone: +370 (5) 212-40-84 - Fax: +370 (5) 212-27-41
E-Mail: giedre.uleviciute@ecovis.lt - Internet: www.ecovis.lt