ALTERNATIVES TO BANKRUPTCY — THE DEBT REPAYMENT SCHEME (“DRS”)

Citation(2008) 20 SAcLJ 541
Published date01 December 2008
Date01 December 2008

Bankruptcy law should generally be inclined towards debtor rehabilitation, and bankruptcy should only come about as a last resort. A debt repayment scheme (“DRS”) has been proposed to help wage-earner debtors with relatively small debts to avoid bankruptcy. This article examines the key features of such schemes and other related debt rehabilitation models in various jurisdictions. These features will help in understanding the core concepts underpinning the likely framework of the proposed DRS legislation.

I. Introduction

1 In an increasingly credit-based and consumer-centric world, a “culture of consumption” has become prevalent,1 with many consumers overlooking the dangers of overextending their credit. The rapid growth in the volume and varieties of consumer credit has led to an inevitable increase in the number of overcommitted debtors. A pivotal challenge common to many bankruptcy regimes is how to provide relief from the burden of previously-incurred and often accumulating debt, while seeking to protect creditors and safeguard their interests.

2 Bankruptcy regimes generally seek to attain a fair balance between the interests of debtors and creditors alike. Nevertheless, it has been observed that no balancing of any kind can take place unless there is first agreement about the objectives of bankruptcy law, the interests deserving of attention and the relative weight to be assigned to them.2 Even where there may often be a considerable degree of consensus about the basic values and goals, there may be disagreement across different jurisdictions over the appropriate means for achieving them. These observations cannot be ignored if one is to adopt a pragmatic approach towards law reform.

3 For some debtors, bankruptcy may be the only practical means of staving off creditors. But a record of bankruptcy will obviously have an adverse effect on an individual’s credit status. The long-term consequences of bankruptcy may not be foreseen, let alone wholly understood. Alternatives to bankruptcy are thus necessary features in all bankruptcy regimes. These are primarily negotiated schemes aimed at affording debtors a means of avoiding the disabilities and associated stigma of a bankruptcy record. Such alternatives aim to promote responsible debt settlement and individual debtor rehabilitation. The primary objective is to afford debtors a fresh start. Such alternatives can take various different forms, having regard to the basic values and framework of the bankruptcy laws in place in their respective jurisdictions.

II. A brief overview of the Singapore bankruptcy context

4 In Singapore, the affairs of bankrupts are administered by the Official Assignee, who heads the Insolvency and Public Trustee’s Office (“IPTO”)3. The Official Assignee does not take on any role prior to bankruptcy. He is not statutorily empowered to do so. There is no system of independent oversight or control in respect of pre-bankruptcy conduct. There are no provisions to compel debtors and creditors to work towards negotiating settlement of their debts. Within the current bankruptcy framework, a debtor usually has little option but to succumb to a creditor who is intent on forcing him into bankruptcy. Upon bankruptcy, a debtor loses control of his assets and will face a range of restrictions on his lifestyle, including restrictions on travel and managing businesses.

5 As in most bankruptcy regimes, the bankruptcy regime in Singapore recognises that bankruptcy should always be a matter of last resort for financially-distressed debtors. In some instances, the debtor may yet avoid bankruptcy by entering into an individual voluntary arrangement (“IVA”) with his creditor(s). The IVA is the sole alternative bankruptcy procedure currently available in Singapore. Less commonly, a debtor may be able to obtain an annulment of bankruptcy by tendering full payment in discharge of his debts, or he may enter into a composition of his debts.

6 More often than not, upon being made bankrupt, the debtor is expected to extricate himself from bankruptcy by means of various modes of discharge. While there is no automatic discharge from

bankruptcy in Singapore, s 125 of the Bankruptcy Act now at least permits the Official Assignee to exercise discretion to discharge a bankrupt, subject to certain preconditions, after a minimum period of three years.4 This mode of discharge has proved successful in assisting bankrupts with debt levels of $500,000 or less to be released from bankruptcy in a reasonably short period of time.5

7 Bankruptcy levels in Singapore are relatively low, although the rate at which bankruptcy orders have been made has increased substantially over the last ten years.6 The majority of the 25,000-odd undischarged bankrupts are individual debtors. The statistics maintained by IPTO at the time of writing indicate that about 82% of all bankrupts have debts which do not exceed $500,000.7 Approximately 43% of all bankrupts have debts of $100,000 or less, while 22% of all bankrupts have debts of $50,000 or less.

III. Preliminary proposal for a debt repayment scheme

8 The feasibility of introducing a debt repayment scheme (“DRS”) as an alternative to bankruptcy was recently examined in Singapore. A scheme modelled loosely on the wage reorganisation scheme found in Chapter 13 of the US Bankruptcy Code has been proposed.8 The study team led by the Official Assignee found various features of Chapter 13 to be capable of adaptation within the Singapore context. Preliminary consultation with key stakeholders such as the Association of Banks, the Law Society and the Insolvency Practitioners’ Association of Singapore revealed general support for the scheme. Thereafter, a public consultation exercise was conducted and feedback has been obtained, also indicating general support for the scheme.9

9 As mentioned during the Minister’s speech at the Committee of Supply Debate in March 2007, the proposed DRS is based on Chapter 13

of the US Bankruptcy Code.10 At the time of writing, work on the draft legislation is nearing completion. Once the draft legislation is finalised, a further round of public consultation is scheduled to commence. Pending the completion of the draft DRS legislation, this article seeks to examine the key features of other models of debt rehabilitation and repayment schemes currently existing in other jurisdictions. These features will help in understanding the likely basic framework of our forthcoming DRS legislation.

IV. Chapter 13 of the US Bankruptcy Code11

10 Chapter 13 of the US Bankruptcy Code is often referred to as the “wage-earner chapter”, more for convenience than precision, as the scheme is only available to individual debtors who have a regular source of future wages. The scheme is designed to enable them to develop a plan for full or partial debt repayment. In principle, Chapter 13 is still a form of bankruptcy, although for practical purposes it operates very differently from the more conventional Chapter 7 form of bankruptcy, which is commonly understood to take the form of a “straight bankruptcy” or “liquidation” as opposed to a Chapter 13 “reorganisation”.

11 Prior to 2005, a debtor could not be compelled to undergo Chapter 13 as it was a voluntary scheme. Amendments to the US Bankruptcy Code by virtue of the Bankruptcy Abuse Prevention and Consumer Protection Act of 200512 resulted in the creation of a “means test” to help differentiate those who can afford to repay at least part of their debts and those who cannot. Thus, based on the premise that a debtor who can pay should repay his debts, individuals with income above the state median must undergo a Chapter 13 scheme. They will not be eligible for a Chapter 7 bankruptcy. Under current bankruptcy

laws, debtors must also undergo credit counselling within 180 days after filing for Chapter 13.

12 Essentially, filing for Chapter 13 will require the debtor to propose and carry out a repayment plan outside of the bankruptcy regime under Chapter 7. The plan will involve submission of a portion of his post-petition earnings for a period of between three to five years to pay pre-petition debts. The bankruptcy court will have to determine whether to approve the repayment plan. Creditors are then paid over an extended period of time under court supervision and protection. Payments will be made to creditors out of post-petition income, net of living expenses. Creditors need not be fully paid but should get at least as much as they would have obtained under Chapter 7 bankruptcy. By adopting the means test, the court-ordered plan eliminates the option of recourse to Chapter 7, which would otherwise enable avoidance of payment of debts while obtaining a discharge of those debts. In some instances, Chapter 7 cases may also be converted to Chapter 13 bankruptcies.

13 Creditors are entitled to challenge the debtor’s proposals under the payment plan, but once the plan is approved, creditors are stayed from prosecuting their claims on any debt recovery. Apart from the stay or moratorium on creditors’ claims, including the opportunity to avoid mortgage foreclosure, Chapter 13 offers the debtor the advantage of retaining ownership and possession of his assets. The debtor will have to file with the court the following:

(a) schedules of his assets and liabilities;

(b) a schedule of his current income and expenditure;

(c) a schedule of executory contracts and unexpired leases; and

(d) a plan for repayment of his debts.

14 The debtor must file the plan of repayment within 15 days of the filing of the petition. The plan must provide for the payments of fixed amounts to the standing trustee on a regular basis. Within 30 days after the filing of the plan, even if the plan has not yet been approved by the court, the debtor must start making payments to the standing trustee. A meeting of creditors is held in every case but creditors rarely attend such...

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