The New Bankruptcy Law: Good for Banks, Bad for Taxpayers?
In a few weeks, Parliament considers a new law that will allow individuals to file for personal bankruptcy for the first time. The law is very favorable to creditors. It is much less favorable to taxpayers. Taxpayers should question why they should pay the costs of the statute and the burdens that it imposes on the Lithuanian economy.
The financial fortunes of individuals rise and fall with the cycles of the economy. Lithuania and most of the western world is presently trying to emerge from a bad economic cycle. Bankruptcies increase during such periods, as we are seeing in many countries at present.
One of major effect of the proposed new law will be to prolong and extend the bad economic times. Individuals burdened by debts from the sharp recession will file for bankruptcy and seek to start new lives. Under the proposed law, however, there is no clean break.
Many men and women have had their jobs taken from them by forces far beyond their control. Understandably many of these casualties of the recession now have debts that they cannot pay. They may file for bankruptcy, but they will not be allowed to reenter the work force as full participants in the economic rebound.
Rather, in an arrangement that hints of a return to feudalism, bankrupts will be held under the supervision of the court and will keep only a meager percentage of the fruits of their labors. This will happen for a period as long as five years.
Other countries have recognized that personal financial collapse presents few attractive choices. However, they have concluded that, on balance, it is better to wipe the debtor’s slate clean. All of the debtor’s nonessential assets are converted to cash, and this is distributed to the creditors. But that is all that the creditors receive. They share the burden of the bad economy with their debtors, and accounts are settled based on what the debtor owned at that time.
The debtor and the debtor’s family are allowed to rebuild their lives in the improved economy with a fresh start and an incentive for high productivity.
A particular problem with the proposed law is that it does not provide a mechanism for ending the lengthy collections process in cases in which the value of the payments from the debtor are less than the total cost of collection. Experiences in other countries indicate that such cases are common because many seriously impaired debtors live a very marginal existence to begin with.
At a minimum, there should be an excuse from five-year court oversight for bankrupts who simply do not have the means to pay substantial amounts toward outstanding debts. This would include those who are elderly, who have suffered major illness or permanent injury, and those who simply will never the means to pay.
Debtors in these situations deserve society’s compassion. In many counties this is expressed in the form of a release from debts where the debts have become all-consuming and life-denying. And not too far in the background is the realization that there are better uses for hard-earned taxes than supporting a collection process that will never be successful.
Thus, the proposed statute fails to address the most basic question: what does society gain from this new law? That banks and other wealthy creditors gain is clear. But for the ordinary taxpayer, there are only loses: the effects of a bad economy are artificially drawn out and, to add further insult, the taxpayer provide money to enable uneconomical, and often unfair, results.
John Weistart (Jonas Vistartas) is Professor of Law at Duke University, School of Law, USA. He does research in the field of the economics of bankruptcy. Professor Weistart has taught at the International School of Management, Vilnius, and has other professional activities in Lithuania.