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Presentation Dr Clive Vieland Boddy

VIEWS: 18 PAGES: 24

									Misuse of Bankruptcy
       Laws
   Dr. Clive Vlieland-Boddy
Personal Insolvency
Poverty, Debt and Bankruptcy

• Introduction
• Borrowing, debt and the poor
• Bankruptcy
• Bankruptcy reform
                      Introduction
• Why is there poverty & why does poverty persist?
• The vicious cycle of poverty
• Various approaches:
  – Poor are dysfunctional or have atypical preferences
  – Poor have restricted opportunities because of systemic
    problems
  – Poverty is the result of perverse incentives created by policy
• Various mechanisms:
  –   Education
  –   Unemployment
  –   Health
  –   Discrimination
  –   Credit and borrowing
   Borrowing, debt and the poor
• Historically borrowing and debt have often been
  seen as problems for the poor.
  – Too poor to cover their expenditures
  – Borrow from lenders who charge high interest rates
  – Sometimes perpetually indebted, debtors prison, slavery
    or worse
• Some economic theories imply that borrowing helps
  the poor
  – Smoothing consumption during income shocks
  – Allows large, unexpected expenditures – medical bills,
    legal fees
  – Obtain resources which help to increase economic
    opportunities – education, small business
Borrowing, debt and the poor, cont.
• Poor are more subjected to unexpected income and
  expenditure shocks
  – Job loss
  – Health problems
  – Car problems
  Ability to withstand shocks from own resources is low
• Poor are restricted in their borrowing opportunities and
  pay higher interest rates
  – Hidden fees, fines on credit cards, flexible rates
  – Pawnshops, payday lenders, rent-to-own stores
• Interest payments increase, further debt
• Possibility of bankruptcy
              Bankruptcy
• Large increase in personal bankruptcy
  filings – about 2 million in 2005
• More of a low-income problem.
        So what are the causes?
• High debt
   – Why high debt? High spending and income and
     expenditure shocks
   – High spending:
   – relative consumption and what is subsistence
   – due to low income – used cars, high repairs,
     furniture
   – credit card lending, other lenders, high interest
     rate
• Rise in unemployment, job insecurity, changes in
  government policies, health insurance and coverage
  Who or what is to blame?
– Person going bankrupt using the system?
– Problem with opportunities, system?
– Easy bankruptcy laws?
– Seen as an easy escape route?
         Bankruptcy reform
• Lenders embarked on a huge lobbying
  campaign
• Bankruptcy Abuse Prevention and
  Consumer Protection Act (BAPCA) passed
  in 2005
• Sharp increase in personal bankruptcy
  prior to passage, then sharp fall, but then
  steady increase, but lower than before
      Bankruptcy reform, cont.
• Debtors cannot choose between Chapter 7 and
  Chapter 13 – must pass means test to file under
  Chapter 7 based on income
• Debtors cannot propose own Chapter 13
  repayment plan – income and normal spending
  taken into account
• Increase in cost – credit counseling course,
  lawyers have to certify accuracy, filing fees
  higher. Costs now $2,500 and $3,500 for
  bankruptcy, compared to $600 and $1600
  before
      Bankruptcy reform, cont.
• Much more creditor-friendly
• Reduce loopholes for the rich
• For the poor?
  – Higher costs make filing much more difficult
  – Lenders find lending more lucrative, increase loan
    pushing
• What needs to be done?
  – Need for stricter regulation of lenders
  – Broader issues: macroeconomic policy, health,
    transportation, inequality between rich and poor
Corporate Insolvency
INSOLVENCY SYSTEMS AND RISK
MANAGEMENT: CONCEPTUAL ISSUES

 The creation of an effective insolvency regime is
  a successful interplay of three key elements:
  design, legislation and implementation.
 The government needs to understand that it is
  the ultimate risk manager (David Ross: Harvard
  Business School).
 The development of a modern insolvency
  system gives the government the ability to
  manage risk.
 The creation of a transparent system with
  predictable outcomes greatly enhances long-
  term capital formation.
                                                  14
The Legal Structure- Requirements

The ideal legal structure would be
 specialized judges.
Two key ingredients are present
Speed. Insolvency proceedings need to be
 expedited quickly.
Predictability. There has to be real
 confidence in the outcome
INSOLVENCY SYSTEMS AND RISK
MANAGEMENT: CONCEPTUAL ISSUES (Cont’d)

 When the liquidation values of companies are
  greater than the going-concern value, you do not
  need an insolvency system. You merely need to
  tighten your recovery laws, systems and
  procedures.
 Enacting a law is relatively easy. Making it work
  (i.e., implementation) is often very difficult.
 Political support is crucial. Specialized laws
  need a state-of-the-art enabling environment to
  deliver results. Capacity-building and institution-
  strengthening.
                                                   16
        What Should be Saved?

“Sickness worthy of revival”:
Not all companies are worth reviving – e.g.,
  inefficient, obsolete technology, etc.
In fact, owing to competitive disadvantages,
  sometimes entire industries can be considered to
  be “unworthy” –
  e.g., textile products in North Asia, sugar in
  Pakistan, etc.

                                                 17
          Amnesty Schemes
• Amnesty schemes protect inefficient
  managements:
  Very often the root cause of sickness is the
  management. In such cases, a change of
  management can convert sick entities into
  healthy companies.
• Moral hazard:
  Such schemes promote the “default culture” and
  have a cumulative effect that can last for
  decades.
                                               18
CORPORATE REHABILITATION ACT: LEGAL
ARCHITECTURE

 The need is to have a system with elements of both
  re-organisation and liquidation was a key concern.
 Re-organisation without effective liquidation creates
  a very unbalanced insolvency system.
 If liquidation provisions are not credible, then
  bankruptcy law doesn’t do its work
 If re-organisation provisions are not practicable,
  then companies are liquidated unnecessarily.
 Uncertainty results in either case”.


                                                   19
CORPORATE REHABILITATION ACT: LEGAL
ARCHITECTURE (Cont’d)

• To be effective, an insolvency process requires
  the pro-active participation of both the
  “interested” parties – i.e., debtors and creditors.
• It should not enable inadequate management to
  obtain a court sanction when there is little real
  hope of success.
• All too often a stay of actions is granted where
  there is no real plan for recovery.
• These are merely delaying tactics.
• Often companies in the recovery plan continue
  for years absorbing all the creditors funds until
  they are extinguished and the inevitable            20
CORPORATE REHABILITATION ACT: LEGAL
ARCHITECTURE (Cont’d)


 The English model:

 The English Model, involves “debtor-eviction”. This
  advantage allows “contested entry”, which enables the
  removal of the possibility of countless frivolous
  insolvency petitions.
 A further advantage is that the management is by a
  judicial administrator who also prepare the rehabilitation
  plan for the court.
 This is an independent officer from the management


                                                               21
CORPORATE REHABILITATION ACT: LEGAL
ARCHITECTURE (Cont’d)

 The American model (Chapter 11).
 Entry into rehabilitation proceedings should be a legal
  right. However, debtors must consider such a step
  carefully because of the provision for automatic
  conversion into liquidation in the event that no
  rehabilitation plan is approved.
 Various quantitative tests for entry should be considered
 The process should be entirely stakeholder driven. Both
  the debtor and the creditor(s) can file plans.
 The entire process should be compressed with finite
  time-frames. For example, the debtor to have a
  maximum of one month after entry into rehabilitation
  proceedings to file a plan. This is normally the case.
 The cram-down feature is a threat designed to force
  consensus on a rehabilitation plan.
                                                          22
NON-SPECIALISED JUDGES WILL DELIVER
POOR QUALITY JUDGEMENTS: HOW TO PLUG
THE KNOWLEDGE GAP?? (Cont’d)

 We have achieved this by building into the CRA a multi-disciplinary
  vision - the judiciary is only one component.




                                                                   23
NON-SPECIALISED JUDGES WILL DELIVER
POOR QUALITY JUDGEMENTS: HOW TO PLUG
THE KNOWLEDGE GAP??

 “War is too important a subject to be left to the
 generals.”

                              Winston Churchill, 1943

 “Insolvency is too complex a subject to be left to the
 judges.”

                                         Salman, 1999


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