Shenzhen court issues landmark personal bankruptcy ruling

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A court in the southern business center of Shenzhen approved the first liquidation of personal bankruptcy (破产 清算), another step forward in building a legal framework that will allow millions of people across the country to reorganize their debts and make a fresh start.

Hu Xuhui, a local resident who did not have enough assets to pay off her debts, was declared insolvent, a process also known in China as bankruptcy liquidation, according to one. decision (link in Chinese) released Tuesday by the Shenzhen Intermediate People’s Court. She will now be subject to luxury spending and labor restrictions for three years and any new assets she earns or acquires, beyond an agreed monthly budget for living expenses, will be distributed to creditors. After that, she will be released from bankruptcy and restrictions once the court gives the green light.

Forty years of reform and openness have led to an explosion of private enterprise and a booming consumer society. But the country still lacks a national legal framework to deal with individuals who cannot repay their debts, although a corporate bankruptcy law (企业 破产 法) came into effect in June 2007.

It was only July 2019 that the National Development and Reform Commission and a dozen other central government agencies, including the Justice Ministry and the banking regulator, have said they will explore a mechanism for insolvent people to file for bankruptcy, including focusing first on corporate bankruptcy, then on consumer debt. Shenzhen was chosen as Testing ground for the new system.

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Opinion: Shenzhen takes milestone with personal bankruptcy regulations

Shenzhen local regulations came into effect in March, and in July, the Shenzhen Intermediate Court approved the first bankruptcy reorganization plan (重整) for a local businessman, Liang Wenjin, ordering him to repay the principal to the creditors within three years but exempting him from paying interest and late penalties. The court has also dealt with cases where debtors and creditors have reached an agreement through conciliation.

Hu’s case is different. She has been declared insolvent and her unpaid debts can be discharged after three years. Hu had a business and borrowed over 4.8 million yuan ($ 750,000) from banks and friends, but as an individual because the business was too small to apply for business loans, Hu had a business. declared the court. The business closed and it was unable to repay its debts.

Hu’s total assets were valued at around 300,000 yuan, but his recorded liabilities barely exceeded 920,000 yuan, according to the ruling. The administrator, a local law firm and the creditors agreed to declare her insolvent, the court said.

The cases reflect the need to offer legal solutions to help people who accumulate debts that they cannot repay. Without a law to guide the courts, people do not have the same protection as businesses and may face unlimited repayment obligations for their business debts and for their own personal debts.

As a result, many private entrepreneurs riddled with debt have chosen to flee, leaving creditors at the mercy and complicating the lives of the courts, which have struggled to adjudicate on debt disputes when they could not find the right ones. debtors or assets that could be used to indemnify creditors. Individuals who have accumulated too much personal debt are often sued by debt collectors and subjected to threats or violence.

But while the government recognizes that debtors should be treated fairly in legal proceedings, there are concerns that allowing people to be declared insolvent or undergo bankruptcy reorganization could encourage many. people use the law as a way to avoid paying off their debts. It would be unfair to those who lent money in the first place and could increase the proportion of bad debts for many financial institutions.

Contact reporter Guo Yingzhe ([email protected]) and editor Nerys Avery ([email protected])

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