Avoiding the Squid Game: An Exploration of Debt Forgiveness in Asian Bankruptcy Regimes
By Sean Lee (Singapore Global Restructuring Initiative)
“Out there, I don’t stand a chance” – Player 322 (Squid Game)
In Netflix’s latest hit series “Squid Game”, several characters, in the pursuit of financial gain, voluntarily participate in a series of six games, where the consequence of failure results in a loss of life. In spite of such high stakes, many characters elect to participate, arguing that a life burdened with voluminous debt is a fate worse than death. Despite the fictious set-up of the show, the series paints a vivid picture of a life without the possibility of debt relief, especially in a society which stigmatises bankruptcy. Furthermore, with personal bankruptcies rising, there has been some reports in South Korea of credit delinquents feeling a sense of desperation not unlike the characters of the series. This post explores the justifications for debt forgiveness, the presence (or absence) of debt forgiveness in various Asian bankruptcy regimes, and some alternatives to formal bankruptcy proceedings granting debtors a second chance in life.
Justification for debt forgiveness in personal bankruptcy
Popularized in the Middle Ages in Europe, debtors unable to pay their debts as they fell due were incarcerated until they worked off the debt, or they obtained enough money from the outside to pay off their debts. It is therefore unsurprising that there have been historical connotations between moral failure and bankruptcy.
Yet, in the modern age, there have been attempts to position bankruptcy less as a moral failing, but instead as a product of misfortune. It has been argued that a principle purpose of bankruptcy legislation is to provide relief to the honest but unfortunate debtor from the weight of oppressive indebtedness, and permitting him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.
Following this reframing of bankruptcy, there has also been a re-evaluation on the importance of debt forgiveness. Debt forgiveness as a policy has been analysed from a social order viewpoint, with Simone Weil arguing that both the payment of debt and the forgiveness of debt are “equally necessary for social order”. Other justifications from a socioeconomic viewpoint include reducing a bankrupt’s reliance on public welfare programs, incentivising debtors to remain economically productive and contribute to society, instead of being distracted by their own financial ruin. Finally, there has been research linking indebtedness to poor health, and given the economic ruin resulting from the COVID-19 pandemic, it may not be too farfetched to suggest that an inefficient bankruptcy regime could have consequences on both individual health and public health systems.
The morality of bankruptcy has also seen a re-evaluation through a somewhat Kantian lens. This new analysis posits that human dignity is of a higher value than the economic benefits or costs associated with achieving a desired economic result, and the discharge of debt is an acknowledgment that the dignity of the individual person has value.
Not all Asian countries have enacted personal bankruptcy laws or allow for debt forgiveness
Despite the benefits of a fresh start policy, not all Asian countries have adopted a personal bankruptcy regime. As stated in a prior article, the People’s Republic of China has yet to enact laws for personal bankruptcy for its citizens, and has thus far only introduced a personal bankruptcy regime in the Shenzhen Special Economic Zone. In addition, Vietnam has yet to adopt a personal bankruptcy regime, and individual liability remains unlimited.
While Indonesia does recognise personal bankruptcy, the principle of debt forgiveness is absent from Indonesian Bankruptcy Law. Even after the termination of bankruptcy, creditors are still entitled to collect their debts, hamstringing a debtor’s chance to have a fresh start. Under the Indian Insolvency and Bankruptcy Code, a fresh start is only available to debtors whose gross annual income does not exceed sixty thousand rupees, asset value does not exceed twenty thousand rupees and debt value does not exceed thirty-five thousand rupees. With such restrictions, it is unsurprising that the outgoing Insolvency and Bankruptcy Board of India Chairperson opined that the next phase of the implementation of the IBC should include “individual insolvency with provisions for a fresh start”.
Alternatives to formal bankruptcy proceedings
Elsewhere in Asia, some countries have been exploring alternatives to formal bankruptcy proceedings. Such informal schemes allow the debtor to avoid the various legislative restrictions that comes with being adjudicated as bankrupt (such as, amongst others, the restrictions on directorship appointments and travel, and potential difficulties of obtaining credit post-bankruptcy). More importantly, sidestepping formal bankruptcy proceedings allows debtors to ‘save face’ and avoid the various social stigmas associated with bankruptcy, which is sometime seen as a social disgrace in some Asian cultures.
The Singapore government has enacted the Debt Repayment Scheme, often described as a ‘pre-bankruptcy scheme’, to grant debtors the opportunity to financially start anew after committing to the terms of the scheme and making payments to repay creditors after under a repayment plan over a period of not more than 5 years. Upon completion of the scheme, the debtor is released from all prior debts and thereby awarded a fresh start.
Following the Great earthquake disaster of Japan in 2011, many Japanese debtors faced a “double loan crisis”. Not only did such debtors have to pay off existing loans, but they also had to take on new loans to rebuild their business, homes and lives. In response to this crisis, the Japanese government announced the creation of the Guidelines for Individual Debtor Out-of-Court Workouts to provide some relief to affected citizens and promote out-of-court workouts, allow citizens to avoid the harsh consequences of formal bankruptcy proceedings. Significantly, the financial institutions also supported these informal workouts. The Japanese public has also embraced out-of-court bankruptcy proceedings, as evident from the general decline in filings for personal bankruptcy over the 2010s.
Conclusion
With the economic slowdown resulting from the COVID-19 pandemic, it should be evident that financial ruin may befall an honest but unfortunate debtor. There are numerous reasons in favour of supporting debt forgiveness upon the termination of formal bankruptcy proceedings, but countries in Asia might do also well to also explore the possibilities of out-of-court arrangements and pre-bankruptcy arrangements to allow debtors to avoid the restrictions and stigmas associated with the ‘bankrupt’ label. Asian countries seeking reform in their personal bankruptcy regime may consider looking to Singapore as a potential blueprint towards more constructive personal bankruptcy policy. For individuals facing financial ruin, clawing a path to a new lease of (solvent) life might just be their most difficult game yet; and they will need every advantage they can get.