Personal Bankruptcy in the Middle Kingdom: China's Local Pilot Programs and Half of a Bankruptcy System.

• Author: Austin, Daniel A.

In 2019, several cities in the People's Republic of China ("PRC") enacted their own personal bankruptcy rules (sometimes referred to as "pilot programs"), effective only within their immediate administrative jurisdictions. These were the first personal bankruptcy provisions in modern China, although China has had two enterprise bankruptcy laws since 1986. (1) This localized system of personal bankruptcy came about because the National People's Congress has not enacted a personal bankruptcy law either as part of the current Enterprise Bankruptcy Law ("EBL") (2) or as a separate law.

The different sets of rules have similarities and differences, and all reflect certain underlying cultural and legal norms such as suspicion of debtors, acquiescence of creditors, and lingering restrictions on the debtor's conduct after the bankruptcy is concluded.

Courts and commentators differ over whether China's piecemeal approach to personal bankruptcy will be effective over the long term, as well as over whether these regional, experimental efforts will lead to a national bankruptcy law.

This article examines the several sets of local, personal bankruptcy laws. Part I provides a cultural and legal context for personal bankruptcy within the framework of China's formal and informal debt-enforcement mechanisms. Part II looks at the bankruptcy regulations issued in Taizhou, Wenzhou, and Shenzhen and reviews some of the cases administered under these rules. Part III presents a critique of China's localized approach to personal bankruptcy from an influential bankruptcy-law researcher.

1. CHINA'S BANKRPUTCY PROBLEM

   1. HALF OF A BANKRUPTCY SYSTEM

      China's EBL became effective as of June 1, 2007. (3) The EBL contains elements similar to business bankruptcy under the U.S. Bankruptcy Code ("Code"), such as the automatic stay, creditor classes and committees, power to reject contracts, and prohibition on fraudulent or preferential transfers. (4) In addition, payment priority under the EBL--i.e., secured creditors, bankruptcy-related expenses, employee compensation and tax claims, and "common creditor claims"--also resembles payment priorities under the Code. (5) Notwithstanding numerous similarities, the EBL incorporates perspectives unique to modern China. (6)

      Overall, debtors and creditors have been slow to utilize bankruptcy under the EBL. (7) A perceived lack of expertise by peoples' court judges and cultural aversion to legal process in general maybe some of the reasons for this. (8) Although recourse to bankruptcy in China remains not nearly as common as in the United States, the trend is towards greater use of bankruptcy as a market-force tool to address business debt. (9)

      Despite the growing acceptance of bankruptcy to address business insolvency, China has no nationwide personal bankruptcy law. Indeed, some Chinese commentators have described the EBL as a "half bankruptcy law." (10) So why has China's National People's Congress so far declined to enact a national personal bankruptcy law? Reasons include a deeply ingrained popular bias against debt evasion and the lack of a reliable credit-reporting system.

   2. LAO LAI, CREDIT REPORTING, AND EXTRAJUDICIAL DEBT COLLECTION

      Lao lai ([phrase omitted]) is a pejorative term for a debtor that wrongfully refuses to pay its debts, somewhat equivalent to the English word "deadbeat," only with greater contempt. (11) Debt evasion is a serious problem in China, often referred to it as a "chronic disease" that undermines the country's financial and social stability. (12) Statistics from the Supreme People's Court ("SPC") indicate that more than seventy percent of debtors subject to enforcement action have evaded or violently resisted collection efforts. (13)

      Many Chinese assume that a law that allows people to avoid paying debt will function as a financial hu shen fu ([phrase omitted]), a traditional magic talisman that protects the wearer from bodily harm. (14) Others assert that bankruptcy laws will spawn a wave of fraudulent bankruptcy applications because it will be impossible to distinguish opportunistic debtors from honest ones. (15)

      One of the chief impediments to overcoming such cultural distrust is the lack of an effective and reliable creditor-reporting system, which would better enable creditors to determine a debtor's true assets and liabilities. This problem has been noted by many commentators, including Li Shuguang, professor at China University of Political Science and Law, principle drafter of the EBL, and one of China's leading bankruptcy scholars. (16) As Professor Li observed, "We lack a credit reporting system. A person may have one million in assets but can get away with not paying tens of thousands in debt, and assets held by his family cannot be traced." (17)

      China's traditional distain for debtors, weak collection system, and lack of credit reporting nurtures a shadow industry of violent or illegal methods to collect debt. (18) In a recent case, a people's court in Beijing sentenced multiple defendants for illegal debt collection. (19) Starting in 2015, the defendants operated companies throughout China that assisted online lenders to collect debt. The companies employed over 300 collectors who used "soft violence" methods such as oral threats or abusive language to harass the debtor and his or her family members and associates. Other means included mass texting to the debtor's phone contacts, creating fake retouched photos of the debtor in embarrassing poses, disclosing private information, and making the debtor's number ring at police stations and hospitals. (20) Some 700 victims were affected. (21) Forty-two defendants were found guilty and sent to prison, including the ringleader, a person named Zhao, who received a seven-year prison sentence and was fined RMB1 million. (22) Private debt collection of this nature is commonplace throughout China.

   3. JUDICIAL DEBT ENFORCEMENT

      The PRC judicial system authorizes money judgments and enforcement of debts through seizure and sale of a judgment-debtor's property. In addition, since 2013 the SPC has maintained a "lao lai [deadbeat] blacklist" of people who are able but refuse to pay their debts. (23)

      1. Money Judgment and Exemptions

         Formal legal procedures for collecting delinquent debt in China are similar to western countries. The creditor submits an application to the local people's court (the lowest level court) with evidence regarding the debt and amount owed. If there is no factual dispute, the court will issue an order directing the debtor to pay. (24) If the debtor disputes the claim, the court will investigate the facts and consider evidence presented by the parties. The court must issue its ruling within fifteen days. (25) The debtor then has fifteen days to appeal the ruling, and if it does not appeal within that time, the creditor may request the court to issue an order of compulsory execution. (26) The judgment is then turned over to the people's court's execution department. (27)

         The execution department is authorized to seize and sell the debtor's assets, usually by online auction. (28) If the debtor refuses to cooperate with authorities, the court may issue a search warrant of the person's house and property. (29) In addition, the court may seize online funds in virtual transaction accounts such as Alipay, WeChat, and other mobile payment applications. (30) The court also can obtain data from banks and financial institutions and freeze accounts, as well as directly debit fixed income such as pensions. (31) Courts also may scrutinize transfers of real property registered under the name of the debtor's spouse or children. (32) In more serious cases, the debtor can be sentenced for up to seven years in prison. (33)

         Social pressure can be an important tool for collecting debt. Courts sometimes post videos with the debtor's name, face, and information on social networking sites in the area where the debtor lives to embarrass the debtor into paying. (34) In June 2018, a movie theater in Fujian Province created a video with the names of 120 lao lai [deadbeats] to play before feature films. (35) Judicial authorities in Zaoyang City, Hubei, have used a "deadbeats ringtone" to collect debt when standard collection efforts failed. [36] On June 10, 2017, the Zaoyang City People's Court ordered a man surnamed Li to pay a person surnamed Wang the sum of RMB22,000 for property damage. (37) Li failed to pay, and after a year of investigating real estate registrations, vehicle records, bank accounts, etc., the Debt Execution Department failed to locate any property that could be used to pay the debt to Wang. (38) Then, on June 12, 2019, the court placed the following ringtone on Li's phone: "Hello, the owner of the phone you have called has been declared by the People's Court of Zaoyang City to be a dishonest person under debt-enforcement proceedings. Please encourage him to perform the obligations required by the court order without delay." (39) Within days, Li was so embarrassed by the ringtone that he went to the courthouse and paid the amount owed and requested that the ringtone be removed. The tactic has been successfully used in other debt-collection cases. (40)

         Chinese debtors are allowed to keep certain property necessary for a minimum standard of living for the debtor and dependent family members, including clothes, furniture, cooking utensils, tableware and other items necessary for the life; basic living expenses; items necessary to complete compulsory education; (41) and necessary medical supplies and equipment. (42) Debtors also may keep awards and commemorations of nominal value. (43)

         Many courts also allow a debtor to exempt a house or apartment if it is the debtor's sole residence or under certain other limited conditions. (44) For houses registered solely in the debtor's name, the maximum size permitted by the exemption is thirty square meters per person, and for houses owned jointly by the debtor...