Wednesday, February 18, 2009

The Case for Individual Bankruptcy in China (Republish)

Some stories rattle you so much that you cannot stop thinking about’em for a long time, and the story of Mr. Chen Si did just that to me.

Chen Si, as reported by the LA Times in its story titledOn His Weekends, Chinese Samaritan Saves Lives, is a manager of a shipping company in the city of Nanjing. On weekends, he patrols the Nanjing Changjiang Bridge, known as the “bridge of death.” For almost four years, he has appointed himself as the “guarding angel” of people in despair because many individuals come to this spectacular bridge to end their misery and lives.Usually, he tries to spot people bent on committing suicide, and runs over to rescue them from the brink of despair and death. To date, he has saved one hundred forty four (144) lives. That is an amazing number, considering that he has been pretty much on his own, without government or civilian assistance. He wants to continue saving lives and families.

At a first glance, Chen’s story warms your heart because it is good to know that there are people like him who care and act to prevent tragedies from happening. It is good to know that there are people out there in Chinawho do not worship money. And it surely is good to know that those saved by him might have a second chance at life no matter how tough it is to live on.

Yet, this story is sad at the same time. Chen is a lone “ranger,” trying to save an ever increasing number of despaired and hopeless people in China. Chen can only patrol the Nanjing Bridge. Chen can only patrol theNanjing Bridge on weekends. What about the Wuhanbridges, the Jiujiang Bridge, the numerous bridges and cliffs around the country? What about those people who commit suicide by taking poison pills? Chen saved 144 lives in four years, and “by official estimates, as many as 288,000 Chinese commit suicide each year…” The exact number of suicide in China is probably greater, and what Chen can do is so limited. What the Chens, Lis, and Wangs can do is also limited because of the size and extent of the problem.

What exactly is causing the rising suicide rate? I’m not a sociologist, nor a psychologist. And I don’t claim to know the exact answer to this question. However, I do think that people’s inability to pay their debt has something to do with it. At least some people who could not pay their debt would probably end up killing themselves, just to be over with the shame, frustration, and debt. If you read Chen’s story, you might find that a lot of people that he saved wanted to commit suicide due to their “hopeless” financial situation.

Taking this presumption that inability to pay debt, in part, contributes to the rising suicide rate, I would argue that China should seriously consider making bankruptcy available to individuals, thus creating an institutional structure to abate the massive problem that Chen could never accomplish by himself in his life time.

Bankruptcy is about giving the debtor a second chance, a fresh start. It gives those individuals in financial trouble another chance(s) to reorganize or restart by discharging certain creditors’ claims. At the same time, bankruptcy also has to balance the interest of the debtor with those of the creditors. After all, all creditors want their money back at a minimum. Therefore, reaching the right balance between creditors and the debtor in bankruptcy has always been a huge issue, and continues to be an intriguing phenomenon in the states of the U.S. For example, some states are extremely pro-creditor, like New YorkDelaware; while others, likeTexas and Florida are very pro-debtor. Hence goes the popular saying: “Debtors either go to Texas or die.”Despite the inconsistencies and differences among the states in America, personal bankruptcies do accomplish a great deal by giving people in financial trouble a fresh start. Of course, bankruptcy abuses have occurred.Nonetheless, Congress has addressed that issue by amending the Bankruptcy Code to make Chapter 7 liquidation less accessible while pushing more individual bankrupt debtors to Chapter 13 proceedings.

Could personal bankruptcy work in China?

Currently, individuals are not eligible for bankruptcy under China’s new Enterprise Bankruptcy Law effective since June 1, 2007. One of the reasons cited for foreclosing individuals from bankruptcy is that Chinadoes not have a credit system like other developed countries. Of course, there is the argument that Chinashould not transplant all Western legal concepts into Chinese law.

I would give credit to both arguments, but would also argue that personal bankruptcy should be made available as soon as possible. A credit system is an important element in that it allows creditors to reasonably assess the level of risks in handing out credits. It is a simple, quick and cost-effective way to do business, and it lowers the transaction cost of moving capital from place to place. But, is it an absolute prerequisite to making bankruptcy available to individuals? Are there alternative ways to reduce creditors risks yet keep the transaction cost down? A credit system in the U.S.played an important rule in making personal bankruptcy a reality, but Americans were, are and will probably for a long time be more mobile than the Chinese. With less mobility, tracking down or discovering a person’s credit history is arguably easier, thus the transaction cost can indeed be kept low. In contrast to Americans, the Chinese are more community oriented, living in close-knit social units; therefore, the social structure also makes it a lot easier to track a person’s credit history. On account of the stated differences, the necessity of a credit system as a prerequisite for personal bankruptcy is doubtful.

With respect to the second argument, I agree that Chinashould not at any time blindly transplant legal concepts. Nonetheless, that does not mean China cannot borrow and remodel certain concepts like personal bankruptcy. The fear of introducing individual bankruptcy, I assume, is that it would encourage irresponsible spending, promote consumerism. First of all, consumerism is already there, so forget about keeping it out. Second, the Chinese believes in saving, practices saving, and loves saving. In fact, Chinaprobably has very high saving rates among its citizens, if not the highest. The introduction of a foreign legal concept is unlikely to reverse virtues passed down from thousands of years ago. And the conservative thinking that “the son shall pay the father’s debts” is still pretty prevalent,” which could help keeping abuses down.

So, individual bankruptcy could work in China.Traditional views about paying debts will act as a filter against irresponsible spending and bankruptcy abuse. Even if that fails, the NPC and/or the State Council can always step in and stem abuses by creating higher legal barriers (as it was done in the U.S.). A credit system, crucial to establishing individual bankruptcy, might be not so crucial to China because the social, geographical and cultural conditions are very different from those in the U.S. Third, allowing fictional persons, corporations, to avail themselves of the benefits of bankruptcy (a second chance) is a great move, but keeping real people, with emotions, despair, families, from have a fresh start via bankruptcy simply does not contribute to social harmony. In short, Chinashould allow individual bankruptcies as soon as possible.

Until then, Chen Si will continue to be a lone hero and savior, patrolling the Nanjing Bridge.

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