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Prof. Jason J. Kilborn John Marshall Law School (Chicago)

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Presentation on theme: "Prof. Jason J. Kilborn John Marshall Law School (Chicago)"— Presentation transcript:

1 Prof. Jason J. Kilborn John Marshall Law School (Chicago)

2  Irish bill based all but exclusively on E&W model  Unique E&W model likely not best for Ireland  Other models in Europe (and US) enlightening

3  Expert Recommendations and the Evolution of European Best Practices for the Treatment of Overindebtedness, (Deventer: Kluwer, 2011), ssrn.com/abstract=  World Bank, Insolvency and Creditor/Debtor Regimes Task Force, Report on the Treatment of the Insolvency of Natural Persons ( forthcoming 2012)

4  Consumer insolvency policy: What goals are we pursuing?  Lessons from empirical observation: (1) weaknesses of negotiated solutions (2) negotiating in shadow of key alternative

5 Why now? Why is IMF interested? How to evaluate proposed solutions

6  Pandemic of crushing debt  Structural problem  Allowing this problem to persist unaddressed undermines national economic development, international competitiveness

7  Tired slogans versus systemic goals  Bi-lateral versus multi-lateral, societal view  Broad benefits of safety release valve versus narrow (illusory) virtues of pacta sunt servanda

8 The FACT of debtors’ insolvency creates losses, “deprives creditors of their rights”—an insolvency system compels creditors to accept this truth and find a productive way forward for themselves and SOCIETY.

9  Internalizing negative externalities of loose underwriting

10  Facilitating proper account valuation

11  Internalizing negative externalities of loose underwriting  Facilitating proper account valuation  Reducing waste in fruitless enforcement

12  Internalizing negative externalities of loose underwriting  Facilitating proper account valuation  Reducing waste in fruitless enforcement  Reducing costs from illness, crime, welfare

13  Internalizing negative externalities of loose underwriting  Facilitating proper account valuation  Reducing waste in fruitless enforcement  Reducing costs from illness, crime, welfare  Increasing production of taxable income

14  Internalizing negative externalities of loose underwriting  Facilitating proper account valuation  Reducing waste in fruitless enforcement  Reducing costs from illness, crime, welfare  Increasing production of taxable income  Enhancing economic activity, entrepreneurialism

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16 Insolvency system functions as a backstop, safety net for inevitable casualties

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18 ... still chasing chimeras...

19  economic cycles—unemployment  currency swings—asset devaluation  globalization—exported banking risk (RMBS US → Europe)  health, divorce, childbirth... life is risky!

20 Dividing the costs of expected tragedy Dispersing the burdens of expected tragedy

21 Insolvency System  Unfair penalty on “responsible” debtors who would never default?

22 Insolvency System  Unfair penalty on “responsible” debtors who would never default? Auto Insurance System  Unfair penalty on “safe” drivers?

23 Insolvency System  Unfair penalty on “responsible” debtors who would never default? Auto Insurance System  Unfair penalty on “safe” drivers?... accidents happen with and without driver fault...

24 Insolvency System  Unfair penalty on “responsible” debtors who would never default?... and default occurs with and without debtor fault... Auto Insurance System  Unfair penalty on “safe” drivers?... accidents happen with and without driver fault...

25  Keep egregious credit abusers out of system  Keep egregiously bad drivers off the road

26  Keep egregious credit abusers out of system  Keep egregiously bad drivers off the road Over -reaction & over -deterrence are undesirable in both cases

27 o Insolvency relief is a trade-off for deregulation of consumer lending o Insurance for restoring equilibrium in “open credit society” o Moral hazard = inevitable slippage o Don’t sacrifice the many good benefits for want of unattainable perfection!

28 The long, frustrating quest for alternatives to bankruptcy

29  Business is business vs. moralistic judgment  What’s the alternative?

30 The tri-partite Irish approach in light of comparative experience PIA DSA Bankruptcy

31  One creditor easily has > 50% secured debt  That creditor thus has absolute veto, with no review for “reasonableness” or “good faith”  No change from status quo : banks CAN agree to voluntary modifications NOW —do they?  US experience reveals inevitable failure

32  20 years of wrangling with unsecured creditors  E&W, Sweden, France, Germany, Netherlands

33  20 years of wrangling with unsecured creditors  E&W, Sweden, France, Germany, Netherlands  Few assets, limited income, large debts, and moralistic creditor judgments = negotiation proved “pure formality” in all but a few cases  Distracts counseling resources/attention from truly negotiable cases!  Sweden first to scrap mandatory stage in 2007

34 Trusted intermediaries

35 France More than 50% “success,” but trending down Not just for “insolvent” debtors ► more and more “insolvent” Ds = immediate discharge! KEY : Banque de France pressure on creditors ► rise in plan acceptance from 40% → 65%+

36 Netherlands NVVK long history of plan negotiation Sharp downward trend to 9% after new Wsnp Reversal, back to ≈ 30%, on 2 NVVK fronts:

37 Netherlands NVVK long history of plan negotiation Sharp downward trend to 9% after new Wsnp Reversal, back to ≈ 30%, on 2 NVVK fronts: (1) hopeless cases routed immediately to Wsnp - concentrating resources on good candidates (2) structural negotiation with key creditors - (CJIB—fines and penalties bureau)

38  MABS as trusted intermediary?  No compulsion for creditors The alternative is no “stick behind the door”…

39 Debtors will agree to unworkable plans that will eventually fail

40  Overwhelming majority of Ds will have no realistic option other than bankruptcy ► expect cries of debtor “moral hazard” when creditors reject reasonable proposed plans...  KEY : reasonable, consistent, uniform application of “income payment orders” ► bill’s guidelines seem sensitive, but † 5 years following 3-year “recovery” is too long † “reasonable needs” per court discretion = disaster

41  Half-measures ignore societal goals of insolvency  Why parrot unique E&W system?  Why leave public policy to banks— look where that has gotten us.  One portal; one solution, but fool’s errand to expect substantial returns to creditors—pounds of expense for pennies of gain


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