Congress made the U.S. bankruptcy system considerably harsher toward debtors in 2005, instituting new repayment requirements for many people and raising the cost of filing.
Compared with what people in other countries face when they're broke, however, the U.S. bends over backward to help people resolve debts they can't pay.
"The U.S. still has the most debtor-friendly system in the world," said attorney Gordon W. Johnson, the president of EM Advisors in Reston, Va., and an international bankruptcy expert.
In the U.S., people unable to pay their bills can file for bankruptcy, which halts all collection attempts, at least temporarily. Most consumer-bankruptcy cases are Chapter 7 liquidation filings, which erase most unsecured debt, such as credit card and medical bills. Higher-income filers may end up in a Chapter 13 filing, which erases remaining debt after the filer has completed a five-year repayment plan.
Here's just a sampling of what other countries have in store:
Dubai: Yes, you can go to jail
Islamic law prohibits the charging of interest on loans, but that doesn't mean consumers can't get into trouble with debt.Credit cards are used in the Middle East, with the issuers typically collecting "fees" rather than interest, said Steve Rhode, a U.S. consumer-debt adviser who has counseled insolvent expatriates in Dubai.
You also can get loans in Muslim countries, although they work differently. People who want to buy a car without paying cash go to a bank and write a series of postdated checks, to be cashed once a month until the debt is fully paid. A similar system is employed for apartment rentals.
In Dubai, if you don't have enough cash in your account to cover the check in any given month, watch out: The bank can get a warrant for your arrest, and you can be jailed, Rhode said. Those in default also can have their passports seized, preventing them from leaving the country.
Remedial solutions -- credit counseling, debt settlement, bankruptcy -- aren't available. The harsh treatment of defaulters and a sharp downturn in the economy recently have led to a significant uptick in "skips": indebted foreigners who have lost their jobs abandoning their cars and other belongings, fleeing town before banks can have them arrested.
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Germany: Bankruptcy is a teachable moment
Europe experienced the explosion in consumer-credit availability a bit later than the U.S. did. But the deregulation of European credit markets in the late 1970s and 1980s quickly led to a surge of consumer credit and consumer insolvencies, said Jason Kilborn, an associate professor of law at The John Marshall Law School in Chicago who has written extensively about bankruptcy systems in Europe.Collection and remediation techniques, however, failed to keep up with soaring debt loads, Kilborn said.
In Germany, as in most European countries, creditors could turn to specialized public debt collectors to try to get defaulters to pay. These collectors might hold public auctions of one of the debtor's few possessions -- a sofa, say -- which often brought in so little money that the auction costs weren't even covered, let alone any part of the debt, Kilborn said.
"They would harass these people who clearly couldn't pay," Kilborn said.
Video: Taking on the debt settlement industry
Lawmakers began to worry that these aggressive collection activities were wasting state resources, failing to curb irresponsible lending practices and hurting workers' productivity. Why work hard, the concern was, if whatever income you managed to make would just be scooped up by ravenous creditors?
Over time, Germany evolved a consumer-bankruptcy system that somewhat resembles the U.S.'s Chapter 13 repayment plans.
Every insolvent consumer who files for bankruptcy relief is put into a six-year repayment plan, even though most (as in the U.S.) have below-average incomes and can't afford to pay their creditors anything. In fact, 80% of Germany's bankruptcy filers can't pay even the administrative costs for their cases, which typically run several thousand dollars, Kilborn said.
In the U.S., these filers would have most of their unsecured debts wiped out almost instantly in Chapter 7 liquidation. They would be out of bankruptcy within four months.
Germany, however, views its six-year repayment plan as a chance to educate consumers about responsible money management, Kilborn said. If the debtor follows the rules of the plan, his or her debts are wiped out after six years even if not a single payment is made to a creditor -- and typically, none is.
"Europe sees these repayment plans as an investment in the financial education of their citizens," Kilborn said.
India: Bands of thugs and public shaming
There is no system, formal or informal, for helping people resolve their consumer debts in India, Kilborn said.A growing middle class and a rise in the availability of credit haven't led to any kind of mediation system for people who can't pay. Instead, even legitimate lenders may turn to bands of thugs to enforce debts or use public humiliation, such as demonstrations outside the defaulters' homes.
Debt among farmers has became particularly troublesome, Kilborn said, as drought, crop failures and low prices for harvests have created hard times. Farmers may turn to high-rate loans to buy seeds and equipment, then find themselves unable to pay back the loans. The situation has led to an apparent uptick in farmers committing suicide and even reports of farmers selling their wives to pay off debt.
If India ever develops a working system for helping defaulters repay or erase their debts, it's unlikely to follow U.S. or European models' reliance on the courts, Kilborn said.
"The Indian judicial system is well-known to be completely ineffective. Cases can grind on for years and years," Kilborn said. "The courts are not going to be an effective vehicle for relief."
Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board and helps middle-class families cope at Building a Brighter Future.
Published Nov. 3, 2009
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Great article..I want to take this to my money management class. I thought I had it bad until I read this article. Thanks Liz