Determinants of Failure ... and Success in Personal Debt Mediation

Abstract

For nearly thirty years, legislators in Europe and South America have looked to mediation as a preferred mechanism for resolving the rising problem of personal overindebtedness. This reliance has generally been misplaced, as voluntary personal debt conciliation has most often ended in failure. In some cases, however, mediation has fulfilled its promise of unburdening the court system and reconciling debtors and creditors gracefully, without formal intervention. What distinguishes failure from success in this context, and might legislators enhance the efficiency and effectiveness of personal insolvency regimes by incorporating these lessons? This article offers some insight into these questions and proposes a new approach to mandatory mediation in the personal insolvency context. It reviews the institution of mediation as a prerequisite to court-driven personal insolvency proceedings in both longstanding systems--in France, Germany, Austria, and the Netherlands--as well as more modern regimes--in Ireland, Colombia, Chile, and Spain. After reviewing data on the failures and successes of these debt mediation mandates in recent years, this article reflects on how these results square with the predictions of mediation theory. Salient theoretical determinants of mediation success are then extracted and applied to the empirical experience of personal debt mediation. In particular, mediation theory and experience offer compelling explanations for both successes and failures in the contexts of mortgage foreclosure mediation (most notably in the United States following the financial crisis) and negotiated personal debt workouts in the modern United States and Europe, with surprising parallels from the world of Classical Islam. A framework for predicting successful personal debt mediation thus emerges, providing a foundation for a more sensible and selective approach to mandatory mediation in the personal insolvency context.