Insolvency Proceedings for Natural Persons: Why is Latin American Innovating?

Abstract

The benefits of commercial insolvency proceedings have been acknowledged globally. However, commercial insolvency proceedings are driven only by economic concerns. When the insolvent is a human being other concerns must be considered, such as: satisfaction of basic needs of the debtors and their families, relief from stress and health problems caused by over indebtedness, incentives to remain productive and to maintain or help debtors re-entry the economic market. Many international organizations had developed recommendations and principles for effective business insolvency regimes, but insolvency for non-business natural persons was left behind. However, the 2008 recession alerted of the dangers of excessive household debt. Accordingly, international organizations recommended revisions to insolvency laws dealing with natural persons. In Latin America only a few countries have implemented a special insolvency system for individuals. This paper will compare and analyze key features of the insolvency proceedings for natural persons implemented by Colombia and Chile. The analysis will be made by examining the statistics each country has provided, and by discussing the weight that: (a) access requirements, (b) renegotiation terms, (c) repayment terms and requirements for approval of repayment plans, and (d) costs have played in the results. The renegotiation proceedings implemented by Colombia and Chile have a special feature that has played a key role in achieving restructuring agreements with creditors: failure to reach an agreement during the negotiation stage leads to bankruptcy, and bankruptcy grants a discharge. However, statistics show that there are around 35% more filings in Chile than in Colombia, and that around 30% more repayment plans have been approved in Chile than in Colombia. Access requirements and costs have played an important role in these results. In Colombia individuals may not file for insolvency until their overdue debt equals 50% (fifty percent) of their total indebtedness. In contrast, Chilean filing requirements for a renegotiation agreement set forth a minimum debt amount, but do not require that the overdue obligations meet a percentage of the total indebtedness. Additionally, in Chile individuals with indebtedness below the required minimum amount may always file for the liquidation proceeding without having to meet any test, so debtors always have access to some form of relief. The fees and costs also make a difference in the number of filings and in the number of approved repayment plans. The proceeding in Colombia is more expensive, as debtors must pay a private mediator. In contrast, in Chile the renegotiation proceeding is free, as it is handled by public officers that cannot charge debtors or creditors for their services. Moreover, if a repayment plan is not approved debtors are lead to bankruptcy in both systems, where they must pay a liquidator. These causes that debtors in Colombia are bound to pay at least 2 professionals: the mediator and then a liquidator, but if debtors are not able to pay for any of those professionals their proceeding will be stalled. In Chile liquidators’ fees always have a cap when the parties do not approve a repayment plan but do approve the distribution of debtors’ assets for liquidation, and in the event the debtor cannot afford the liquidator’s fees the fees are paid by the Insolvency Authority from the public budget. These prevents insolvency proceedings from being stalled indefinitely in Chile and forces them to end, making sure individuals get a discharge upon termination of the proceeding. Renegotiation and repayment terms, as well as, requirements for approval of repayment plans do not seem to have a relevance influence in the results.