Is There Consumer Bankruptcy in Latin America? The Cases of Colombia, Brazil and Peru

Abstract

Insolvency law has suffered a big turnaround. Originally, creditors could pay themselves with the assets and body of their debtor. Insolvency was a sort of felony, so the debtor had to be punished. Seizing the body of the debtor was satisfactory enough. Then, a distinction was made between individual traders and non-traders, allowing only the first to become bankrupt and to be released from liabilities for any existing debts upon surrendering their existing assets, even if their value wasn’t enough to repay existing debts. Such release is now known as “discharge.” Together with the consolidation of discharge, notions of rehabilitation of the debtor started to develop, but it was until the 19th century that bankruptcy and discharge were made available to non-traders. Today, many countries have developed bankruptcy proceedings for individuals providing for a discharge, which usually differ from the proceedings available to traders, and are commonly known as “consumer insolvency proceedings.” This paper will focus exclusively on the bankruptcy of non-trader individuals, also referred to as consumers. Several benefits arising from consumer bankruptcy or debt restructuring proceedings contemplating a discharge have been identified, such as, encouraging responsible lending, more accurate risk assessment, more efficient mechanisms for finding value, more equitable distribution of available value, and the creation of value by encouraging debtors to be productive and maximize returns as they know they will enjoy most of the value created. On January 2011, the World Bank conducted a survey involving 58 countries. Results showed that 21 out of 25 high-income countries regulated a consumer bankruptcy proceeding and 20 out of 25 regulated a consumer debt restructuring proceeding, while only 16 out 33 low or middle-income countries provided a proceeding of such nature. Moreover, 22 out of the 25 high-income countries surveyed contemplated a discharge for debtors. Findings show that consumer insolvency proceedings are becoming more and more popular in high-income countries. In the U.S.A., only during 2016 consumer bankruptcy filings exceeded 794,900. Consequently, some Latin American countries, such as Colombia, have implemented consumer insolvency proceedings, and others made a discharge available under certain circumstances. The aim of this paper is to compare the characteristics attributed to such proceedings, and to analyze which factors may cause an increase in the number of filings. Comparison is based on literature, governmental information and statistics. Findings, so far, show that filings for consumer insolvency proceedings in Latin American countries are much less in number, among other factors, due to the stigma of bankruptcy, lack of information, and more restrictive measures, such as, failing to regulate a debt restructuring mechanism.