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Bankruptcy of individuals. What is the path of practice?

For a long time in Russia, despite the active development of the credit system, there was no institution of bankruptcy of individuals. This created numerous problems for citizens unable to fully or partially fulfill their debt obligations. The legal community and politicians have long discussed the need to introduce the institution of bankruptcy of individuals in the country. In the end, the Federal Law «On the Resolution of the Features of Insolvency (Bankruptcy) in the Territories of the Republic of Crimea and the City of Federal Significance of Sevastopol and on Amending Certain Legislative Acts of the Russian Federation» dated June 29, 2015 №154-FZ was adopted. It introduced the institute of bankruptcy of individuals into the law of 26.10.2002 №127-FZ. Let us analyze how the practice of applying the new provisions develops in last two years.

The main reasons for adopting the Federal Law № 154-FZ

The adoption of the Federal Law № 154-FZ was due to the following important factors.

Firstly, in today’s Russia a vast market of mortgage and consumer lending has been formed. This required the formation of a regulatory framework that regulates the protection of the rights and interests of individuals who have become borrowers.

Secondly, due to the increasing economic situation, currency inflation, many borrowers were unable to repay the debt, and this situation also required an early resolution.

Now the citizen is obliged in the case of impossibility of satisfaction of the claims of one or several creditors to apply to the arbitration court with a petition declaring him bankrupt. Prior to the adoption of the law, in the event of a non-payment of a natural person, the credit was followed by the initiation of an enforcement proceeding with the subsequent recovery of the amount by bailiffs. However, enforcement proceedings did not allow full implementation of measures to protect the rights of debtors. Moreover, the existing nature of the enforcement process led to two possible consequences: either the property of the debtors was sold, which could imply a violation of their interests, or, if the debtors did not possess property, the creditor did not receive anything.

Also, the absence of the institution of bankruptcy of individuals contributed to the prosperity of collection agencies and other similar organizations specializing in the repayment of debts, in some cases - by non-legal means. It was not possible and avoiding the debt by virtue of Federal Law No. 229-FZ of 02.10.2007 «On Enforcement Proceedings».

Grounds for the bankruptcy of an individual, its positive and negative consequences

The absence of the institution of bankruptcy of individuals created additional problems for creditors. So, in the case of the realization of the sole property of the debtor, if he had obligations to several creditors, then only the debt to one of them was repaid. That is, the introduction of bankruptcy procedure for individuals significantly improved the situation not only of the debtors themselves, but also of their creditors.

According to the current legislation, in order to be declared bankrupt, an individual must meet the following criteria:

  • Have a debt of at least 500 thousand rubles;

  • Evidence of the inability to repay the debt within the last 90 days;

  • To make attempts to pay off debt obligations, to restructure debts, to enter into agreements with creditors on installment payments.

Thus, not every debtor, unable to pay its credit debt, can be declared bankrupt. The procedure is most advantageous in the following situations:

  • When the amount of debt is greater than the value of all available assets of the debtor. In this situation, after the sale of the debtor’s property, the debts will be canceled.

  • The debtor has only one property - an apartment or a house where he lives. In this case, since a single housing is not subject to sale, the bankruptcy procedure is also beneficial.

It should also be noted that while the bankruptcy petition is under review in the court or the bankruptcy procedure itself is being implemented, penalties and sanctions for non-payment of debt contributions on loans are being stopped.

Assessing the pro et contra of bankruptcy proceedings for the debtors themselves, it should be noted its unconditional benefit only to those citizens who do not possess any property. If an individual is the owner of vehicles, expensive household appliances, cottages, garages, then all this property will be sold to pay off the debt. At the same time, it should be remembered that the law establishes the basic principle of inviolability of the minimum property, which is necessary for the existence of a citizen and members of his family.

A promising point in the law is a ban on confiscation of the only apartment or house of the debtor, but it should be remembered that as the only housing is not considered real estate purchased in a mortgage.

As a result of declaring bankrupt citizens for 5 years will not be able to enter into loan agreements or loan agreements without indicating the fact of bankruptcy. In addition, within 5 years a citizen cannot initiate a new procedure for his bankruptcy. Also within 3 years a citizen is denied the right to occupy management positions in the management bodies of a legal entity, otherwise participate in the management of the activities of a legal entity.

The refusal of arbitration managers to work with individuals

After the Federal Law №154-FZ entered into force in 2015, significant problems in the sphere of its practical implementation gradually began to be revealed. One of the key problems in the implementation of this law was the steady reluctance of the majority of insolvency practitioners to work with individuals. This is due to the fact that it is unprofitable for professional insolvency practitioners to conduct business on bankruptcy of individuals.

First, the amount of remuneration received by the bankruptcy administrator in case of bankruptcy of a legal entity and when carrying out a similar procedure for an individual is not comparable.

Secondly, remuneration for participation in the bankruptcy of a legal entity is granted monthly, and for the procedure of bankruptcy of an individual – after the entire complex of necessary measures. In this case, very often the remuneration of the insolvency practitioner after the consideration of the case and so is not paid in full because of the lack of adequate financial means from the bankrupt.

A review of court practice in bankruptcy cases of individuals shows that insolvency practitioners sometimes apply for payment of remuneration before the bankruptcy procedure is completed. But courts in most cases decide to leave the fee on deposit before the end of the procedure, and the costs incurred by insolvency practitioners are compensated for by selling the debtor’s property.

Therefore, as a rule, insolvency practitioners insist on paying them additional remuneration, otherwise they simply refuse to take the case of bankruptcy of an individual, and citizens cannot find specialists ready to undertake the procedure.

The situation with insolvency practitioners is conditioned by the initial assumption of lawmakers that the debtor himself will perform the bulk of the functional duties entrusted to insolvency practitioners. But the vast majority of individuals who are debtors do not have the proper level of knowledge and skills that would allow them to carry out the complex of financial manager’s duties even in their own bankruptcy case.

Financial aspects of refusal from bankruptcy

It should be noted that the arbitration court, when accepting an application for bankruptcy from an individual, first requires the provision of evidence of the availability of financial means to pay for the bankruptcy procedure. According to the legislation, an individual pays for the costs of bankruptcy independently. It is necessary not only to pay a state fee, but also to provide funds to pay the insolvency practitioner, as well as to compensate for the costs of publications and postal services.

Since an individual who is not able to repay loans, most often does not have significant financial resources, he or she is unable to pay for the bankruptcy procedure and, accordingly, does not initiate it. This circumstance, in our opinion, is one of the main reasons for the relative small number of applications for bankruptcy compared to the number of Russian debtors who cannot repay debts to creditors. So, during the first 8 months after the entry into force of the Federal Law № 154-FZ, 23656 cases of bankruptcy of individuals were initiated. Of course, these are very small figures compared to the real number of debtors who cannot pay their debts.

Courts refuse to consider applications for bankruptcy for citizens who are unable to provide evidence of their ability to pay for this costly procedure. So, in December 2015, the Arbitration Court of the Krasnoyarsk region terminated the proceedings on the bankruptcy case of the citizen N., who owed more than 1.7 million rubles to one of the banks. The reason for the termination of production was the establishment of the fact of insufficient funds and property to pay the costs of the case, full or partial repayment of debts to creditors – the only source of income for N. was a pension of 12.5 thousand rubles.

The impossibility of paying for bankruptcy proceedings is one of the main reasons for the initiation by the debtor citizens themselves of only 15-20% of bankruptcies. The rest of the bankruptcy cases are initiated by creditors – banks and other organizations. It should also be understood that it is not advisable for individuals with an insignificant amount of debt (for example, 500 thousand rubles) to initiate a bankruptcy procedure, since the costs of conducting it will be not much less than the amount of debt itself.

Finally, we should not forget about such an important nuance as the need to pay tax on the amount of written-off debt. In accordance with the Tax Code of the Russian Federation, the written-off debt is equated to income. Accordingly, a citizen must pay tax on personal income in the amount of 13%.

Main Trends and Prospects

A small number of applications for bankruptcy compared with the number of insolvent debtors is due, among other things, to the low level of legal culture and legal literacy of the country’s population. Many citizens, especially representatives of low-income population, are poorly informed about legislative innovations. Federal Law № 154-FZ in this case is not an exception, and even if a citizen has heard of his acceptance, he may not have an idea of the essence of the law and the nuances of its implementation.

There are numerous questions to the organizational aspects of bankruptcy of individuals. In particular, since the fee of the arbitration administrator is determined as a percentage of the sold property of the citizen, a situation is created in which the insolvency practitioner is interested not in protecting the interests of the individual, but in his prompt bankruptcy and sale of his property in order to receive compensation.

No less relevant problem is the complexity of assessing the debtor’s property. According to Art. 446 Civil Process Code the Russian Federation, on the unique inhabited premise belonging to the debtor, punishment cannot be turned. At the same time, the cost of a single dwelling may be many times higher than the amount owed to creditors (for example, arrears may be 1 million rubles and the cost of an apartment – 5 million rubles).

Resolution 11-P / 2012 of the Constitutional Court of the Russian Federation indicated constitutional-legal defectiveness of Part 1 of Art. 446 Civil Process Code RF. However, the Constitutional Court did not recognize this part as constitutionally acceptable, since it noted that the lack of a developed procedure for foreclosure on the single housing of the debtor would create numerous precedents for the application of arbitrary criteria. In practice this will lead to violation of the civil rights of debtors.

Given the above costs of bankruptcy law, the question was raised about the need to improve it. One of the first steps towards simplifying the procedure of bankruptcy of individuals was the signing by the President of the Russian Federation V.V. Putin by the Federal Law of November 30, 2016 No. 407-FZ «On Amending Article 333-21 of Part Two of the Tax Code of the Russian Federation». In accordance with it, the amount of state duty, payment of which is necessary to open a bankruptcy procedure, was reduced twentyfold and from January 1, 2017, amounts to 300 rubles for individuals versus 6,000 rubles, which citizens had to pay before the law was enacted.

Undoubtedly, the procedure for determining the participation of insolvency practitioners in bankruptcy cases for individuals, as well as the tendency of many managers to refuse to work with individuals, is one of the major obstacles to the bankruptcy procedure. It seems promising to more clearly define the procedure for remuneration of insolvency practitioners and cover the costs incurred by them.

It is also necessary to simplify the collection of documents required for the commencement of the bankruptcy procedure, since at present many citizens are faced with the impossibility of providing documents in full and, accordingly, are denied the beginning of the procedure.

Thus, the implementation of Federal Law № 154-FZ in modern Russia faces in practice many obstacles. The reluctance of insolvency practitioners to work with individuals, the lack of financial resources to pay for the bankruptcy procedure, the complexity of assessing the debtor’s property, the completion of the restructuring stage in the vast majority of cases by deciding on the sale of the debtor’s property (although initially the debt restructuring sets itself other tasks) are among the main problems. Legislation on the bankruptcy of individuals needs to be improved, and legislators will inevitably return to the need for further improvement, as they will be pushed to it by the existing reality.