Is bankruptcy only for the rich?
The Law on Personal Bankruptcy came into force in March of 2013 in Lithuania; it provides for a possibility for individuals riddled with financial problems to get rid of their debt burdens, at least in theory. However, a detailed analysis of the legal provisions revealed that in reality the bankruptcy would be accessible only to the affluent individuals with high income.
A person whose debt exceeds 20 000 litas, upon the advance notice of all the creditors, must apply to the court for his bankruptcy. Along with the application, the information on income, assets, debts, dependents, and other information requested under the law must be provided together with the nomination of the bankruptcy administrator.
Within a maximum of one month, the court, having considered the application and found that the person is insolvent, shall order the bankruptcy proceedings. In this case, a bankruptcy administrator shall be appointed and creditors shall be given up to 30 days for bringing the creditor claims; the person is obliged to prepare a solvency restoration plan. The information about the bankruptcy proceedings shall be published in the website of the bankruptcy department.
From the onset of the bankruptcy proceedings a person is prohibited from performing outstanding financial obligations, calculation of penalties and interest is suspended and he is prohibited from disposing of his assets; an administrator is to be doing that instead. In addition, the administrator would open an escrow account in his name, where a share of the income of an individual undergoing bankruptcy and the funds received from the sale of his assets are to be deposited. A person undergoing bankruptcy is allowed to retain a single personal account, and dispose of the funds required to meet basic needs of his own and his dependents. Others funds falling into this personal account, exceeding the amount of necessary funds established in the solvency restoration plan, shall be deposited into the administrator’s escrow account. Furthermore, an individual is basically prohibited from possessing cash – the law provides that all amounts in cash exceeding a half of the basic social benefit (i.e. LTL 65) must be placed in his personal bank account.
Upon approval of the creditor claims by the court, an individual’s solvency restoration plan has to be prepared. It identifies the expected revenue, anticipated sale of the assets and other measures aimed at restoration of solvency. Furthermore, it is to include a monthly sum necessary for meeting individual needs and the purposes they are intended for, creditor claim satisfaction schedule, as well as other things as required under the law. The draft plan has to be presented to the administrator, which is to issue his opinion on the feasibility of the plan, to be attached thereto, and convene a meeting of creditors during which voting for approval of the plan is to take place. Even if the plan is not approved by the creditors, it can still be brought to the court, which, having considered to the bankruptcy administrator’s opinion, the interests of the individual and his creditors, may decide to have the plan approved.
Upon approval of the solvency restoration plan by the court, its implementation is started. During the plan period, which may not be longer than 5 years, the assets listed therein are sold, the revenues of an individual, in excess of the amounts required for basic needs under the plan, are deposited into the administrator’s escrow account. The administrative costs are to be covered first from the amounts in the account, as well as the payments to creditors are to be made in accordance with the law and the plan. After the expiry of the plan’s implementation period, the outstanding debt to the creditors is to be written off.
Majority of debtors cannot afford it
Upon entry into force of the law, in theory, the debt-burdened individuals having survived the five-year “purgatory” of bankruptcy should be ridden of the remaining debt and restart their full-fledged living. However, it seems that not everyone can afford to opt for bankruptcy, as it is by no means a low-cost solution.
Individuals with low income, which is barely enough to cover their basic needs and with no assets that could be sold, would be unable to find a bankruptcy administrator, in absence of whom the procedure would be impossible. It is obvious that no administrator would agree to provide his services free of charge, the more that there is much work in the personal bankruptcy procedure. Although the financial crisis is in decline, the need for the bankruptcy administration services is still great and few individuals can afford them, not to mention the hopelessly indebted ones. And here we have a vicious circle – one cannot afford to go bankrupt without sufficient assets or revenue.
It should be noted that the Law on Personal Bankruptcy has received a lot of criticism from various parties even before it was passed. There’s no doubt it will be amended and updated again and again; the only hope for the poor is to be heard by the legislator which would come up with a solution for the poor, who cannot afford the bankruptcy administration services, to take advantage of personal bankruptcy.