China court approves personal bankruptcy ruling that could pave the way for further debt cases

Zhou Xin

A local Chinese court has approved the first-ever personal bankruptcy agreement in China’s history, setting a precedent that could spread across the country as household debt levels rise amid the slowing economy.

The court in Wenzhou, Zhejiang province, the cradle of China’s private-sector economy, ruled that a local man surnamed Cai only has to repay 1.5 per cent of his 2.14 million yuan (US$300,000) of debt, the equivalent of 32,000 yuan (US$4,480) over the next 18 months.

It did not specify how Cai, who has a monthly household income of around 8,000 yuan (US$1,120), amassed the debt.

“He has a 1 per cent equity stake in a machine tool company, and his paid-in capital to the company is 5,800 yuan. He has a damaged motorcycle and a very small amount of [bank] deposits,” the local official newspaper, the Wenzhou Daily, reported, citing the court ruling. “In addition, his wife has been suffering from high blood pressure and kidney disease for many years, resulting in a huge medical bill, and his child is still in college. The whole family’s income just couldn’t make ends meet and he is clearly unable to repay the huge debts.”

The whole family’s income just couldn’t make ends meet and he is clearly unable to repay the huge debts

Wenzhou Daily

The landmark case took place at a time when the government is trying to set up a nationwide legal framework to handle a growing number of individuals who are unable to repay their debts.

At the end of June, China had 14.43 million people who were listed by the courts as “persons who have lost credibility”, the equivalent of just over 1 per cent of the total population, official data showed, with most placed on the blacklist due to unpaid debts.

Cai can resume his credible social status three years after paying back the agreed amount, although until then, he is not allowed to travel in business or first class on the high-speed railway network, serve as legal representative for any business entity, while he must seek special permission if he wants to travel abroad, the court ruled.

If Cai’s household annual income exceeds 120,000 yuan (US$16,800) after six years of paying back the 1.5 per cent, he will need to use 50 per cent of any money above that level to repay creditors, the Wenzhou Daily reported.

The newspaper said that the case offered “judicial practice” to support the establishment of China’s personal bankruptcy system.

China’s Supreme People’s Court said in October 2018 that the country’s court system should “study and push forward a personal bankruptcy system” as cases involving citizens who are unable to repay their debts had surged in the country.

China’s National Development and Reform Commission, the economic planning agency, issued a joint policy document with 12 other ministries in July saying China will push forward individual bankruptcy rules.

Personal bankruptcy, which allows an individual to waive excessive debt, had been a foreign idea in China until about a decade ago. However, it has become an issue of debate as the country’s households are taking on increasing levels of debt, with the household debt-to-gross domestic product ratio having surged from 11 per cent in 2006 to 53.6 per cent at the end of the first quarter of 2019.

At the same time, personal bankruptcy remains controversial as many are concerned that it could be abused to avoid repaying debts.

China courts handled 18,823 corporate bankruptcy cases in 2018, an increase of 97.3 per cent from a year earlier, according to China's Supreme People's Court.

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