Discharge of Debts for Individuals in Japan: The "Menseki" System

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

For individuals in Japan overwhelmed by debt, filing for personal bankruptcy (自己破産 - jiko hasan) offers a legal pathway to financial relief and a chance for a "fresh start" (経済的再生 - keizaiteki saisei). A cornerstone of this process is the system of "discharge" (menseki - 免責), which, if granted by the court, releases the debtor from the legal obligation to repay most of their outstanding debts. This system balances the need to provide relief to honest but unfortunate debtors with the interests of creditors and the integrity of the credit system. The bankruptcy trustee (破産管財人 - hasan kanzainin) plays a significant investigative and advisory role in this process.

The Purpose and Nature of the "Menseki" (Discharge) System

The primary purpose of the menseki system is to facilitate the economic rehabilitation of individual debtors. By alleviating the burden of unmanageable debt, the system aims to allow individuals to regain their financial footing and participate productively in society.

Key characteristics of the menseki system include:

  • Focus on Individuals: Discharge is available only to individual debtors. Corporations that undergo bankruptcy are typically dissolved and cease to exist; they do not receive a "discharge" in the same way individuals do.
  • Court-Granted Privilege: Discharge is not an automatic right. It is granted by the bankruptcy court after a review of the debtor's conduct and circumstances.
  • Balancing Act: The system seeks to strike a balance between providing relief to debtors and upholding fairness to creditors. This is achieved by setting out specific grounds upon which discharge may be denied, while also allowing for discretionary discharge in many cases.

The Discharge Procedure in Japanese Individual Bankruptcy

The process for obtaining a discharge in an individual bankruptcy case generally unfolds as follows:

  1. Automatic Consideration (原則的申立て不要 - gensokuteki mōshitate fuyō):
    Unless the debtor explicitly states that they do not wish to receive a discharge, the court will automatically consider the matter of discharge as part of the bankruptcy proceedings (Bankruptcy Act, Article 248, Paragraph 1). A separate formal petition for discharge by the debtor is usually not required if they filed for bankruptcy themselves.
  2. Trustee's Investigation and Opinion (管財人の調査・意見申述 - Kanzainin no Chōsa/Iken Shinjutsu):
    If a bankruptcy trustee is appointed (as is common in cases with assets to administer, or where investigation into the debtor's affairs is needed), one of their crucial tasks is to investigate whether any "grounds for denial of discharge" (menseki fukyoka jiyū - 免責不許可事由) exist (Bankruptcy Act, Article 252, Paragraph 1). These grounds relate to certain types of misconduct by the debtor.
    Following this investigation, the trustee must submit a written opinion (意見書 - ikensho) to the court (Bankruptcy Act, Article 251, Paragraph 2). This opinion will state:
    • Whether any grounds for denial of discharge are present.
    • If such grounds exist, whether the trustee nevertheless believes a "discretionary discharge" (sairyō menseki - 裁量免責, discussed below) should be considered by the court.
      The trustee's opinion is based on their findings from examining the debtor's records, interviewing the debtor, and any information received from creditors.
  3. Creditors' Opportunity to State Opinions (債権者の意見聴取 - Saikensha no Iken Chōshu):
    The bankruptcy court will set a period during which bankruptcy creditors can submit their opinions to the court regarding whether the debtor should be granted a discharge (Bankruptcy Act, Article 251, Paragraph 1). Creditors may support the discharge, oppose it (especially if they believe grounds for denial exist), or provide relevant information.
  4. Debtor Hearing (免責審尋 - Menseki Shinjin):
    The court typically holds a hearing, known as a menseki shinjin, where the judge can directly question the debtor (Bankruptcy Act, Article 251, Paragraph 3). This allows the court to assess the debtor's demeanor, sincerity, understanding of their financial situation, and commitment to future responsible conduct.
  5. Court's Decision (裁判所の免責決定 - Saibansho no Menseki Kettei):
    After considering the trustee's report and opinion, any opinions submitted by creditors, the information gathered at the debtor hearing, and all other circumstances of the case, the bankruptcy court will issue a formal decision (Bankruptcy Act, Article 252). This will be either:
    • Order Granting Discharge (免責許可決定 - menseki kyoka kettei): If no grounds for denial are found, or if the court exercises its discretion to grant discharge despite such grounds.
    • Order Denying Discharge (免責不許可決定 - menseki fukyoka kettei): If non-waivable grounds for denial exist and the court does not grant discretionary discharge.

Grounds for Denial of Discharge (免責不許可事由 - Menseki Fukyoka Jiyū)

Article 252, Paragraph 1 of the Bankruptcy Act lists eleven specific grounds upon which the court may deny discharge. These generally relate to acts of bad faith, fraud, or failure to cooperate with the bankruptcy process. The most significant grounds include:

  1. Fraudulent Concealment or Diminution of Estate Assets (Art. 252(1)(i)): Knowingly concealing, destroying, or unfavorably disposing of assets belonging to the bankruptcy estate with the intent to harm creditors.
  2. Preferential Transfers with Harmful Intent (Art. 252(1)(ii)): Providing security for a pre-existing debt or making payments on such a debt after the debtor knew bankruptcy was imminent (e.g., after ceasing payments or filing a petition), knowing that such actions would unfairly prejudice other creditors. This applies to actions that are not part of the debtor's legal obligations or are otherwise unjustifiable.
  3. Incurring Debts or Disposing of Assets Under Unfair Terms After Imminent Bankruptcy (Art. 252(1)(iii)): After ceasing payments or filing a petition, incurring new debts or disposing of assets under terms significantly disadvantageous to creditors, with the intent to benefit the estate.
  4. Squandering Assets or Excessive Gambling/Speculation (Art. 252(1)(iv) - 浪費又は賭博その他の射幸行為 - rōhi mata wa tobaku sonota no shakō kōi): Causing a significant reduction in one's assets or incurring substantial new debt through wasteful spending (e.g., on luxury goods, excessive travel) or through gambling or highly speculative transactions. This is a common ground for initial concern.
  5. Fraudulent Acquisition of Credit (Art. 252(1)(v)): Obtaining credit by fraudulent means (e.g., misrepresenting one's financial condition to a lender) within one year before the filing of the bankruptcy petition or during the bankruptcy proceedings.
  6. Submission of False Creditor Lists or Other False Statements (Art. 252(1)(vi) & (viii)): Knowingly submitting a false list of creditors to the court, or making false statements to the court or the bankruptcy trustee regarding one's assets, liabilities, or financial history.
  7. Failure to Cooperate or Obstruction (Art. 252(1)(viii), (ix), (xi)): Refusing to provide necessary explanations to the court or trustee, failing to submit required documents, absconding, or otherwise obstructing the trustee's duties or court proceedings. This also includes violating other duties stipulated in the Bankruptcy Act.
  8. Prior Discharge Within Seven Years (Art. 252(1)(x)): If the debtor has received a discharge in a previous bankruptcy case, or a discharge through certain types of civil rehabilitation proceedings (給与所得者等再生 - kyūyo shotokusha tō saisei), and the order confirming that prior discharge became final and binding within the seven years preceding the filing date of the current bankruptcy petition.

Discretionary Discharge (裁量免責 - Sairyō Menseki)

A crucial and frequently utilized feature of the Japanese menseki system is the concept of "Discretionary Discharge" (sairyō menseki), provided for in Article 252, Paragraph 2 of the Bankruptcy Act.

This provision states that even if one or more of the grounds for denial of discharge (as listed in Paragraph 1) are found to exist, the court may still grant a discharge if it deems it appropriate after comprehensively considering all circumstances of the case.

Factors Considered for Discretionary Discharge:

When deciding on discretionary discharge, the court (heavily guided by the trustee's investigation and opinion) will examine factors such as:

  • The nature, severity, and circumstances of the misconduct that led to the ground for denial. Was it an isolated incident or a pattern of behavior? Was the financial impact significant?
  • The debtor's remorse and reflection (反省の度合い - hansei no doai): Is the debtor genuinely regretful of their past actions?
  • The debtor's cooperation with the bankruptcy proceedings: Has the debtor been truthful and cooperative with the trustee and the court throughout the process?
  • The debtor's efforts towards economic rehabilitation: Is the debtor making sincere efforts to manage their finances responsibly and improve their situation?
  • The potential impact on creditors: While the primary goal is debtor rehabilitation, the court will also consider the effect on creditors.
  • The debtor's overall personal and financial history.

Trustee's Role in Discretionary Discharge:

The bankruptcy trustee's opinion is particularly vital in discretionary discharge cases. The trustee will not only report on the existence of grounds for denial but will also provide a balanced assessment of the debtor's current attitude, level of cooperation, sincerity in seeking rehabilitation, and whether, despite past misconduct, granting a discharge would ultimately serve the rehabilitative goals of the Bankruptcy Act without unduly prejudicing public interest or the integrity of the system.

In practice, discretionary discharge is granted in a large majority of cases where grounds for denial technically exist but are not deemed so egregious as to warrant outright denial, especially if the debtor demonstrates sincere remorse and full cooperation. This reflects a strong policy emphasis on providing debtors with a chance to rebuild their lives.

Effect of a Discharge Order (免責許可決定の効力)

Once an Order Granting Discharge (menseki kyoka kettei) becomes final and binding, it has profound legal effects for the individual debtor (Bankruptcy Act, Article 253):

  1. Release from Obligation to Pay "Bankruptcy Claims": The debtor is released from their legal obligation to pay their "bankruptcy claims" (hasan saiken). These are generally defined as monetary claims that arose against the debtor from causes existing before the commencement of the bankruptcy proceedings and which were subject to the bankruptcy distribution process.
  2. Exceptions – Non-Dischargeable Claims (非免責債権 - hi-menseki saiken): Importantly, the discharge does not release the debtor from certain specific categories of debts that are deemed "non-dischargeable" by law (see below).
  3. No Effect on Administrative Claims or Secured Creditors' Rights: The discharge does not affect "administrative claims" (zaidan saiken) that arose during the bankruptcy proceedings, nor does it affect the rights of secured creditors to enforce their security interests (betsujo-ken) against their specific collateral (Article 253, Paragraph 3).
  4. No Effect on Guarantors or Co-debtors: The discharge of the principal debtor does not release or otherwise affect the liability of any guarantors (保証人 - hoshōnin) or co-debtors (連帯債務者 - rentai saimusha) who were also liable for the discharged debts (Article 253, Paragraph 2). These parties remain fully liable to the creditor.

Non-Dischargeable Claims (非免責債権 - Hi-Menseki Saiken)

Even if a debtor receives a general discharge, they remain legally obligated to pay certain types of debts. Article 253, Paragraph 1 of the Bankruptcy Act lists these non-dischargeable claims:

  1. Tax Claims (Item 1 - 租税等の請求権 - sozei tō no seikyūken): This includes national and local taxes, social insurance premiums, and similar public dues.
  2. Claims for Damages from Malicious Torts (Item 2 - 悪意で加えた不法行為に基づく損害賠償請求権 - akui de kuwaeta fuhō kōi ni motzuku songai baishō seikyūken): Claims for damages caused by tortious acts committed by the debtor with malicious intent (e.g., damages from intentional fraud, assault).
  3. Claims for Damages from Torts Causing Death or Personal Injury Committed Intentionally or by Gross Negligence (Item 3).
  4. Certain Family Law Obligations (Item 4): This is a broad category including:
    • Obligations for spousal support arising from cohabitation (婚姻費用 - kon-in hiyō).
    • Child support obligations (養育費 - yōikuhi).
    • Other obligations to support relatives as required by law.
  5. Employee Wage Claims and Claims for Return of Employee Security Deposits (Item 5): Wages owed by the debtor (if they were an employer) to their employees, and claims for the return of any security deposits lodged by employees.
  6. Claims Knowingly Omitted from the Creditor List (Item 6): If the debtor was aware of a particular creditor but intentionally (or with gross negligence) failed to include them in the list of creditors submitted to the court, and that creditor did not otherwise have knowledge of the bankruptcy proceedings, that creditor's claim is not discharged.
  7. Fines, Penalties, Collection Costs, etc. (Item 7).

Revocation of Discharge (免責の取消し - Menseki no Torikeshi)

In very limited circumstances, a discharge order that has already been granted can be revoked by the court (Bankruptcy Act, Article 254). This can occur if:

  • It is discovered that the debtor obtained the discharge through fraudulent means (e.g., by actively concealing significant assets that should have been part of the estate).
  • A petition for revocation is filed by a creditor within one year from the date the discharge order became final and binding.

Revocation is a serious measure and is not taken lightly by the courts.

Conclusion

The menseki system is a fundamental component of individual bankruptcy in Japan, designed to provide a meaningful "fresh start" for debtors who find themselves in overwhelming financial difficulty. While the process involves careful scrutiny by the bankruptcy trustee and the court, and while certain misconduct can lead to denial of discharge, the availability of discretionary discharge ensures that the system leans towards rehabilitation. For honest but unfortunate debtors, menseki offers a release from the burden of most past debts, allowing them to rebuild their financial lives, albeit with the important caveat that certain public policy-driven claims and claims arising from serious misconduct remain non-dischargeable.