Individual Civil Rehabilitation in Japan: How Does it Work for Salaried Individuals, and What is the "Residential Mortgage Special Clause"?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

For salaried individuals in Japan facing overwhelming debt, the prospect of losing their home can be a primary concern. Individual Civil Rehabilitation (個人再生 - Kojin Saisei) is a court-supervised procedure designed to help such individuals restructure their finances, significantly reduce their unsecured debts, and, crucially, often retain their primary residence through a mechanism known as the "Residential Mortgage Special Clause" (住宅資金特別条項 - Jūtaku Shikin Tokubetsu Jōkō). This article explores how Kojin Saisei functions for employees, with a particular focus on this home-saving provision.

Understanding Individual Civil Rehabilitation (Kojin Saisei)

Kojin Saisei is a legal procedure under Japan's Civil Rehabilitation Act (民事再生法 - Minji Saisei Hō) tailored for individual debtors who have a likelihood of earning future income continuously or repetitively but are unable to meet their current debt obligations. Unlike bankruptcy, which primarily involves liquidation of assets, Kojin Saisei aims for the debtor's economic rehabilitation by allowing them to repay a substantially reduced amount of their unsecured debts over a defined period (typically three years, extendable to five years under special circumstances), while often keeping essential assets.

Eligibility Criteria:
To be eligible for Kojin Saisei, an individual generally must:

  1. Have a prospect of future, regular income. This makes it particularly suitable for salaried employees.
  2. Have total unsecured debts (excluding the mortgage covered by the special clause, and certain other priority claims) not exceeding ¥50 million.

The Two Main Types of Individual Civil Rehabilitation

There are two primary forms of Kojin Saisei:

1. Small-Scale Individual Rehabilitation (小規模個人再生 - Shōkibo Kojin Saisei; Art. 221, Civil Rehabilitation Act):
This is the more commonly used type, available to individuals (including salaried employees and sole proprietors) who meet the general eligibility criteria.

  • Rehabilitation Plan Approval: A key feature is that the proposed rehabilitation plan requires the constructive approval of creditors. Specifically, the plan is deemed approved if it is not rejected by creditors representing more than half of the total number of voting creditors, AND if it is not rejected by creditors holding more than half of the total value of the voting claims. In practice, active rejection by a sufficient number of creditors is relatively uncommon for well-structured plans.

2. Salary Earners' Rehabilitation (給与所得者等再生 - Kyūyo Shotokusha-tō Saisei; Art. 239, Civil Rehabilitation Act):
This type is specifically designed for individuals, primarily salaried employees, whose income is stable and not subject to significant fluctuations.

  • No Creditor Voting: The most significant difference from Shōkibo Kojin Saisei is that the rehabilitation plan does not require creditor voting for approval. Court confirmation is based on meeting statutory requirements.
  • Disposable Income Calculation: However, there's a trade-off. The minimum repayment amount under this procedure must be at least equivalent to the debtor's "disposable income" for two years (可処分所得 - kashobun shotoku, calculated according to a statutory formula). This can sometimes result in a higher total repayment obligation compared to the minimums required under Shōkibo Kojin Saisei, especially for debtors with higher incomes or fewer dependents.

Choosing Between the Two:
Lawyers will typically advise opting for Shōkibo Kojin Saisei if creditor opposition to the plan is unlikely and if the two-year disposable income calculation for Salary Earners' Rehabilitation would result in a significantly higher repayment burden than the standard minimum repayment thresholds. One of the illustrative case studies showed a scenario where the disposable income calculation yielded a repayment nearly three times higher than the standard minimum, making Shōkibo Kojin Saisei the clear choice.

The Lifeline for Homeowners: The Residential Mortgage Special Clause (Jūtaku Shikin Tokubetsu Jōkō)

For many salaried individuals, their home is their most valuable asset and one they are desperate to keep. The Residential Mortgage Special Clause (Arts. 196-206, Civil Rehabilitation Act) is a powerful provision within Kojin Saisei that makes this possible.

Purpose and Function:
This special clause allows a debtor to continue making payments on their residential mortgage—either under the original terms or under modified (rescheduled) terms agreed with the mortgage lender or stipulated by the court—while other unsecured debts are significantly reduced and repaid under the main rehabilitation plan. Effectively, the mortgage is "carved out" from the general debt reduction process.

Key Requirements for Application (Art. 198(1)):
To utilize this clause, several conditions must generally be met:

  1. Nature of the Loan: The debt must be a "housing loan" (jūtaku shikin kashitsuke saiken - 住宅資金貸付債権), meaning it was incurred for the construction, purchase, or improvement of the debtor's residence.
  2. Security on the "Residence": A mortgage (or other equivalent security interest) securing this housing loan must be established on the "residence" itself (and often its land).
  3. Definition of "Residence" (Art. 196(1)): The property must be owned by the individual debtor and primarily used as their own dwelling, with at least half of its floor area dedicated to their residential use.
  4. Absence of Other Problematic Liens: Crucially, the residence must not be subject to any security interests (other than the housing loan mortgage itself) that would secure non-housing loan debts if those other security interests could lead to the loss of the home (Art. 198(1) proviso, referring to security interests under Art. 53(1)). This means if there's a second mortgage securing a business loan on the home, the special clause generally cannot be used.

Handling Co-existing Encumbrances (e.g., a Quasi-Attachment):
What if the property has other encumbrances that are not typical security interests, like a quasi-attachment (仮差押登記 - karisashiosae tōki) for an unsecured debt? One case study involved this scenario. The legal argument presented was that such a quasi-attachment does not automatically disqualify the use of the Residential Mortgage Special Clause. This is because:

  • A quasi-attachment typically secures a claim that, in a rehabilitation proceeding, becomes a "rehabilitation claim" (saisei saiken).
  • The enforcement of rehabilitation claims is stayed upon the commencement of Kojin Saisei proceedings (Art. 39(1)).
  • The underlying claim itself is subject to modification under the terms of the approved rehabilitation plan (Art. 85(1), Art. 232(2)).
    Therefore, as long as the debtor adheres to the rehabilitation plan, the quasi-attachment should not lead to the forced sale of the home. However, this situation underscores the increased importance of demonstrating the debtor's robust ability to perform the plan, as any default could revive risks.

Types of Mortgage Treatment under the Special Clause:
The special clause allows for various ways to handle the mortgage:

  • "As Is" Type (そのまま型 - sonomama-gata; Art. 199(1)): The debtor continues to pay the mortgage according to its original terms. This is common if the mortgage is not in arrears and the debtor can afford the payments.
  • Reschedule Type (リスケジュール型 - risukejūru-gata; Art. 199(2)): The repayment period of the mortgage can be extended (up to a maximum age for the debtor, e.g., 70, and generally not more than 10 additional years), thereby reducing monthly payments. This usually requires the mortgage lender's consent or meets specific statutory conditions.
  • Principal Deferment Type (元本猶予型 - ganpon yūyo-gata; Art. 199(3)): Allows for a temporary deferment of principal payments, with only interest being paid for a period. This typically requires lender consent.
  • Other variations exist depending on the specifics of the mortgage and negotiations with the lender.

Continuing Mortgage Payments Post-Filing (弁済許可 - Bensai Kyoka):
Once a Kojin Saisei petition is filed, there is generally a stay on repaying pre-petition debts. To continue making mortgage payments and avoid default (which could jeopardize the special clause), the debtor's lawyer must promptly apply to the court for permission to make these payments (弁済許可申立 - bensai kyoka mōshitate; Art. 85(2) of the old Act, current practice based on general principles of plan necessity).

Determining the Repayment Amount for Other Debts

Under Kojin Saisei, unsecured debts (other than the specially treated mortgage) are significantly reduced. The amount to be repaid is determined by comparing two main benchmarks, with the debtor obligated to pay the higher of the two:

  1. Statutory Minimum Repayment Standards (最低弁済額基準 - Saitei Bensai-gaku Kijun; Art. 231(2)(3),(4)):
    The Civil Rehabilitation Act sets minimum repayment amounts based on the total unsecured debt:
    • Total unsecured debt less than ¥1 million: The full amount.
    • ¥1 million to less than ¥5 million: ¥1 million.
    • ¥5 million to less than ¥15 million: One-fifth of the debt.
    • ¥15 million to less than ¥30 million: ¥3 million.
    • ¥30 million up to ¥50 million: One-tenth of the debt.
  2. Liquidation Value Guarantee Principle (清算価値保障原則 - Seisan Kachi Hoshō Gensoku; Art. 174(2)(4) applied via Art. 231(1) and Art. 241(2)(vi)):
    The total amount repaid to creditors under the rehabilitation plan must be greater than the amount they would likely receive if the debtor were to go through bankruptcy liquidation at the time of the plan approval. This involves calculating the value of the debtor's non-exempt assets (e.g., cash surrender value of insurance, value of a car if retained, a portion of expected retirement benefits, real estate equity if any beyond the mortgage). The "residence" itself, if fully encumbered by the mortgage treated under the special clause and having no surplus equity, would contribute ¥0 to this liquidation value calculation for unsecured creditors.

The repayment amount, determined by the higher of these two figures, is then typically paid in monthly installments over three years. This period can be extended up to five years if special circumstances make a three-year repayment unfeasible.

The Court Process and Key Stages

The Kojin Saisei process involves several key stages:

  1. Filing the Petition: The debtor, through their lawyer, files a petition with the competent district court. This includes detailed financial information, creditor lists, a draft household budget, and, if applicable, an intention to use the Residential Mortgage Special Clause.
  2. Appointment of Rehabilitation Trustee/Supervisor (Saisei I'in) (if applicable):
    • In some jurisdictions, like the Tokyo District Court, a saisei i'in (typically a lawyer) is appointed in all Kojin Saisei cases. This trustee/supervisor oversees the debtor, investigates their finances, and assists the court. They also often conduct a "performance test" (rikō kanōsei tesuto - 履行可能性テスト), requiring the debtor to make trial payments for about six months into an account managed by the trustee to demonstrate their ability to adhere to the proposed plan. The trustee's fee (e.g., around ¥150,000 - ¥200,000 in Tokyo) is paid from these accumulated funds or as a court deposit.
    • In other jurisdictions, a saisei i'in may not be appointed if the debtor is represented by a lawyer and the case appears straightforward, unless specific issues arise (e.g., doubts about plan feasibility, complex assets, or potential non-discharge grounds that need scrutiny). Case 7 explicitly involved filing in a court where a trustee was not routinely appointed for lawyer-represented cases, and the lawyer made proactive efforts to address potential issues to maintain that status.
  3. Commencement Decision (開始決定 - Kaishi Kettei): If the court finds the eligibility criteria are met, it issues a commencement decision, formally starting the proceedings.
  4. Claims Filing and Verification: Creditors file their claims, and the debtor (or trustee, if appointed) reviews them.
  5. Drafting and Submitting the Rehabilitation Plan (再生計画案 - Saisei Keikaku-an): The debtor, with their lawyer's assistance, prepares a detailed rehabilitation plan outlining the proposed debt repayments.
  6. Plan Approval and Confirmation:
    • For Shōkibo Kojin Saisei: The plan is sent to creditors. It is approved unless rejected by the requisite majority (more than half in number AND holding more than half the debt value).
    • For Kyūyo Shotokusha-tō Saisei: No creditor vote is held.
      The court then reviews the plan for compliance with legal requirements (including the liquidation value guarantee and feasibility) and, if satisfied, issues a confirmation order (認可決定 - ninka kettei).
  7. Implementation: Once the plan is confirmed and becomes final and binding, the debtor begins making the scheduled payments to creditors. Successful completion over the 3-5 year term leads to the discharge of the remaining (reduced) portions of the unsecured debts.

Addressing Specific Challenges in Practice

  • Demonstrating "Feasibility of Performance" (Rikō Kanōsei): This is critical, especially if the repayment amount is close to the debtor's calculated disposable income or if there are complicating factors like the quasi-attachment mentioned earlier. Lawyers might advise strategies like proactively clearing other short-term payment obligations (e.g., tax arrears, a nearly paid-off car loan) during the months between filing and the start of plan payments to free up cash flow and strengthen the feasibility argument.
  • Retaining Other Essential Secured Assets (e.g., Car): If a car is essential for work or daily life and is subject to a loan with ownership retention by the creditor (a form of security interest), it's not covered by the residential mortgage clause. The debtor might try to negotiate a "separate payment agreement" (betsujo-ken kyōtei - 別除権協定) with the car loan creditor. This typically involves agreeing to pay the creditor an amount equivalent to the car's current market value (or the remaining loan if lower) as a priority or common benefit claim, in exchange for the creditor agreeing not to repossess the vehicle. The feasibility of this depends on the car's value, the loan balance, and the creditor's willingness to cooperate.

The Lawyer's Indispensable Role

Navigating Kojin Saisei is complex. The debtor's lawyer plays a vital role in:

  • Assessing eligibility and choosing the appropriate type of Kojin Saisei.
  • Meticulously preparing and filing all necessary court documents.
  • Strategizing for the application of the Residential Mortgage Special Clause.
  • Accurately calculating debt levels, potential repayments, and the liquidation value.
  • Negotiating with mortgage lenders and other creditors (e.g., for betsujo-ken kyōtei).
  • Guiding the debtor through court procedures and interactions with a saisei i'in (if appointed).
  • Ensuring the proposed rehabilitation plan is legally compliant, feasible, and fair.

Conclusion

Individual Civil Rehabilitation (Kojin Saisei) provides a crucial lifeline for salaried individuals in Japan who are struggling with debt but wish to avoid losing their homes. The Residential Mortgage Special Clause is the centerpiece of this home-retention strategy, allowing mortgage commitments to be honored or adjusted while other unsecured debts are significantly reduced to manageable levels. While the process is intricate and requires careful legal navigation, it offers a structured path towards financial recovery and the preservation of a key element of personal stability – the family home. Success depends on regular income, a well-crafted and feasible plan, and often, the skilled guidance of an experienced legal professional.