My Employee in Japan is Struggling with Debt but Wants to Keep Their House: How Does "Nin'i Seiri" Address Cases with Salary Income and Mortgages?

For many salaried individuals in Japan, homeownership represents a significant achievement and a cornerstone of family life. When unsecured debts—such as those from credit cards, personal loans, or even loans taken for family support—become overwhelming, the fear of losing one's home due to these other financial pressures can be immense. Nin'i Seiri (任意整理), or negotiated restructuring, offers a potential out-of-court pathway to manage these unsecured debts while aiming to continue mortgage payments and retain the home. This article explores how this process works for employees in Japan who find themselves in this challenging situation.

The Common Dilemma: Salary, Mortgage, and Mounting Unsecured Debt

The scenario is not uncommon: an employee with a steady salary and a mortgage taken out in better times finds their financial situation strained by other debts. These unsecured obligations might have accumulated due to unforeseen circumstances, a period of reduced income, unexpected expenses, or helping family members. The primary concern for such individuals is often twofold:

1. How to regain control over their unsecured debts.
2. How to do so without jeopardizing their home, which is typically their most significant asset and subject to a long-term mortgage.

Nin'i Seiri can be a viable option if the mortgage is current and the individual's income, after covering mortgage payments and essential living expenses, is sufficient to make structured repayments on the adjusted unsecured debts.

The Initial Consultation: Addressing Fears and Gathering Complex Facts

When a salaried homeowner first consults a lawyer about debt problems, they are often under considerable stress and may have misconceptions about their options.

1. Correcting Misconceptions, Especially Regarding Bankruptcy:
Many debtors harbor a strong aversion to formal bankruptcy (自己破産 - jiko hasan), fearing severe social stigma, loss of employment, or incorrect assumptions like entries on their family register (koseki) or loss of civil rights like voting. A crucial initial step for the lawyer is to provide accurate information and alleviate these fears. For example, Japanese bankruptcy does not result in disenfranchisement, nor is it recorded on the family register or resident certificate (jūminhyō) in a way that is broadly publicly accessible outside of the Official Gazette (Kanpō) publication. Explaining the true implications of bankruptcy versus other options like Nin'i Seiri or individual civil rehabilitation (kojin saisei) helps the debtor make an informed decision. In many instances, the desire to avoid bankruptcy, even if based on misconceptions, strongly motivates the exploration of Nin'i Seiri.

2. Comprehensive Information Gathering:
Debtors in this situation might arrive at the initial consultation with disorganized or incomplete financial documents. The lawyer’s role is to patiently piece together the full picture. This involves:

• Identifying All Debts: This includes the mortgage, car loans, credit card balances, consumer finance loans, and any informal loans (e.g., from family, or debts incurred by a spouse, sometimes even in the debtor's name without their full initial awareness, which can complicate matters).
• Mortgage Details: Understanding the terms of the mortgage, current payment status, and the lender.
• Income Verification: Salary slips, tax withholding statements to confirm net disposable income.
• Household Budget: A detailed breakdown of monthly living expenses to determine realistic repayment capacity for unsecured debts after accounting for mortgage payments and essential costs.
• Asset Review: While the focus is on keeping the home, other assets are also assessed.

Even if the client brings a jumble of unopened demand letters and scattered statements, these can contain vital clues for the lawyer to reconstruct the debt portfolio.

The Nin'i Seiri Strategy for Homeowners with Salary Income

The core strategy in these cases revolves around isolating the mortgage (if payments are current and the debtor wishes to continue them) and negotiating terms for the remaining unsecured debts.

1. Prioritizing and Handling Mortgage Payments:
If the mortgage payments are current and the debtor intends to continue them, the mortgage lender is typically not included in the Nin'i Seiri negotiations for the unsecured debts. The lawyer usually does not send a "Notice of Engagement" (junin tsuchi) to the mortgage lender in such circumstances. This is a strategic decision to avoid disrupting the existing mortgage agreement, which the debtor wishes to maintain. The debtor continues to make mortgage payments directly as per their original contract. The viability of this approach hinges on the affordability of these ongoing mortgage payments alongside any restructured plan for other debts.

2. Issuing the "Notice of Engagement" (Junin Tsuchi) to Unsecured Creditors:
For all other (unsecured) creditors, the lawyer will dispatch the junin tsuchi. This notice formally informs these creditors of the lawyer's representation and, for regulated lenders, legally obligates them to cease direct collection efforts against the debtor. It also typically requests full transaction histories.

3. Debt Recalculation (Hikinaoshi Keisan) and Overpayment Claims (Kabarai-kin):
Once transaction histories for the unsecured debts are received, the lawyer performs the crucial hikinaoshi keisan – recalculating the debt based on the statutory interest rates under Japan's Interest Rate Restriction Act. This can lead to:

• A reduction in the recognized principal amount of unsecured debt.
• The identification of overpayment claims (kabarai-kin) if interest paid historically exceeded legal limits. These recovered overpayments can be a vital source of funds to settle other debts or cover legal costs.

4. Negotiating Repayment Plans for Unsecured Debts:
The lawyer then negotiates with each unsecured creditor individually. The goal is to agree on a repayment plan based on the debtor's disposable income after accounting for their ongoing mortgage payments and essential living expenses.

• Repayment Period: These plans typically span three to five years (36 to 60 monthly installments). Lenders are often reluctant to agree to terms beyond five years in Nin'i Seiri.
• Interest Waiver: A key objective is the waiver of future interest accrual on the restructured unsecured debts.
• Realistic Assessment: The proposed repayment amount must be genuinely sustainable for the debtor over the entire term, considering their fixed mortgage commitments. An overly optimistic plan risks future default.

5. Formalizing Settlement Agreements:
Successful negotiations are documented in written settlement agreements (wakai sho - 和解書 or gōi sho - 合意書) with each unsecured creditor, outlining the new repayment terms.

Handling Specific Assets and Complicating Factors

Several other factors often come into play:

• Car Loans: If the debtor has a car loan, particularly one where the lender retains ownership (shoyūken ryūho - 所有権留保) until the loan is fully paid, this debt needs separate consideration. If the car is essential, payments on this loan might also need to be maintained outside the Nin'i Seiri of other unsecured debts. If car payments cease, the vehicle could be repossessed. The affordability of these payments, alongside the mortgage and restructured unsecured debt payments, must be factored into the overall plan.
• Debts Incurred by Family Members: It's not uncommon for one spouse to take on debts, sometimes even in the other spouse's name or with their unknowing (or reluctant) involvement. Nin'i Seiri for the primary client (e.g., the employee X in Case 2) will focus on debts for which they are legally liable. If the spouse also has significant personal debts, they might need to consider their own debt resolution options.
• Mental Health and Dependency Issues: If debt accumulation is linked to underlying issues like a spouse's shopping or gambling dependency, possibly exacerbated by mental health conditions such as depression, this adds another layer of complexity. While Nin'i Seiri addresses the financial aspect, these underlying issues also need to be addressed for long-term stability. Such circumstances (e.g., gambling) might also be grounds for non-discharge in bankruptcy, making Nin'i Seiri a more appealing route if it's financially viable.
• The "Blacklist" (Credit Information Impact): The lawyer must clearly explain that engaging in Nin'i Seiri will result in adverse information being recorded with credit information bureaus (JICC, CIC, JBA/KSC). This will make it difficult to obtain new credit (cards, loans) for approximately 5 to 7 years, sometimes longer. This is an unavoidable consequence but is often weighed against the benefits of debt resolution.
• "Consolidation Loans" (おまとめローン - Omatome Rōn): Some debtors might inquire about commercial debt consolidation loans as an alternative. However, these loans themselves come with interest, may require collateral, and debtors already in financial distress may not qualify or find the terms unfavorable. In Case 2, the debtor had unsuccessfully applied for such a loan before seeking legal counsel.

Advantages of Nin'i Seiri for Salaried Homeowners

For salaried individuals wishing to protect their homes, Nin'i Seiri offers distinct advantages over more drastic measures, provided the circumstances are suitable:

• Home Retention: The primary benefit is the possibility of keeping one's mortgaged home by continuing regular mortgage payments while restructuring other debts.
• Privacy: As an out-of-court procedure, it avoids public records like the Official Gazette, which is a concern for many.
• Avoidance of Bankruptcy Stigma: Many debtors have a strong psychological preference for avoiding the label of "bankrupt."
• No Restrictions on Most Employment/Licenses: It generally doesn't impact professional qualifications in the way bankruptcy might for certain specific roles.
• Tailored Solutions: Negotiation allows for more individualized repayment plans with unsecured creditors compared to the standardized approaches in some court procedures.

Limitations and Risks

Despite its appeal, Nin'i Seiri is not a panacea and carries limitations:

• Dependence on Creditor Cooperation: Unsecured creditors are not legally obligated to agree to a Nin'i Seiri proposal. If a major unsecured creditor refuses reasonable terms, the plan may not be viable.
• Limited Debt Reduction: Principal reduction on unsecured debts is mainly achieved through statutory interest recalculation (hikinaoshi keisan). Significant write-offs of correctly calculated principal are rare.
• Overall Affordability: The combined burden of ongoing mortgage payments and the restructured unsecured debt payments must still be affordable. If the unsecured debt load is too high even after interest recalculation, Nin'i Seiri may not be sustainable.
• Long Repayment Terms: Repaying unsecured debts over 3-5 years, on top of a mortgage, is a long-term commitment. Changes in income or expenses during this period can lead to default on the Nin'i Seiri agreements.
• Potential for Future Insolvency: If Nin'i Seiri fails, the debtor might eventually need to consider individual civil rehabilitation (which has more robust home-saving provisions) or bankruptcy, potentially losing the home if the mortgage then becomes unsustainable.

The Lawyer's Role: Navigator and Negotiator

The lawyer's role in these cases is multifaceted:

• Educator and Counselor: Explaining complex legal options, correcting misconceptions, and managing client anxieties.
• Investigator: Diligently gathering and analyzing financial information, even when presented in a disorganized manner.
• Calculator: Performing accurate hikinaoshi keisan to determine legal debt amounts and identify overpayments.
• Strategist: Determining the best approach to each creditor and the overall restructuring plan.
• Negotiator: Engaging with unsecured creditors to achieve favorable settlement terms.
• Drafter: Formalizing agreements in legally sound documents.

Patience and thoroughness are key, as illustrated in scenarios where initial consultations reveal a complex web of debts, spousal involvement, and a lack of organized documentation.

Conclusion

For salaried employees in Japan burdened by unsecured debt but determined to keep their mortgaged homes, Nin'i Seiri can offer a viable path to financial stability. It allows for the continuation of mortgage payments while providing a structured, albeit informal, way to address other consumer debts through negotiation, interest recalculation, and potentially the leveraging of overpayment claims. Success hinges on a realistic assessment of the debtor's repayment capacity after accounting for mortgage obligations, the cooperation of unsecured creditors, and the skilled guidance of a legal professional. While not without its risks and limitations, Nin'i Seiri, when carefully planned and executed, can provide a crucial lifeline for homeowners navigating financial distress.