My Japanese Business Partner is Facing Financial Difficulties: What Initial Steps Should a Lawyer Take in a Japanese Debt Consultation?

When a business partner, whether an individual or a corporation, faces financial difficulties in Japan, understanding the initial steps a Japanese lawyer takes during a debt consultation is crucial. This initial phase is not merely about gathering facts; it's a critical juncture that sets the stage for the entire debt restructuring process, aiming to provide relief to the debtor while navigating a complex legal and financial landscape. This article delves into the meticulous approach Japanese legal professionals adopt from the moment a distressed debtor seeks their counsel.

The Lawyer's Approach and Ethical Framework

Japanese lawyers approached for debt-related issues generally operate with a mindset geared towards assisting the debtor. The prevailing professional understanding is that individuals or entities seeking help for overwhelming debt are often in dire straits and are looking for a viable path to financial recovery. Therefore, the lawyer's initial posture is typically one of receptiveness to taking on the case, barring conflicts of interest or other disqualifying factors.

Confidentiality is paramount from the outset. The lawyer will assure the potential client that all information shared will be kept strictly confidential, a cornerstone of the lawyer-client relationship. Simultaneously, the lawyer will conduct an internal check for any conflicts of interest that might preclude them from representing the debtor.

Comprehensive Information Gathering: The Cornerstone of the Initial Consultation (事情聴取 - Jijō Chōshu)

The first meeting is heavily focused on detailed information gathering (jijō chōshu). Lawyers in Japan understand that debtors may not arrive with perfectly organized documents, especially during their first consultation when they are often under considerable stress. The objective is to paint a comprehensive picture of the debtor's situation. This involves a systematic inquiry into several key areas:

1. Debtor's Profile (相談者の人的属性 - Sōdansha no Jinteki Zokusei)

Understanding the debtor's personal and professional background is essential.

• For Individuals:
  • Occupation and Income: Current job, employment status (full-time, part-time, self-employed), length of service, net monthly income, bonuses, and any other sources of revenue. For business owners, details of the business are explored.
  • Family Structure: Marital status, number of dependents, cohabiting family members and their income (if any), and financial support provided to or received from family members.
  • Cause of Indebtedness: A crucial inquiry, as the reasons behind the debt (e.g., business failure, living expenses, gambling, medical bills, acting as a guarantor) can significantly influence the choice of debt restructuring procedure and eligibility for discharge in bankruptcy. For example, significant debt from gambling or lavish spending can be grounds for non-dischargeability in personal bankruptcy (破産法第252条1項4号 - Hasan Hō Dai 252-jō 1-kō 4-gō).
• For Corporations:
  • Business Overview: Nature of the business, industry, operational history, number of employees, and management structure.
  • Reasons for Financial Distress: Market changes, mismanagement, loss of key customers, etc.

2. Debtor's Assets and Income (相談者の資産・収入 - Sōdansha no Shisan/Shūnyū)

A thorough inventory of the debtor's assets and all income sources is compiled.

• Liquid Assets: Cash on hand, bank account details (balances, types of accounts).
• Real Estate: Ownership of residential or commercial properties, including details like location, mortgages, and co-ownership.
• Vehicles: Cars, motorcycles, or other vehicles, along with any outstanding loans or security interests.
• Financial Assets: Stocks, bonds, investment trusts, and other securities.
• Insurance Policies: Details of life insurance policies, particularly the cash surrender value, which can be a significant asset.
• Receivables: For businesses, outstanding accounts receivable; for individuals, any loans made to others.
• Retirement Benefits: Expected amount of retirement allowance, if applicable, as a portion of this can be considered an asset.
• Other Valuables: Any other items of significant value (e.g., art, jewelry).
  Lawyers emphasize the importance of full disclosure to prevent accusations of asset concealment, especially if formal bankruptcy proceedings are contemplated.

3. Debtor's Liabilities (相談者の負債状況 - Sōdansha no Fusai Jōkyō)

A meticulous listing and understanding of all debts is critical.

• Creditor List (債権者一覧表 - Saikensha Ichiranhyō): The lawyer will usually ask the debtor to complete a detailed creditor list. This includes:
  • Creditor's name and contact information.
  • Date of initial borrowing and last transaction.
  • Original loan amount and current outstanding balance.
  • Purpose of the loan or nature of the debt.
  • Existence of any collateral or security.
  • Details of any guarantors or co-signers.
• Undisclosed Creditors (申告漏れの債権者 - Shinkoku-more no Saikensha): The lawyer will probe for any unlisted creditors, such as loans from family members, friends, or, critically, unregulated lenders (often referred to as yamikin or loan sharks). Failing to declare all creditors can have severe consequences, particularly in bankruptcy, where it can be grounds for denial of discharge (破産法第252条1項7号 - Hasan Hō Dai 252-jō 1-kō 7-gō).
• Possibility of Overpayment Claims (過払金発生の見極め - Kabarai-kin Hassei no Mikiwame): Japanese law has strict limits on interest rates. For loans taken out before amendments to lending laws were fully implemented (around June 2010), many lenders charged interest exceeding these statutory limits. Lawyers will inquire about the start date of borrowing and the continuity of transactions to assess the likelihood of overpayment claims (kabarai-kin). If such claims exist, they can offset existing debts or even result in a refund. Lawyers are usually cautious about giving definitive statements on overpayments at the initial stage, pending full review of transaction histories. This also applies to debts that have already been fully repaid, as overpayments may still be reclaimable within the statute of limitations.
• Debt Status: Current status of each debt, such as whether it's in default, if there are ongoing collection efforts by creditors (督促 - tokusoku), or if any payment due dates are imminent.

Essential Documentation for Initial Assessment

To facilitate an accurate assessment, the lawyer will request the debtor to provide, or help them prepare, several key documents, often even before or during the first meeting:

• Consultation Card (相談カード - Sōdan Kādo): A form to gather basic personal and financial information from the debtor.
• Creditor List (債権者一覧表 - Saikensha Ichiranhyō): As detailed above, a comprehensive list of all creditors and debts.
• Statement of Household Income and Expenditures (家計全体の状況 - Kakei Zentai no Jōkyō): A monthly budget, typically for the last one or two months, showing all income and expenses for the entire household. This helps assess repayment capacity.

In addition to these summary documents, the lawyer will usually request the debtor to bring any relevant supporting documentation they possess:

• Copies of all bank passbooks (預貯金通帳 - yochokin tsūchō) for at least the past two years.
• All credit cards, ATM cards, and loan cards.
• Income verification documents (e.g., salary slips - 給与明細 - kyūyo meisai, withholding tax statements - 源泉徴収票 - gensen chōshū-hyō, tax returns - 確定申告書 - kakutei shinkoku-sho).
• Asset-related documents (e.g., real estate registration certificates - 不動産登記事項証明書 - fudōsan tōki jikō shōmei-sho, vehicle inspection certificates - 車検証 - shakenshō, insurance policies - 保険証券 - hoken shōken).
• Liability-related documents (e.g., loan agreements - 契約書 - keiyakusho, invoices/statements - 請求書 - seikyūsho, demand letters from creditors - 督促状 - tokusokujō, any documents from courts such as summons or judgments - 裁判所からの送達書類 - saibansho kara no sōtatsu shorui).

Initial Advice and Critical Instructions to the Debtor

Once a preliminary understanding of the debtor's situation is formed, the lawyer provides crucial initial advice and instructions:

1. Alleviating Immediate Distress and Preventing Further Complications:
   • The lawyer will often explain that their formal engagement will typically halt direct collection efforts from most legitimate lenders (especially those subject to the Money Lending Business Act - 貸金業法 - Kashikingyō Hō). This provides immediate psychological relief.
   • The debtor is strictly instructed not to make any new borrowings, especially from loan sharks (yamikin).
   • Crucially, the debtor is advised to stop making payments to any existing creditors. This is to prevent "preferential payments" (偏頗弁済 - henpa bensai), where one creditor is favored over others, which can become a significant issue if the debtor later files for bankruptcy (it can be subject to avoidance by a trustee or affect discharge).
   • However, payments for essential living expenses like utilities, rent (if necessary to maintain housing), and food are generally permissible.
2. Overview of Potential Debt Restructuring Procedures:
   • The lawyer will provide a brief, understandable outline of the main debt restructuring options available in Japan, such as negotiated restructuring (Nin'i Seiri), personal bankruptcy (Jiko Hasan), and individual civil rehabilitation (Kojin Saisei).
   • The general merits and demerits of each applicable procedure will be touched upon.
   • The potential for overpayment claims (kabarai-kin) and how their recovery might influence the choice of procedure is also often mentioned.
3. Implications of Lawyer's Intervention:
   • Cessation of Direct Collection: As mentioned, the lawyer's "Notice of Engagement" (junin tsuchi) to creditors generally stops direct contact and collection attempts by lenders regulated under the Money Lending Business Act (貸金業法第21条1項9号 - Kashikingyō Hō Dai 21-jō 1-kō 9-gō).
   • Credit Information Reporting ("Blacklisting"): The lawyer will explain that engaging them for debt restructuring will likely result in an "accident information" (事故情報 - jiko jōhō) entry with credit information bureaus (信用情報機関 - shin'yō jōhō kikan). This is often referred to as being "blacklisted" and will make it difficult to obtain new loans or credit cards for approximately 5 to 10 years.
4. Handling Bank Accounts and Potential Set-offs:
   • If the debtor has loans from a bank where they also hold deposit accounts, the lawyer will warn them that the bank might freeze these accounts and exercise a right of set-off (相殺 - sōsai) against the deposits once it receives the Notice of Engagement.
   • Therefore, the debtor is typically advised to withdraw funds from such accounts before the notice is sent.
   • They are also advised to change any automatic salary deposit arrangements or direct debits for utilities if they are linked to accounts at banks where they also have debts.
5. Explanation of Legal Fees and Other Costs:
   • The lawyer must clearly explain the fees involved, including their own remuneration structure (retainer, success fees, etc.) and any court costs or other disbursements.
   • For debtors with very limited means, the possibility of using the Japan Legal Support Center (法テラス - Houterasu) for legal aid may be discussed. Lawyers must be registered with Houterasu to offer services under this scheme.

Preliminary Assessment for a Path Forward (方針の選択 - Hōshin no Sentaku)

While a definitive strategy is rarely finalized in the very first meeting, the lawyer will make a preliminary assessment of the most viable options. This initial judgment is based on the information gathered.

• Accurate Debt Ascertainment: The lawyer will explain that precise figures for total debt and potential overpayments can only be determined after receiving and meticulously reviewing the transaction histories from all creditors and performing the hikinaoshi keisan (recalculation under statutory interest rates).
• Repayment Capacity vs. Total Debt: A key initial calculation involves comparing the debtor's likely repayment capacity (net monthly disposable income) with the recalculated total debt. A common benchmark for the feasibility of a negotiated restructuring or individual civil rehabilitation is whether the debt can be repaid within 36 to 60 months (3 to 5 years). If this appears impossible, bankruptcy becomes a more probable route. For instance, if a debtor can afford ¥50,000 per month, a repayment plan over 3 years would cover ¥1.8 million. Debts significantly exceeding this would point towards other solutions.
• Debtor's Preferences: The debtor's personal preferences are also critical. For example, a strong desire to retain a mortgaged home might steer the discussion towards individual civil rehabilitation with a residential mortgage special clause, even if bankruptcy might otherwise seem simpler. Similarly, concerns about restrictions on certain professional qualifications might make bankruptcy a less desirable option if alternatives exist.

The lawyer will often present a few potential scenarios and explain that the final strategy will be determined after more detailed investigation, particularly the collection and analysis of all transaction histories.

Engagement and Immediate Next Steps

If the debtor decides to proceed and the lawyer agrees to take the case, a formal engagement agreement (委任契約書 - inin keiyakusho) is signed, and the debtor provides a power of attorney (委任状 - ininjō) to the lawyer. The terms of the lawyer's fees, including any payment plans, will be confirmed.

The lawyer will then instruct the client on any further documents or information needed and will prepare to send the crucial "Notice of Engagement" (junin tsuchi) to all known creditors. This notice formally announces the lawyer's representation and typically requests a freeze on direct collection activities and the disclosure of full transaction records.

Conclusion

The initial consultation and subsequent engagement with a Japanese lawyer in a debt restructuring matter are intensive and meticulously structured. The lawyer's primary tasks are to accurately diagnose the debtor's financial health, understand their personal circumstances and objectives, explain the complex legal framework in an accessible manner, and provide immediate, practical advice to prevent the situation from worsening. This foundational work is essential for navigating the Japanese debt resolution system effectively and paving the way for the most appropriate legal remedy, whether it be a negotiated settlement, a rehabilitation plan, or, if necessary, a fresh start through bankruptcy. For any party involved with a Japanese entity or individual facing financial distress, understanding this initial legal process provides valuable insight into how such situations are approached and managed within Japan's legal system.