Personal Debt Restructuring in Japan: What are the Options of Bankruptcy, Civil Rehabilitation, and Voluntary Arrangements for Individuals?

Japanese Attorney at Law - Bengoshi L.L.

• 11 min read

Facing overwhelming debt can be a profoundly stressful experience for any individual. In Japan, as in other developed economies, legal frameworks exist to provide relief for individuals struggling with financial obligations they can no longer meet. The primary avenues for personal debt restructuring include voluntary arrangements with creditors (nin'i seiri), personal civil rehabilitation (kojin saisei), and personal bankruptcy (jiko hasan). Each of these procedures offers a different path towards financial fresh start, with distinct processes, requirements, and consequences. This article provides an overview of these key options available for individuals in Japan seeking to address unsustainable debt.

I. Initial Steps in Addressing Personal Debt Issues in Japan

When an individual finds themselves unable to manage their debt payments, the first steps taken are crucial for setting the stage for a viable solution.

The importance of seeking timely advice from a legal professional, typically a lawyer (bengoshi), cannot be overstated. During the initial consultation, the lawyer will:

  • Conduct a detailed interview to understand the debtor's financial situation, including income, expenses, assets, and the nature and extent of their debts.
  • Request the debtor to gather all relevant documentation, such as loan agreements, credit card statements, payment records, and proof of income and assets.
  • Provide an initial assessment of the situation and explain the available debt restructuring options.

B. Attorney's Notice of Undertaking (受任通知 - Junin Tsūchi)

Once a lawyer formally accepts the case (undertakes the representation), they will typically send a "notice of undertaking" (junin tsūchi) to each of the creditors. This notice informs the creditors that the lawyer is now representing the debtor in relation to their debt.

  • Effect of the Notice: A significant immediate effect of this notice, particularly for creditors who are money lenders, is the cessation of direct collection efforts against the debtor. Article 21, Paragraph 1, Item 9 of the Money Lending Business Act prohibits money lenders from engaging in collection activities (such as demands for payment) against a debtor once they have received such a notice from the debtor's lawyer, without just cause.
  • Credit Information: It's important for debtors to understand that once a lawyer intervenes for debt restructuring, this fact is likely to be registered with credit information bureaus. This can impact their ability to obtain new loans or credit cards for a certain period.

C. Investigation and Confirmation of Debts

After sending the notice of undertaking, the lawyer will work to accurately determine the total amount of legally enforceable debt.

  • Requesting Transaction Histories: The lawyer will request detailed transaction histories from each creditor.
  • Recalculation under the Interest Restriction Act (利息制限法 - Risoku Seigen Hō): For loans from consumer finance companies or other lenders that may have charged interest rates exceeding the statutory limits set by the Interest Restriction Act, the lawyer will recalculate the outstanding balance based on these legal rates. This recalculation can sometimes reveal that the legally owed debt is lower than the amount claimed by the creditor, or even that an overpayment (kabaraikin - 過払金) has occurred. If an overpayment is identified, a claim for its refund can be pursued.
  • Accurate Debt Ascertainment: This process is crucial for determining the true extent of the debtor's liabilities, which in turn informs the most appropriate restructuring strategy.

D. Determining the Appropriate Restructuring Policy (債務整理方針の確定)

Based on the confirmed debt amounts, the debtor's income, assets, living expenses (often assessed by having the debtor keep a detailed household budget - 家計簿 kakeibo), future financial prospects, and personal preferences, the lawyer and debtor will collaboratively decide on the most suitable debt restructuring policy. This involves a thorough discussion of the pros and cons of each available option. It is important to dispel any misconceptions or stigmas the debtor might have about certain procedures, like bankruptcy, and to select the path that offers the best chance for a sustainable financial recovery.

II. Voluntary Arrangements (任意整理 - Nin'i Seiri)

Voluntary arrangement, or nin'i seiri, is an out-of-court procedure where the debtor's lawyer negotiates directly with each creditor to reach a settlement on the repayment of debts.

A. Overview and Process

  • This procedure does not involve the courts directly.
  • The lawyer aims to agree on a revised repayment plan, which might include a reduction in the total amount owed (primarily through the waiver of future interest and recalculation of past interest under the Interest Restriction Act) and a schedule of affordable installment payments.
  • If an agreement is reached with a creditor, it is typically formalized in a settlement agreement (和解契約 - wakai keiyaku).

B. Negotiation with Creditors

  • Basis for Negotiation: Negotiations are generally based on the principal amount recalculated according to the Interest Restriction Act. The aim is usually to stop the accrual of future interest and late charges. Practical guidelines, such as the "Tokyo Three Bar Associations' Uniform Standards for Credit and Consumer Loan Debt Processing" (discussed further below), often inform the negotiation stance, advocating for repayment of the recalculated principal over a manageable period without future interest.
  • Repayment Period: Repayment plans under nin'i seiri typically span three to five years.
  • Lump-Sum Settlements: If the debtor has access to some funds (e.g., from the recovery of an overpayment from another creditor), it may be possible to negotiate a lump-sum settlement for a reduced principal amount with some creditors.
  • Creditor Discretion: A key characteristic of nin'i seiri is that it relies on the voluntary agreement of each creditor. Creditors are not legally obligated to accept a settlement proposal, and some may be less willing to compromise than others, especially if they hold security or have a strong legal position.

C. Advantages and Disadvantages

  • Advantages:
    • Generally less complex and less public than court-supervised procedures.
    • The debtor can often choose which debts to include in the negotiation (e.g., they might choose to continue paying a mortgage to keep their home or a car loan if the car is essential, while restructuring unsecured debts). This is particularly useful if there are guarantors for certain debts whom the debtor wishes to protect.
    • The debtor's name is not published in the Official Gazette (官報 - Kanpō), which is a public record of bankruptcy and civil rehabilitation proceedings.
  • Disadvantages:
    • Relies on creditor consent; not all creditors may agree to the proposed terms.
    • The extent of debt reduction is usually less significant than what might be achievable through bankruptcy or civil rehabilitation.
    • It does not provide a legal discharge of debt in the same way as bankruptcy.

D. The "Tokyo Three Bar Associations' Uniform Standards for Credit and Consumer Loan Debt Processing" (東京三弁護士会統一基準)

These standards, first adopted in 1996 and subsequently revised, provide important guidelines for lawyers handling debt restructuring cases, particularly those involving consumer loans and credit card debt.

  • Purpose: To ensure consistent, fair, and effective debt resolution, promote creditor cooperation, and protect debtors from exploitative practices.
  • Key Principles:
    • Full Disclosure of Transaction History: Lawyers should demand complete transaction records from creditors.
    • Recalculation under Interest Restriction Act: Debt amounts should be recalculated based on the legally permissible interest rates to determine the correct principal.
    • Settlement Proposals without Future Interest/Damages: When proposing a settlement, accrued default interest and future interest should generally not be added to the recalculated principal.
    • Specific Guidelines for Certain Claims: The standards also address how to handle specific situations, such as claims subrogated by credit companies (ensuring only the actual product price, minus fees, is the basis for recalculation) and claims pursued by affiliated guarantee companies (aiming to reduce the claim to the original loan amount). They also advise scrutiny of prior settlements potentially reached via non-attorney debt arrangers or lawyers with improper ties to such entities.

These standards, while not legally binding on creditors, represent a benchmark for good practice and are influential in negotiations.

III. Personal Civil Rehabilitation (個人再生 - Kojin Saisei)

Personal civil rehabilitation, governed by the Civil Rehabilitation Act (Minji Saisei Hō), is a court-supervised procedure that allows individuals with regular income who are facing financial distress to significantly reduce their unsecured debts and repay the reduced amount over a set period, typically three to five years, according to an approved rehabilitation plan (再生計画 - saisei keikaku). A key feature is the potential for debtors to retain their homes if they have a mortgage, through a special home loan clause (住宅ローン特則 - jūtaku rōn tokusoku).

A. Types of Personal Rehabilitation Procedures

There are two main types:

  1. Small-Scale Individual Rehabilitation (小規模個人再生 - Shōkibo Kojin Saisei):
    This is available to individuals with unsecured debts not exceeding ¥50 million, who are expected to have future, continuous, or repeated income.
    • A key requirement for plan approval is a form of "negative consent" from creditors: the plan is deemed approved unless creditors holding more than half of the total unsecured debt amount, or more than half in number of the voting creditors, object to it (Civil Rehabilitation Act, Article 230, Paragraph 6).
  2. Salary Earners' Rehabilitation (給与所得者等再生 - Kyūyo Shotokusha tō Saisei):
    This is available to individuals whose income is primarily from salary or similar regular sources and whose income fluctuations are likely to be small.
    • This procedure does not require creditor voting for plan approval.
    • However, the repayment amount under the plan must be no less than the total amount of the debtor's disposable income for two years (Civil Rehabilitation Act, Article 241, Paragraph 2, Item 7). This "disposable income requirement" can sometimes result in higher repayment amounts than under the small-scale procedure. Consequently, even salaried individuals often opt for the small-scale procedure if they meet its criteria.

B. Key Features and Process

  • Filing a Petition: The debtor files a petition with the District Court.
  • Commencement Order: If the requirements are met, the court issues an order commencing the rehabilitation proceedings.
  • Submission of Debts and Assets: The debtor submits lists of creditors, debts, and assets. Creditors also file proofs of claim.
  • Formulation of a Rehabilitation Plan: The debtor, often with the assistance of their lawyer or a court-appointed individual rehabilitation commissioner (個人再生委員 - kojin saisei iin), prepares a rehabilitation plan. This plan outlines how much will be repaid to creditors and over what period.
  • Minimum Repayment Amount: The plan must provide for repayments that meet certain minimums, generally the greater of a statutory percentage of the total debt (e.g., 20% for debts between ¥5 million and ¥15 million, up to a maximum repayment of ¥3 million for debts up to ¥30 million) or the "liquidation value" of the debtor's assets (meaning creditors must receive at least as much as they would if the debtor went into bankruptcy).
  • Court Approval (Plan Confirmation): The court will confirm (approve) the plan if it meets all statutory requirements and, in the case of small-scale rehabilitation, receives the necessary level of creditor acceptance.
  • Repayment: The debtor makes payments according to the confirmed plan. Successful completion leads to a discharge of the remaining portion of the restructured debts.

C. Advantages and Disadvantages

  • Advantages:
    • Allows for significant debt reduction while potentially retaining assets like a home (if the home loan special clause is used).
    • Does not result in the same occupational restrictions as bankruptcy.
  • Disadvantages:
    • The procedure can be complex and take longer than nin'i seiri.
    • Requires stable income to make plan payments.
    • The debtor's name is published in the Official Gazette.

IV. Personal Bankruptcy (自己破産 - Jiko Hasan)

Personal bankruptcy, or jiko hasan, governed by the Bankruptcy Act (Hasan Hō), is a court-supervised procedure for individuals who are "unable to pay their debts generally and continuously as they become due" (支払不能 - shiharai funō – the state of insolvency). Its primary goal is to provide the debtor with a discharge (menseki - 免責) from their debts, allowing for a financial fresh start.

A. Bankruptcy Proceedings

  • Filing a Petition: The debtor files a petition for bankruptcy with the District Court.
  • Commencement Order: If the court finds the debtor to be insolvent, it issues an order commencing bankruptcy proceedings.
  • Appointment of a Trustee (破産管財人 - Hasan Kanzainin): In cases where the debtor has significant assets to be liquidated and distributed to creditors (a "trustee case" - 管財事件 kanzai jiken), the court appoints a bankruptcy trustee (usually a lawyer) to administer the estate. The trustee investigates the debtor's assets and liabilities, liquidates non-exempt assets, and distributes the proceeds to creditors.
  • Simultaneous Abolition (同時廃止 - Dōji Haishi): If the debtor has minimal assets insufficient to cover the costs of trustee administration, the court may issue an order for "simultaneous abolition," where bankruptcy proceedings are commenced and immediately concluded without the appointment of a trustee.
  • Treatment of Overpayment Claims: If the debtor has an unrecovered overpayment claim against a creditor at the time of filing, this claim becomes an asset of the bankruptcy estate to be collected by the trustee (in a trustee case).

B. Discharge of Debts (免責 - Menseki)

The ultimate goal for most individual debtors in bankruptcy is to obtain a discharge order from the court.

  • Grounds for Non-Discharge (免責不許可事由 - Menseki Fukyoka Jiyū): The Bankruptcy Act lists several grounds upon which a discharge may be denied (Article 252, Paragraph 1). These include, for example, significant wastage of assets or gambling leading to debt, fraudulently obtaining credit, or failing to cooperate with the bankruptcy proceedings.
  • Discretionary Discharge (裁量免責 - Sairyō Menseki): Even if grounds for non-discharge exist, the court has the discretion to grant a discharge if it determines that, considering all circumstances, it is appropriate to do so (Article 252, Paragraph 2). This discretionary discharge is often granted if the debtor demonstrates remorse and cooperates fully with the proceedings.
  • Non-Dischargeable Debts (非免責債権 - Hi-Menseki Saiken): Certain types of debts are not dischargeable in bankruptcy, such as taxes, child support, and damages resulting from malicious torts or intentional harm.

C. Advantages and Disadvantages

  • Advantages:
    • Offers the potential for a complete discharge from most debts.
  • Disadvantages:
    • Results in the loss of most significant assets (though certain essential assets are exempt).
    • Imposes temporary restrictions on certain occupations and qualifications.
    • The debtor's name is published in the Official Gazette.
    • The fact of bankruptcy is recorded in credit information files, impacting future creditworthiness for a significant period.

V. Regulations Concerning Attorney Conduct in Debt Restructuring Cases

It's noteworthy that the Japan Federation of Bar Associations (JFBA) has established "Regulations Governing Discipline in the Handling of Debt Restructuring Cases" (債務整理事件処理の規律を定める規程 - Saimu Seiri Jiken Shori no Kiritsu o Sadameru Kitei), effective from April 1, 2011.

  • Purpose: These regulations aim to ensure that lawyers act with propriety when soliciting, accepting, and handling debt restructuring cases. A particular focus is on ensuring reasonable attorney fees, especially in cases involving claims for the recovery of overpayments (kabaraikin), thereby maintaining public trust in the legal profession and protecting the interests of clients. This reflects an effort to address past concerns about overly aggressive solicitation or excessive fees in this area of practice.

VI. Choosing the Right Procedure: A Comparative Perspective

The choice among nin'i seiri, personal civil rehabilitation, and personal bankruptcy depends heavily on the individual's specific circumstances. Key factors include:

  • Total Amount of Debt: Very high debt levels may make nin'i seiri or even rehabilitation impractical.
  • Income Stability and Amount: Rehabilitation and effective nin'i seiri require a stable income source to fund repayments. Bankruptcy may be the only option for those with little or no income.
  • Assets: The desire to retain specific assets, particularly a home, is a major driver towards civil rehabilitation (using the home loan special clause) or nin'i seiri (if mortgage payments can be maintained separately). Bankruptcy generally involves the liquidation of significant assets.
  • Existence of Guarantors: Nin'i seiri allows for selective negotiation, potentially excluding debts with guarantors whom the debtor wishes to protect from claims. Court-supervised procedures generally affect all creditors.
  • Grounds for Non-Dischargeability in Bankruptcy: If significant grounds for non-discharge exist, and discretionary discharge seems unlikely, rehabilitation might be a more viable option.
  • Client's Preference and Psychological Factors: Some debtors have a strong aversion to the perceived stigma of bankruptcy, even if it is financially the most rational option.

A lawyer will carefully weigh these factors with the client to determine the most advantageous path forward.

Conclusion

Japan offers several distinct legal avenues for individuals struggling with overwhelming debt. Voluntary arrangements (nin'i seiri) provide an out-of-court negotiation process, personal civil rehabilitation (kojin saisei) allows for significant debt reduction with a structured repayment plan and the possibility of retaining a home, and personal bankruptcy (jiko hasan) offers a discharge from most debts for those truly unable to pay. Each option has its own set of procedures, benefits, and drawbacks. Making an informed decision requires a comprehensive understanding of one's financial situation and the legal implications of each path. Early consultation with an experienced lawyer is crucial to navigating these complex processes and achieving the most sustainable financial fresh start.