Understanding "Expansion of Free Assets" (Jiyu Zaisan Kakucho) in Japanese Individual Bankruptcies

When an individual in Japan files for personal bankruptcy (自己破産 - jiko hasan), the primary goals are to provide relief from overwhelming debt and to offer a "fresh start" (経済的再生 - keizaiteki saisei, economic rehabilitation). A key component in achieving this fresh start is the determination of which assets the debtor can retain, free from the claims of creditors. Japanese bankruptcy law not only exempts certain essential assets automatically but also provides a distinct mechanism known as the "Expansion of Free Assets" (自由財産の範囲の拡張 - jiyū zaisan no han'i no kakuchō). This system allows the court, with input from the bankruptcy trustee, to permit the debtor to keep additional assets beyond the basic exemptions if deemed necessary for their rehabilitation.

"Free Assets" (自由財産 - Jiyū Zaisan): The Starting Point

Before delving into the expansion mechanism, it's important to understand what constitutes "free assets" that are inherently outside the bankruptcy estate (破産財団 - hasan zaidan) and thus not subject to liquidation by the trustee. Under Article 34, Paragraph 3 of the Japanese Bankruptcy Act (破産法 - Hasan Hō), these "original free assets" (本来的自由財産 - honrai-teki jiyū zaisan) primarily include:

1. Cash up to 990,000 Yen: An individual debtor can retain cash on hand up to a total of 990,000 Japanese Yen. This amount is intended to cover immediate living expenses for the debtor and their dependents for a few months (often rationalized as three months' living expenses based on a standard household).
2. Seizure-Prohibited Property (差押禁止財産 - sashiosae kinshi zaisan): This category refers to assets that are exempt from seizure under the Civil Execution Act (民事執行法 - Minji Shikkō Hō) and other specific statutes due to their essential nature for the debtor's life or livelihood. Common examples include:
   • Essential clothing, bedding, furniture, and kitchen utensils (Civil Execution Act, Art. 131, Item 1).
   • Food and fuel necessary for one month's living (Civil Execution Act, Art. 131, Item 2).
   • Professional instruments and tools indispensable for the debtor's occupation (Civil Execution Act, Art. 131, Item 6), though with value limitations.
   • Certain social security benefits, pensions, and a significant portion of wages or retirement allowances (e.g., three-fourths of wage and retirement allowance claims are generally protected from seizure under Civil Execution Act, Art. 152).
   • Specific benefits like small-scale enterprise mutual aid (小規模企業共済 - shōkibo kigyō kyōsai) payments or certain life insurance payments under older policies.

Additionally, property acquired by the debtor after the commencement of bankruptcy proceedings (新得財産 - shintoku zaisan, newly acquired property) is generally not part of the bankruptcy estate due to the "fixation principle" (固定主義 - kotei shugi), and assets that the trustee formally abandons from the estate also become free assets.

The System of "Expansion of Free Assets" (自由財産の範囲の拡張)

While the "original free assets" provide a baseline, Japanese law recognizes that these might not always be sufficient for an individual's effective rehabilitation. Therefore, Article 34, Paragraph 4 of the Bankruptcy Act establishes a system for the "expansion of the scope of free assets."

This provision empowers the bankruptcy court (裁判所 - saibansho) to issue an order, either upon a petition from the debtor or ex officio (though debtor petitions are the norm), to allow the debtor to retain certain assets that would otherwise be part of the bankruptcy estate.

The purpose of this expansion is explicitly tied to the debtor's ability to maintain a livelihood and achieve economic rehabilitation. It's a discretionary system designed to provide flexibility and ensure that the bankruptcy process doesn't leave the debtor in a state of destitution, hindering their ability to become a productive member of society again.

The Process for Expanding Free Assets

The procedure for seeking an expansion of free assets involves several key players and steps:

1. Debtor's Petition (拡張の申立て - kakuchō no mōshitate): Typically, the debtor, through their legal counsel, files a petition with the bankruptcy court requesting the expansion. This petition will specify the assets they wish to retain and provide reasons why these assets are necessary for their fresh start. In practice, many bankruptcy petition forms used by courts include sections where the debtor can indicate which assets they are requesting be treated as expanded free assets.
2. Trustee's Investigation and Opinion (管財人の意見 - kanzainin no iken): Once a bankruptcy trustee is appointed, they have a statutory duty to investigate the debtor's circumstances and provide an opinion to the court regarding the appropriateness of the requested expansion (Bankruptcy Act, Article 34, Paragraph 5). The trustee will consider:
   • The debtor's overall financial situation, including income, expenses, and family dependents.
   • The nature and value of the assets for which expansion is sought.
   • The extent of the debtor's "original free assets."
   • The potential impact on distributions to creditors if the expansion is granted.
     The trustee's opinion is highly influential, though not absolutely binding on the court.
3. Court's Decision (裁判所の決定 - saibansho no kettei): The bankruptcy court makes the final determination. According to Article 34, Paragraph 4, the court considers:
   • The debtor's living conditions (生活の状況 - seikatsu no jōkyō).
   • The type and value of the original free assets already held by the debtor.
   • The debtor's prospects for earning income (収入を得る見込み - shūnyū o eru mikomi).
   • Other relevant circumstances.
     If the trustee recommends the expansion and it falls within established court guidelines (see below), the court's approval may be given relatively quickly, sometimes implicitly through the trustee proceeding as if the expansion is granted. If the request is contentious or falls outside typical guidelines, the court will issue a formal written decision.
4. Timing of the Decision: The law stipulates that the decision on expansion should generally be made between the time the bankruptcy commencement order is issued and one month after that order becomes final and binding. However, this period can be extended if necessary. In practice, trustees aim to make recommendations on straightforward expansion requests early in the proceedings to provide clarity to the debtor.
5. Debtor's Right to Appeal: If the court denies or limits the requested expansion, the debtor has the right to file an immediate appeal (即時抗告 - sokuji kōkoku) against that decision (Bankruptcy Act, Article 34, Paragraph 6).

Court Guidelines and Commonly Considered Assets (運用基準)

While the Bankruptcy Act provides the general framework, the practical application of the expansion system is significantly shaped by operational guidelines (運用基準 - un-yō kijun) developed by various district courts, notably in major jurisdictions like Tokyo and Osaka. These guidelines aim to provide consistency and predictability.

A widely adopted approach is the "Total 990,000 Yen Standard" (総額99万円基準 - sōgaku kyūjūkyū man-en kijun). This standard is a benchmark, not a rigid cap in all circumstances, but it provides a strong indication of what is generally permissible.

• The Guideline: Under this approach, if the total current value of:
  1. The debtor's cash (which, up to 990,000 yen, is already an "original free asset"), AND
  2. Certain specified categories of otherwise non-exempt assets (known as "expandable assets" - 拡張適格財産 - kakuchō tekkaku zaisan)
     does not exceed 990,000 yen in aggregate, the court (and trustee) will generally deem the expansion of those non-exempt assets to be appropriate and necessary for the debtor's rehabilitation.

Types of Assets Typically Considered "Expandable" within the 990,000 Yen Guideline:

• Bank Deposits (預貯金 - yochokin): Balances in bank accounts.
• Insurance Cancellation Refunds (保険解約返戻金 - hoken kaiyaku henreikin): The cash surrender value of life insurance policies.
• Vehicles (自動車 - jidōsha): Typically, a vehicle with a relatively low market value (e.g., some court guidelines might use a benchmark like 200,000 yen; if the value exceeds this, the debtor might need to pay the excess into the estate to retain it).
• Residential Security Deposits (賃借物件の敷金・保証金返還請求権 - chinshaku bukken no shikikin/hoshōkin henkan seikyūken): The debtor's claim for the return of a security deposit on their rented residence. The valuation here often considers the amount likely to be returned after deducting potential claims for unpaid rent or damages.
• Accrued Retirement Benefits (退職金債権 - taishokukin saiken): If the debtor has accrued retirement benefits but has not yet retired, a portion of the estimated amount they would receive if they resigned at the time of bankruptcy commencement is considered. Many courts value this at 1/8th of the total estimated benefit, reflecting the uncertainty of actual receipt and the fact that 3/4ths are already seizure-prohibited.
• Telephone Subscription Rights (電話加入権 - denwa kanyūken): Historically, these had value, but in the current era of mobile phones, they are often valued at or near zero for expansion purposes.
• Recovered Overpayments to Lenders (過払金返還請求権 - kabaraikin henkan seikyūken): In some jurisdictions, like Osaka, if the debtor has successfully claimed and recovered (or has a confirmed agreement for recovery of) overpayments made to consumer lenders due to illegally high interest rates, these funds may be considered for expansion. This is a more recent development reflecting specific issues in consumer finance.

Valuation of Assets for Expansion Purposes

The guidelines also provide methodologies for valuing these assets. For example:

• Bank deposits are valued at their balance as of the bankruptcy commencement.
• Insurance policies by their cash surrender value.
• Vehicles by their current market value.
• Retirement benefits, as mentioned, are often valued at 1/8th of the potential payout to account for contingencies.
• Security deposits might be assessed after an estimated deduction for restoration costs (e.g., Osaka guidelines mention a standard deduction of 600,000 yen for this estimation if actual costs are unknown).

Expansion Where the Total Exceeds the Guideline (e.g., 990,000 Yen)

• Contribution to the Estate: If the total value of cash and expandable assets slightly exceeds the 990,000 yen guideline (e.g., totals 1,100,000 yen), a common practice is for the debtor to pay the excess amount (in this example, 110,000 yen) into the bankruptcy estate from other sources (like post-petition earnings or assistance from relatives). Upon this contribution, the expansion for the listed assets up to the 990,000 yen effective limit is then often approved. This effectively allows the debtor to "buy back" the excess value.
• Showing "Indispensability" (不可欠性 - fukaketsusei): If the debtor seeks to retain assets significantly exceeding the 990,000 yen aggregate value without making a contribution for the excess, they must provide compelling evidence that retaining these specific assets is "indispensable" for their economic rehabilitation. This is a higher bar and requires a strong justification based on unique personal circumstances, such as specific health needs requiring certain funds or equipment essential for a specialized profession that cannot be replaced within the standard limits.

Assets Generally Not Subject to Expansion

Certain types of assets are generally not considered eligible for expansion under this system, as they are not typically seen as essential for basic living or immediate rehabilitation in the same way as those listed above. These include:

• Real Estate (不動産 - fudōsan): Owning real estate is usually not considered essential for a fresh start if it has equity that can be distributed to creditors.
• Significant Business Assets: For sole proprietors, while essential tools of trade might be protected as original free assets or through modest expansion, larger business assets like substantial inventory, trade receivables, or valuable business premises are usually part of the estate for liquidation.
• Luxury Items and Investments: High-value non-essential items or significant financial investments are typically not candidates for expansion.

Relationship with Discharge (免責 - Menseki)

The expansion of free assets is a process distinct from the debtor's discharge from their debts, although both serve the overarching goal of debtor rehabilitation. The decision to grant an expansion of free assets is based on the debtor's current and future needs for a fresh start. The decision on discharge, on the other hand, looks at the debtor's past conduct to determine if there are grounds for denying the release from debts (免責不許可事由 - menseki fukyoka jiyū).

Importantly, the existence of grounds that might lead to a denial of discharge (e.g., excessive spending or gambling leading to bankruptcy) does not automatically prevent the court from approving an expansion of free assets if those assets are deemed necessary for the debtor's rehabilitation based on the criteria in Article 34(4). The two inquiries are separate, though a trustee might consider the debtor's overall conduct and cooperation when forming their opinion on asset expansion. In some egregious cases of misconduct relating to assets, this might indirectly influence the trustee's view on the necessity of retaining certain items.

Conclusion

The system for the "Expansion of Free Assets" (jiyū zaisan no han'i no kakuchō) is a distinctive and vital feature of Japanese individual bankruptcy law. It reflects a nuanced approach that seeks to balance the legitimate claims of creditors with the societal interest in allowing honest but unfortunate debtors a meaningful opportunity to rebuild their economic lives. Through a process involving the debtor's petition, the bankruptcy trustee's careful investigation and opinion, and the court's ultimate discretion, this system allows for a flexible determination of the assets an individual debtor can retain. While court guidelines like the "Total 990,000 Yen Standard" provide a degree of predictability, the system retains the capacity to address individual circumstances, ensuring that the "fresh start" envisioned by the Bankruptcy Act is a practical reality.