Interview: Time Is Right for China to Fix Personal Bankruptcy Legal Omission, Expert Says
China’s economic slowdown has led to a growing accumulation of personal debt, placing increasing pressure on both individual borrowers and financial institutions. Meanwhile, the lack of a well-established bankruptcy system leaves many without a clear path to resolve their financial problems.
The lack of an effective legal avenue for personal debt relief in China has driven many debtors to turn to debt intermediaries, some of whom engage in illegal practices, further trapping borrowers in financial distress.
Establishing a personal bankruptcy system is becoming an urgent task. Internationally known as consumer bankruptcy, personal bankruptcy is a legal process through which a debtor who can no longer repay what they owe can seek judicial intervention. This typically involves liquidating or restructuring their assets, discharging certain debts under specific conditions, and defining the rights and obligations of all parties involved. Such a system would allow “honest but unfortunate” debtors to escape financial ruin, regain stability and ultimately rebuild their financial life.
China introduced its Enterprise Bankruptcy Law in 2007, but this makes no provision for personal bankruptcy. Legal experts, such as Li Shuguang, a law professor at the China University of Political Science and Law, have argued that this omission leaves the law incomplete.
The structural gaps in China’s bankruptcy framework have remained largely unchanged for nearly two decades. While amendments to the Enterprise Bankruptcy Law have been under discussion since 2021, little progress has been made.
As household debt continues to rise — with the leverage ratio growing from under 30% in 2011 to 63.5% by the end of 2023 — calls for nationwide personal bankruptcy legislation are intensifying. This trend is further fueled by the growing number of souring personal borrowings, including consumer loans, personal business loans and mortgages.
Some regions in China have begun experimenting with personal bankruptcy. In March 2021, Shenzhen, a tech hub in southern China, introduced the country’s first local regulation on personal bankruptcy, launching a pilot program. Since then, other areas, including Zhejiang, Jiangsu, Shandong and Sichuan, have implemented similar pilot programs.
While the pilots have yielded valuable insights and a few success stories, challenges persist. These include low acceptance rates for bankruptcy cases, limited liquidation processes, difficulties in cross-region enforcement and strong resistance from financial institutions. A major obstacle remains the lack of a national law to standardize and unify these efforts.
In a recent interview with Caixin, Li emphasized that personal bankruptcy is a vital component of a market economy, particularly during economic slowdowns. With nearly 40 years of experience in bankruptcy law and ongoing work on amendments to the Enterprise Bankruptcy Law, Li has proposed several approaches to establishing personal bankruptcy legislation. These include drafting a standalone Personal Bankruptcy Law, adding specific chapters on personal bankruptcy to the existing Enterprise Bankruptcy Law, or expanding its scope to cover individuals who have guaranteed corporate debts.
A personal bankruptcy system, Li argues, could offer honest debtors a second chance, prevent worsening economic inequality and promote social equity. For financial institutions, it could mitigate risks associated with high leverage and encourage more prudent lending practices. Establishing a national personal bankruptcy law will be a gradual process, “requiring the right conditions to take root and flourish.”
The excerpt of the interview follows:
Caixin: Why is a personal bankruptcy system often considered a cornerstone of a healthy market economy, even in societies like China, where the belief that debts must always be repaid has made the idea of bankruptcy uncomfortable for many?
Li Shuguang: In China, bankruptcy is often viewed not only as a personal failure but as a family failure, due to the nation’s deeply rooted collectivist culture. Historically, individual debts were seen as family responsibilities, with creditors expecting family members to step in and repay loans. This mindset has contributed to aggressive debt-collection practices.
A personal bankruptcy system shifts the focus to individual responsibility. It holds people accountable for their financial actions, a principle central to most market economies. Many countries have well-established bankruptcy laws. The United States has refined its bankruptcy system through numerous revisions, Japan has reformed its framework over time and South Korea implemented comprehensive bankruptcy legislation in 2006. The special administrative regions of Hong Kong and Macao have also introduced personal bankruptcy laws. These examples provide valuable lessons for us.
When drafting the Enterprise Bankruptcy Law enacted in 2006, was the issue of personal bankruptcy considered?
China’s bankruptcy legislation came relatively late and underwent a lengthy process. Early efforts began in the 1980s during state-owned enterprise reforms, and later, as part of the negotiations for joining the World Trade Organization, the need for a bankruptcy law became more pressing. By 2003, a drafting committee was established, and initial proposals included provisions for commercial individuals, such as sole proprietors and business partners, as well as partnerships. These provisions were eventually reduced to a few supplemental clauses, however. At the time, personal bankruptcy was poorly understood, and many experts believed the country wasn’t ready, citing reliance on cash transactions and an unconnected financial system.
In principle, a comprehensive bankruptcy law should address individuals, businesses and government balance sheets. While the 2006 Enterprise Bankruptcy Law marked progress — moving China’s market economy to a more developed stage — its lack of personal bankruptcy provisions left it incomplete.
Do you think the conditions have now improved?
Attitudes toward bankruptcy in China have shifted significantly. When Shenzhen launched China’s first personal bankruptcy pilot in 2021, more than 2,000 individuals applied, showing there is a strong demand for such a system. The program focuses on restructuring, with limited debt discharge, but I believe that if liquidation were permitted, even more people would apply.
Meanwhile, the financial system now has a more established credit rating framework. This includes a personal credit evaluation model centered on the People’s Bank of China’s credit report, supported by asset registration and financial credit information, and supplemented by market-based credit scoring services. Advances in big data and other technologies have made it easier to accurately identify personal credit risks. Local pilot programs have also accumulated practical experience. I believe the timing is now right for legislation.
In the current environment, a personal bankruptcy system can play a meaningful role. In July 2024, the Third Plenary Session of the 20th Central Committee of the Chinese Communist Party endorsed a series of measures to improve bankruptcy mechanisms, introduce a personal bankruptcy system and enhance the social credit framework. These steps indicate a clear readiness to implement personal bankruptcy in China.
Who is eligible to file for personal bankruptcy, and how is the concept of an “honest but unfortunate” debtor defined?
A comprehensive personal bankruptcy law typically covers individuals with legal capacity, often referred to as “consumer bankruptcy.” Those unable to repay their debts can voluntarily file, but they must fully disclose their assets, liabilities and the reasons behind their financial difficulties. Fraudulent actions, such as hiding assets or deliberately evading debts, carry legal consequences.
According to the Supreme People’s Court’s database, there are more than 100 million people struggling to pay debts in China, with many falling into financial trouble due to unforeseen circumstances such as illness, unemployment or family crises. For these “honest but unfortunate” debtors, a personal bankruptcy system could limit the risks of financial failure, provide a path to restore credit and offer a chance to rebuild their lives.
What groups should China’s future personal bankruptcy law include?
This is still under discussion, with three possibilities being considered. One is to cover individuals who have provided guarantees for bankrupt businesses, as they often face unlimited liability and can lose everything when the business fails. Another option is to limit coverage to commercial individuals, a practice seen in some Eastern European countries. A third approach, following the global trend, would extend eligibility to all individuals, allowing a broader and more inclusive system.
Historically, personal bankruptcy systems in most countries began by focusing on commercial entities, with consumer bankruptcy only becoming widespread in the late 20th century.
What benefits does a personal bankruptcy system offer to banks and financial institutions?
A strong financial system is essential for economic prosperity, but its inherent reliance on leverage comes with risks. A bankruptcy system offers a crucial mechanism to help banks manage these risks by providing a legal framework to regularly clear bad debts. Without such a system, financial institutions, especially smaller ones, may appear financially healthy on paper but remain burdened by loans that will never be repaid.
Personal bankruptcy also pushes banks to adopt more prudent lending practices, refine credit approval processes and develop better credit evaluation systems. By more accurately assessing borrowers’ risks and setting reasonable loan terms, banks can enhance their stability and contribute to a healthier financial market overall.
What statutory procedures are typically involved in personal bankruptcy?
A personal bankruptcy system generally involves three main procedures: liquidation, reorganization, and settlement. In liquidation, a debtor’s assets — excluding essential living expenses and necessities — are sold, with the proceeds distributed to creditors. The debtor then enters a “discharge observation period,” typically lasting several years, during which spending and investment activities are restricted. Once the period ends and certain conditions are met, the remaining debts may be forgiven.
Reorganization is intended for debtors who still have the means to repay their debts. It involves creating a repayment plan agreed upon by both the debtor and creditors, allowing for installments over time. Settlement, meanwhile, is a simpler process that applies when there are fewer creditors and the parties involved are more willing to reach a voluntary agreement.
This flexibility enables debtors to negotiate terms directly with their creditors.
Since the 2021 launch of Shenzhen’s personal bankruptcy pilot, most cases have involved reorganizations, with only a few liquidations. Some have described it as a “limited” personal bankruptcy system. What’s your view?
Shenzhen’s cautious approach to its personal bankruptcy pilot reflects the need to align with China’s national conditions. Yet resolving personal debt issues effectively hinges on liquidation and substantial debt forgiveness — the essence of any robust personal bankruptcy system.
An early case involved a high-earning debtor whose reorganization plan waived interest and late fees, while requiring the principal to be repaid over three years. Such debtors are rare and unrepresentative of the broader population, many of whom face far more dire circumstances.
Most individuals entering personal bankruptcy are deeply insolvent and in need of significant debt relief, not just minimal interest write-offs. For example, Shenzhen’s first liquidation ruling involved a single mother who, after her business failed, was left with millions in debt. She sold her only home to repay creditors but still owed more than a million yuan. These types of cases highlight the importance of expanding bankruptcy options to address the severe financial challenges that many debtors face.
What supporting measures are needed to improve personal bankruptcy legislation?
To implement personal bankruptcy effectively, the first step is clear legislation. Without a solid legal foundation, the system cannot properly function.
In addition, China’s credit rating system needs refinement. It should more accurately distinguish between dishonest debtors and those who are genuinely unable to repay. This would help prevent unfair discrimination, such as individuals with credit issues being denied job opportunities or restricted to train travel options that are no longer widely available.
Reforming the credit market is another priority. Moving away from reliance on collateral, personal connections or illegal collection methods, the system should establish clear credit limits and conditions based on creditworthiness. This would ensure a fairer lending environment while rewarding reliable borrowers and penalizing dishonest behavior.
Other crucial steps include creating a unified personal asset registration system, a transparent payment tracking system, clear rules for handling joint marital property, stronger social safety nets and updates to bankruptcy-related provisions in the criminal code.
Contact editor Han Wei (weihan@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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