What moral obligations are attached to the economic transaction of money lending? Do I have to pay back debts? In his highly acclaimed book “Debt. The First 5000 Years”, social anthropologist David Graeber argues that the obligatory repayment of debts only emerged with modern capitalism, and gives a variety of historical examples from practice from ancient Greece to the 1953 London Debt Agreement of the haircut.
Debt relief has also become legally possible in Germany with the insolvency regulations that came into force on January 1, 1999: Those who apply for private insolvency and successfully complete the multi-year procedure can be released from their residual debts at the expense of creditors. But what happens to moral debt in the event of such repayment of the economic debt? How do those in debt and in debt deal with the feeling of obligation?
Debt relief against honesty
The adoption of the Insolvency Code (InsO) was celebrated as a milestone in legislation: for the first time, a way out of the modern debt tower was created in the Federal Republic. The two main objectives of the new legal system are formulated in the first paragraph, namely firstly “to jointly satisfy a debtor’s creditors by realizing the debtor’s assets and distributing the proceeds”.
This is followed by the second goal: “The honest debtor is given the opportunity to free himself of his remaining liabilities.” The requirement of honesty is linked to the exemption from debt – but what exactly constitutes the “honest debtor” in the eyes of the legislation?
The criteria and evidence of honesty consist of the conditions and reasons for failure within the insolvency proceedings. First of all, the conditions include that debtors take the initiative when the proceedings are opened and enclose the following documents as an overview with their own application: a certificate from the debt counseling service that an out-of-court settlement has been unsuccessful, a list of assets, creditors and claims, as well as a debt settlement plan.
Secondly, people in the insolvency proceedings must show a willingness to actively participate in the repayment of the debt: they are subject to the obligation to work, i.e. they have to carry out an appropriate, i.e. possibly non-professional employment or temporary and casual activity until the end of the insolvency proceedings, or to do so endeavor and may not reject any reasonable activity.
Furthermore, they must make their entire attachable assets and future capital available beyond the attachment limit for repayments. A third requirement is a duty to provide information, according to which a change of residence or employment is communicated, financial circumstances are disclosed and information about employment, the benefits from such or about the search for employment must be given.
In the first version of the bankruptcy code
The so-called period of good conduct, in which debtors have to prove their honesty, lasted seven years. The length of the overall process has been – and continues to be – criticized and repeatedly discussed in connection with reforms. In fact, these discussions are having an effect: after the first reform, the behavioral phase was reduced by one year to six years in 2006, and since the 2014 amendment it was possible to shorten the behavioral period to three years.
For comparison: In the USA, bankruptcy law provides for an immediate debt settlement and thus a fresh start as soon as debtors have declared bankruptcy on file. As a result, they sell all their belongings and get rid of all debts in return. In Scandinavian, French, Dutch and Belgian models, honesty is also checked, but the procedure is significantly shorter – in France, for example, it takes between six months and two years.
In German insolvency law, on the other hand, legislation places the emphasis on examining perseverance as a prerequisite for debt relief: the bankruptcy code, therefore, has an educational goal.
There are no motivations to shorten the period
The bankruptcy regulations do not take into account incentives for non-mandatory payment offers by the debtor, such as one-off payments from third parties or payments from non-attachable income. In concrete terms, this means that those who pay more will not be released from residual debt earlier.
The German bankruptcy code is, therefore, more socially disciplinary than economically motivating; especially since in the practice of judicial insolvency proceedings, only about 20 percent of the proceedings actually lead to noteworthy payments to the creditors.
The majority of the proceedings are therefore zero bankruptcies with a purely educational goal. But even in the event of total lack of property, debtors have to go through the complex and labor-intensive process in order to free themselves from their over-indebtedness.