Starting on October 1st, the ability to file for personal bankruptcy will be available to Russians for the first time in the country’s history. Prior to amending their bankruptcy laws, only legal entities (corporations) were allowed to file for bankruptcy protection. The new amendments require that borrowers have total debt of at least 500,000 rubles ($7,600) and be more than three months behind on their payments. Debtors that owe less than 500,000 rubles can file bankruptcy if they can show they are unable to repay their debt. The move is meant to ease the financial burden of the Russian people in the midst of a very deep and prolonged recession.
The new amendments appear to resemble Chapter 7 and Chapter 13 bankruptcy laws in the United States. One option provides a framework for debtors with stable income the ability to restructure their debts (Chapter 13) while debtors with little or no income may have their assets sold and the proceeds distributed to creditors (Chapter 7).
While this is wonderful news to struggling debtors, not everyone is cheering. Both the banks and the court system are worried of the consequences of the new amendments. It is estimated that 4 million people could file for bankruptcy protection in Moscow alone in the next year. While the total amount of personal debt in Russia is but a fraction of the personal debt in the United States, the effects on the Russian banks could be devastating. According the Russian Central Bank, total bank lending to individuals is roughly 10 trillion rubles ($150 billion) and approximately 10% is past due. Well-funded, highly liquid US banks would almost surely fail (or need to be bailed out again) if they suffered losses in the 10% range. Russian banks are far more leveraged and far less liquid than their US counterparts. Analysts also fear the court system will be unable to handle the influx of cases. According to Moscow’s Higher School of Economics, the courts do not have people that are properly trained to manage and maintain the debtor’s assets and debt repayments, nor do they have mediators (what we would call Trustees) to stand between the debtor and his creditors.
While allowing debtor’s the ability to have the debt forgiven or restructured is certainly a positive step, the immediate and short-term consequences will almost certainly be painful.