Application of "fresh start" doctrine for individual debtors in Lithuania: EU and US perspective

Abstract

Bankruptcy1 of natural persons is not legalized in Lithuania. It means, individuals have to fulfill their obligations to the creditors to the end of their life. During the social welfare crisis period that is present in Lithuania at the moment this issue is especially relevant. In spring of 2009 the project of legal act concerning bankruptcies was registered in Seimas (Parliament) of Republic of Lithuania, but in spite of the opinion existing in academic literature that legalization of bankruptcy of natural persons is absolute necessity, the adoption of the respective legal act in Lithuania was postponed indefinitely. Although professionals criticized some of the clauses of the proposed legal act, the enactment of the act was postponed not because it was imperfect in its form but because at the moment its legalization would be irrational in the face of society's expenditure and benefits. The objective of the article is to generalize and evaluate necessity of the legalization of insolvency of natural persons and to present a conceptual model for legalization of individual insolvency. The first part of the article is devoted to the analysis of arguments of supporters and opponents of the legalization of individual insolvency. The insolvency of an individual and legalization of procedures of bankruptcy are aimed at solving the recovery of the debts from the insolvent individual in a civilized way by balancing all of his creditors' interests. From the analysis of supporters' and opponents' arguments interesting conclusion can be drawn that individual bankruptcy can be ranked as a form of limited liability for individuals. It gives reason for premise that a debtor in some cases will behave opportunistic, but in spite of that fact, the global experience shows that the rule of limited liability is very socially and economically useful. The survey also proves that there are neither legal nor economic arguments for suspension of legalization of bankruptcy of natural persons. The second part of the article is devoted to modeling the conceptual model for legalization of individual insolvency. Suggested model gives the understanding that "Fresh start" doctrine cannot be associated with the straight discharge from the debts. The natural person can be discharged from the debts if only he meets the requirements for an application to court for bankruptcy procedures and if only he fulfilled the payment plan and successfully passed prevention and rehabilitation procedure. The issue of procedures of prevention and integration of the debtor is highly important and complicated. The detailed system of such procedure is the object of another research based on the experience of other countries. This research would develop a longitudinal picture of the debtor after bankruptcy and would reveal whether most debtors really get a fresh start and why some of them fail.