Microfinance Practice: Re: [MFP] Fwd: jailing the poor

Greetings Anuj! Bankruptcy laws in most countries were designed to protect secured creditors' rights and to assign a priority for payment of debts; where there is some blood to squeeze out of the turnip so to speak.

As decades passed, and economic situations and politics changed, there was also a commensurate global evolution in bankruptcy laws; such that the laws can in certain circumstances provide some debt relief for the over stretched borrower.

I did some analysis of several countries' bankruptcy laws in Europe, and the US (where I practiced corporate law) as part of a larger research project with the Center for Financial Inclusion, which you can see summarized below starting on p.42. In my opinion, if you are a debtor who cannot repay and want to be 'rehabilitated,' the best states to do business in are France and Sweden.

http://www.smartcampaign.org/storage/documents/what_happens_to_microfinance_clients_who_default_eng.pdf

Not surprisingly, given their attention to the holistic needs of the people in terms of healthcare, low cost education, maternity/paternity leaves etc., the Nordic nations are more debtor friendly than most, allowing for debt relief to generally be granted when payment plans are maintained over a term of years. Sometimes, the term is zero years depending upon the debtor's condition.

As for India, I have only read a cursory amount about the bankruptcy laws (mainly because there is not a lot published), but it seems bureaucratic and expensive to file, and not available to the common man, which has usually been the focus of my research. I can check and see if Moneylife Foundation, Mumbai has studied the issue -- and cc their Managing Editor, Sucheta Dalal for further insights.

For corporate entities, specific to the MF sector, it appears that debt relief is available through Corporate Debt Restructuring (CDR) under the auspices of the RBI. And, several AP entities have availed themselves of this (see Live Mint link below). Because SHGs are structured differently, however (usually as charitable foundations, trusts or pursuant to other non profit company law), I think they may not be able to avail themselves of this facility). For more clarity, you would need an Indian legal opinion -- my opinion is worth 2 cents on Indian law :) Alternatively, you can ask the RBI or NABARD for their opinions.

http://www.livemint.com/Industry/BZ1U1kAs0QpMNRHhLz80RM/Microfinance-institutions-seek-RBI-nod-for-another-debt-reca.html

I hope this is somewhat helpful; it is an interesting issue.

If you'd like GALA, my NGO to explore the issue further with assistance from Indian legal counsel, we are more than happy to take that on as a funded research project.

Best regards,

Jami

On Tue, Jun 9, 2015 at 8:58 PM, Anuj Jain ajain@stfx.ca [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Dear Jami,

Thanks for this, it triggered another question. A colleague recently asked about the role of 'bankruptcy' laws in such situations. He asked, can the SHGs that have failed to repay bank loans due to a variety of reasons declare bankruptcy and reboot on to restart their financial lives?

We know that such laws exist in some countries – effective or ineffective as may be the case; and in many developing countries, the implications of being bankrupt are very very serious. here is a recent article from India on this subject, for example.
http://www.thehindu.com/opinion/editorial/bankruptcy-law-reform-needed/article6955949.ece

Knowing your own work on the legal side, wonder if you would like to throw some light on this subject as well? Do such laws allow any protection, to what degree? Are there macro level implications?

Thanks,

Anuj

From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com]
Sent: Tuesday, June 09, 2015 2:23 PM
To: MicrofinancePractice@yahoogroups.com
Subject: [MFP] Fwd: jailing the poor

Dear All,

I thought some may be interested in this article from the Maine in the USA which discusses an American Civil Liberties Union study on jailing the poor in the US for unpaid fines or court fees (article below). This happens in numerous US states--I have read other ACLU and Appleseed studies on the same topic: different state. Payday lenders have also engaged in incarceration of borrowers who default in Southern states like Texas (alleging that the failure to repay a loan secured by a blank check is prima facie evidence of fraud).

Incarceration of the poor also occurs in developing countries; for example in East Africa, both Tanzania and Uganda have legislation allowing creditors to incarcerate defaulting debtors (in Tanzania if 5 cents is owed, that's enough to land a debtor in jail. In Uganda, the term of incarceration is 6 mos. and you could get consecutive sentences for multiple debts. Once incarceration is completed and the sentence served, the debt is still owed). In Kenya, the case law on this issue are unclear, but because of this lack of clarity, it may also be possible to incarcerate the poor for failure to pay civil debts--who's going to defend the poor anyway? In other countries, like Nigeria & Ghana, I have interviewed MFI clients and read other research which indicates that public authorities, like the police are used to harass defaulting debtors.

My non profit organization the Global Alliance for Legal Aid is researching this issue in several states with pro bono legal support from Mayer Brown law firm. We will share the results with you when the research is complete.

This issue has been a big concern for me since I discovered that it was happening in several countries back in 2008-09, and micro finance institutions are participating in the incarceration of their former clients. It is particularly unfair because in most countries, there is no mechanism available to the poor to obtain debt relief through a bankruptcy, or to mediate with multiple creditors, or even to have a restructuring of micro loans from individual lenders.

Worse, what I have seen happening in places like Uganda is that the MFIs are refinancing or 'topping up' of loans when the client is already in debt difficulty -- just keep digging that hole deeper.

I suspect that this situation will lead eventually lead to damage to the MFIs' reputation and loss of business in the long run (as the word spreads amongst potential clients). But, in the here and now, the lack of respect for human rights is troubling and needs to be addressed by the industry at large.

Best regards,

Jami Solli

Portland Press Herald

June 8, 2015 Monday

Jail is the wrong way to make offenders pay fines ; It's not only unfair to incarcerate those who can't pay, it's a bad way to use public funds.

Pg. 1.A

The U.S. Constitution guarantees equal protection under law. So why do we tolerate a system in which people with money go home after being convicted of a crime while the poor go to jail for the same offense?
The difference is the ability to pay a fine. One defendant can write a check, while the other may have to work off what he owes at the rate of $5 a day incarcerated. The underlying offense may be exactly the same, but the difference between freedom and months in jail can be the balance of a bank account.
This is not a theoretical problem. Research by the American Civil Liberties Union of Maine determined that nearly 10 percent of inmates booked into the Cumberland County Jail between August 2013 and August 2014 were there solely on a warrant for failure to pay fines or court-ordered restitution. Of the 10,674 people booked during that period, 909 were arrested just for failing to pay court debts.
Court officials claim that no one is in jail just because he is poor, but that is a legal fine point. Judges set up what are supposed to be affordable payment plans at sentencing, and anybody who keeps up with the schedule, rich or poor, will not be arrested. But once they fall behind, people with resources can pay their way out and those without cannot.
This is not only a matter of fairness, it is one of common sense. It costs the state far more to work off the fines through incarceration than it would to collect them.
That money would be much better spent getting former convicts off drugs and into jobs than it is warehousing them in jail and then releasing them to re-offend.
In the last four months of last year, 41 inmates were sentenced to pay off back fines or restitution in Cumberland County. Thirteen were unable to pay off enough to be released and paid their debt by sitting in jail. The cost to the county to house them for a total of 232 days was $25,990. The amount of fines and restitution recouped was $10,489.
Jailing offenders is not the only way to impose meaningful consequences for breaking the law, but it is the most expensive. Nonviolent offenders who are not a threat to public safety can work off their debts outside the walls of a jail. People with substance abuse disorders don't often recover without treatment. Paying for that would be a much more effective use of public resources.
If people want to insist that failing to pay court-ordered fines should be punished by jail time, then they should insist that everyone be treated the same, rich or poor. If one set of offenders has to work off a fine at $5 a day in jail, then the other group shouldn't be able to pay its way out.
A better approach would be finding solutions outside the jail walls for both groups of offenders.