Written by Edmund L. Rahming, CPA-CFF, CFE, MBA
Historically, insolvency procedures in the Bahamas have been focused on companies – local companies and international business companies. The insolvency procedures for companies are governed through the application of the Companies Act 1992 and the International Business Companies Act 2000 which were modernized in 2011 with the Companies (Winding Up Amendment) Act, 2011 (the “law”), the Companies Winding Up Rules, 2012, the Foreign Bankruptcy Proceedings (International Co-operation) Rules, 2012, and the Insolvency Practitioners Regulations, 2012. The Companies Winding Up Rules, 2012, are set to be updated later this year, 2020.
While this legislative activity for companies is progressive and assists The Bahamas in meeting international expectations as an international financial centre, we have neglected the modernization of insolvency laws related to individuals in the Bahamas. Our greatest assets, our people and residents, have been left out of the equation. The insolvency procedures for individuals are governed through the application of the Bankruptcy Act 1870 and the Bankruptcy Rules 1958. Much has changed in the Bahamas since 1870. We live in a very different Bahamas today than those that lived here in 1870. There is an urgent need to modernize our personal bankruptcy laws.
Why the urgent need to update of personal bankruptcy laws?
A review of the statistics issued in Quarterly Statistical Digest August 2020 is useful and shows that overall consumer outstanding debt levels have not changed much over the past five years. There has only been a slight increase in the amount of new credit issued as of June 2020 when compared to the same period for the years 2018 and 2019. Other credit statistics show only modest changes with the greatest increase in sectoral debt being that related to Government.
That aside, there are qualitative indicators that provide some cause for concern and they include the decrease in home ownership likely due to the fact that too many families are unable to qualify for mortgage credit due to having too much consumer credit. There is the increase in the number of lending institutions, particularly micro lenders, which usually eventually leads to greater levels of consumer debt outstanding. Also, there is the increase in delinquency matters before the Courts, and the increase in debt delinquency due the negative short-term and projected long-term effects of the COVID-19 pandemic. While many financial institutions are exercising forbearance with debtors due to the effects on household income by the COVID-19 pandemic, this will likely eventually subside. If unemployment levels remain high we can expect delinquency and financial hardship to increase.
The expectation is that the number of persons unable to meet their debt payment demands will increase. Financial institutions can hopefully continue to exercise forbearance at this time while simultaneously being cautious about how long forbearance is kept in place.
The implementation of personal bankruptcy legislation will assist debtors that have found themselves too heavily indebted providing them with an opportunity to start afresh and make better credit management decisions moving forward rather than spending a significant portion of their income earning years paying down consumer debt. Bankruptcy laws will work in tandem with the credit bureau, which is to become operational this year, and benefit the credit system in The Bahamas by ensuring over time greater accountability and transparency, less predatory lending, and a more efficiently operated system of credit for generations to come.
The modes of Personal Bankruptcy
Under the Bankruptcy Act 1870 (the current personal bankruptcy law in place) there is one mode to resolve personal insolvency issues and that is via bankruptcy. Usually, creditors file a Debtor’s Summons to begin the proceedings. The Summons requests that the debtor pay the debt or make a payment arrangement for the debt. If the debtor does not respond to the creditor’s satisfaction, the creditor may file a bankruptcy petition with the Supreme Court (Court). An appointed trustee will administer the assets and liabilities and the Court would issue orders for the administration of the debtor’s assets and liabilities. The effects of the bankruptcy are severe and impact every sphere of the bankrupt’s livelihood in the Bahamas.
Replacing Bankruptcy Act 1870 with a modern law should result in a more progressive and helpful approach to persons finding themselves in debt troubled circumstances. The harsh and antiquated approach of the Bankruptcy Act 1870 is of another day and time. Troubled debtors that arrive at the place where a court process has to be implemented should have two proposed options under new bankruptcy laws, a Consumer Proposal or Bankruptcy. Below we describe both processes and how they generally would work:
A proactive legally binding settlement agreement filed with the Court on behalf of a debtor by a Licensed Insolvency Practitioner after agreement with the creditors, to repay creditors a percentage of unsecured debt owed to them in exchange for full forgiveness. For Bahamians struggling with monthly debt payments, a consumer proposal plan can provide debt relief while avoiding bankruptcy. Proposal monthly payments can be spread out over a maximum of 5 years and are interest free. A credit bureau will score and red flag the debtor to ensure no new debt is taken on during the repayment period. Debt counselling is required.
A legal process designed to help debtors who cannot repay debt find debt relief. The process is administered by a Licensed Insolvency Practitioner and is supervised by the Court. The process usually results in the liquidation of all assets and a monthly payment arrangement to pay-off debt. At the end of the process the debts are legally discharged and the process can be completed within 12 months. The Insolvency Practitioner has the ability and duty to conduct thorough investigations and examinations. International cooperation with foreign courts and insolvency practitioners can be had through the process, if necessary. A credit bureau will score and red flag the debtor to ensure no new debt is taken on for up to 7 years. Debt counselling and the provision of monthly budget performance sheets are required.
Given the increase in consumer debt delinquency, particularly due to the COVID-19 pandemic, new personal bankruptcy laws are needed. Modernization of the personal bankruptcy laws will complement the soon to be operational credit bureau and increase accountability and transparency in the consumer market. Modern laws will assist lenders in acting with greater confidence and honest deserving debtors in quickly obtaining a second chance to manage credit effectively. Our Caribbean sister countries such as Jamaica and Barbados have updated their personal bankruptcy laws with progressive and timely features that will benefit their markets greatly. The Bahamas should not be left too far behind and should advance new laws in this area, particularly given the current economic environment.