The what and why of bankruptcy in Russia and USA

Bankruptcy isn't a topic that anyone likes to discuss. Creditors, debtors, and government officials all get a little queasy at the thought of bankruptcy, but it exists for a reason. And in many situations, it can provide relief when financial friction is heightened. But bankruptcy isn't the same in every country. Laws, rules, and stigmas differ rather significantly - particularly between Russia and the United States.

The what and why of bankruptcy

Bankruptcy is one of the primary methods by which control over an asset can be transferred to more capable or efficient owners in the instance of market economies. Ultimately, bankruptcy serves three distinct purposes:

1. To solve collective action problems among creditors as they deal with insolvent debtors.
2. To give individual debtors a chance at a "fresh start" when they're overburdened by debt.
3. To preserve/save the financial distress firms have by reorganizing rather than liquidating.

Bankruptcy is basically government-sanctioned relief that allows individuals or businesses to have debts forgiven, granted they meet specific criteria and follow certain guidelines. It plays an important role in keeping the larger economic engine hitting on all cylinders. Without bankruptcy, millions of citizens would find themselves impoverished and unable to financially recover from dire situations.

And in today's global economic crisis (stemming from the pandemic), bankruptcy becomes an even more relevant topic. But to assume that bankruptcy is the same everywhere would be ill-advised. 

Bankruptcy differences between Russia and the US

Bankruptcy is different in every country, but in this article, we're going to focus on how bankruptcy law varies between Russia and the US. Here are some things to know:

1. History is Different

Bankruptcy law in the United States predates the formation of the country. And individuals have been able to file for bankruptcy since The Bankruptcy Act of 1867. Russians, on the other hand, have only been able to file for bankruptcy for about five years.

As CNBC explained back in October 2015, "A new law in Russia will allow citizens with total debt of more than 500,000 rubles ($7,600) and over three months of missed payments to file for bankruptcy. In addition, penalties can be imposed on debtors who fail to register as bankrupt if they cannot fulfill loan repayments."

Previously, legal entities were the only ones able to file for bankruptcy. At the time, officials estimated that as many as 6.5 million people would be eligible to file for bankruptcy amid a deep recession. 

2. Treatment of Creditors' Claims (and Burden of Proof)

When an American citizen files a bankruptcy claim, the claims are labeled prima facie valid as long as they meet very basic minimal formalities. Once the claim is filed, it's entered into the claims registry. If the debtor doesn't object to the claim, it's allowed. 

In Russia, there's more to the process. The creditor has to establish grounds for the claim before it's permitted to be entered into the claims registry. Even if no objection is asserted, the courts will review the claim. 

3. Ability of Creditors to Sue a Debtor in Foreign Courts

The Russian "arbitrazh" court's review of bankruptcy claims is much broader than in the United States bankruptcy court, however, jurisdiction is more limited. An American bankruptcy court has the ability to assert worldwide jurisdiction of a debtor's property. Russian courts hold a much different viewpoint. 

"The bankruptcy case of the Vladivostok Base of Trawl and Reefer Fleet (the 'VBTRF') filed in the Russian Far East region provides a good example," the Russia and Eurasia Committee explains. "A group of creditors sued the debtor, the VBTRF, in courts in England, South Korea, and Singapore, notwithstanding the pendency of the bankruptcy in Russia. Other creditors moved the commercial court to enjoin these actions on the ground that all matters concerning the debtor should be resolved within the Russian bankruptcy case."

In this instance, the Russian courts ultimately refused. They held that Russian commercial courts don't have the legal grounds to deprive a person of their right to protection in their own forum of choice. 

This aspect of Russian bankruptcy establishes a pretty strong remedy for creditors under US law, should a debtor have parked assets in the United States.

Adding it All Up

Bankruptcy is a complicated matter that's wrought with any number of challenges and idiosyncrasies. In order to understand bankruptcy in a specific country, you have to zoom out and view its history, economic policies, and larger cultural trends. As this article shows, there are significant differences between bankruptcy in Russia and the United States.