Personal Bankruptcy in Russia: The 2015 Insolvency Law, Procedure, and Consequences

The introduction of personal bankruptcy (bankrotstvo grazhdan) in Russia through Federal Law No. 154-FZ of 29 June 2015, which amended the Federal Law on Insolvency (Bankruptcy) (No. 127-FZ of 26 October 2002), represented a significant development in Russian insolvency law. Before the 2015 amendments, bankruptcy proceedings in Russia were available only for legal entities and individual entrepreneurs. The extension of bankruptcy to natural persons created a legal framework for the resolution of consumer debt problems, the restructuring of obligations, and the discharge of debts that cannot be repaid.

Legal Framework

The personal bankruptcy provisions are contained in Chapter X of the Federal Law on Insolvency (Bankruptcy) (Articles 213.1–213.31), as amended by Federal Law No. 154-FZ. The law distinguishes between the bankruptcy of a citizen who is not an individual entrepreneur and the bankruptcy of an individual entrepreneur, with the latter subject to additional requirements. The law entered into force on 1 October 2015, and the number of personal bankruptcy cases has increased steadily from several thousand in 2016 to over 300,000 annually by 2023. The personal bankruptcy framework aims to balance the interests of debtors in obtaining relief from unmanageable debts with the interests of creditors in recovering amounts owed.

Requirements for Filing

Bankruptcy proceedings may be initiated by the debtor or by the debtor’s creditors. The debtor is required to file for bankruptcy if the debtor’s debts exceed 500,000 rubles and the debtor is unable to repay them, and if the satisfaction of the claims of one creditor would make it impossible for the debtor to satisfy the claims of other creditors. The debtor may file for bankruptcy voluntarily if the debtor reasonably anticipates insolvency and if the debtor’s circumstances indicate that the debtor cannot fulfil monetary obligations within the established time limits. Creditors and the authorised body (the Federal Tax Service) may also file for bankruptcy of a citizen if the debts exceed 500,000 rubles and the debtor has not satisfied the claims within three months from the date on which they should have been satisfied. The application for bankruptcy must be accompanied by documents evidencing the debtor’s debts, income, property, and family situation, as well as information on transactions concluded within the three years before the application.

The Procedure

Personal bankruptcy proceedings may take one of two forms: debt restructuring (restrukturizatsiya dolgov) or the sale of the debtor’s property (realizatsiya imushchestva grazhdanina). The arbitration court, upon accepting the bankruptcy application, appoints a financial manager (finansovyy upravlyayushchiy) — a qualified insolvency practitioner — to supervise the proceedings. The court may approve a debt restructuring plan if the debtor has a regular source of income and no criminal record for economic crimes. The restructuring plan, which must be approved by the creditors and confirmed by the court, provides for the repayment of debts over a period of up to three years (extendable to five years in certain circumstances). Interest continues to accrue during the restructuring period. If the debtor cannot repay debts under the restructuring plan, or if no restructuring plan is approved, the court declares the debtor bankrupt and orders the sale of the debtor’s property. The debtor’s property — with certain exceptions — is sold by the financial manager, and the proceeds are distributed to creditors in the order of priority established by the Insolvency Law.

Exempt Property

Certain property is exempt from sale in personal bankruptcy proceedings. Article 446 of the Civil Procedure Code lists the property that may not be levied upon: the debtor’s only residence (except for mortgages), household furnishings and personal items (except luxury items), tools and professional equipment necessary for the debtor’s work, livestock and farm buildings (for agricultural enterprises), food and fuel for the coming season, state awards and prizes, and means of transport for persons with disabilities. The exemption of the debtor’s only residence is a significant protection, ensuring that the debtor is not rendered homeless by the bankruptcy process. However, the exemption does not apply to the mortgage on the residence; if the debtor’s only residence is mortgaged, the mortgage creditor may enforce the mortgage and sell the property.

Consequences of Bankruptcy

The declaration of bankruptcy has several legal consequences for the debtor. The debtor is relieved of the obligation to pay debts that were not satisfied during the bankruptcy proceedings (the discharge), subject to certain exceptions. The discharge applies to most unsecured debts, including bank loans, credit card debts, tax debts, and debts to utility providers. Debts that are not discharged include: debts for alimony, debts for compensation for harm caused to life or health, debts for the payment of wages and severance pay, debts arising from intentional crimes, and debts that arose from the debtor’s bad faith actions (concealment of property, fraudulent transactions). The debtor may not file for bankruptcy again within five years from the date of the completion of the bankruptcy proceedings. If the debtor files for bankruptcy again within five years, the debtor is not entitled to a discharge and remains liable for all debts. The debtor is also subject to restrictions on obtaining loans and credit during the bankruptcy period, as information about the bankruptcy is entered in the Unified Federal Register of Bankruptcy Information.

Extrajudicial Bankruptcy

Federal Law No. 289-FZ of 31 July 2020 introduced an extrajudicial (vnesudebny) personal bankruptcy procedure for debtors with low levels of debt and no property subject to collection. The extrajudicial procedure is conducted through the Multifunctional Centre for the Provision of State and Municipal Services (MFC). The debtor must declare debts totalling between 50,000 and 500,000 rubles, confirm the absence of property that could be sold to satisfy claims, and confirm the absence of an ongoing enforcement proceeding. The extrajudicial procedure takes six months, after which the debts are discharged. The extrajudicial procedure was introduced to simplify the bankruptcy process for debtors with limited assets and low debt levels, reducing the costs and administrative burden of judicial bankruptcy proceedings. The procedure has been used by a growing number of debtors, though its scope is limited by the debt amount threshold and the requirement of no executable property.

The Financial Manager

The financial manager plays a central role in personal bankruptcy proceedings. The financial manager is appointed by the court from among the members of a self-regulatory organisation of insolvency practitioners. The financial manager’s duties include: reviewing the debtor’s financial situation, identifying the debtor’s property and transactions, convening and conducting creditors’ meetings, managing the sale of the debtor’s property, distributing proceeds to creditors, and reporting to the court on the progress of the proceedings. The financial manager is entitled to remuneration, consisting of a fixed fee (25,000 rubles for personal bankruptcy) and a percentage of the proceeds from the sale of property (7% of the amount distributed to creditors). The financial manager may also claim reimbursement of expenses incurred in the proceedings. The role of the financial manager is subject to the supervision of the court and the self-regulatory organisation, and the financial manager may be held liable for losses caused by improper performance of duties.

Abuse and Fraud

The Insolvency Law contains provisions to prevent abuse of the bankruptcy process. The court may refuse to discharge debts if the debtor acted in bad faith, including: concealing or destroying property, providing false information to the court or the financial manager, creating artificial debts, or obstructing the work of the financial manager. The criminal liability for intentional bankruptcy (Article 196 of the Criminal Code) and fictitious bankruptcy (Article 197) applies to debtors who knowingly cause insolvency or who declare bankruptcy falsely. The financial manager is required to investigate the debtor’s transactions and financial history and to report any indications of fraud or abuse to the court. The court may lift the discharge of debts if it is subsequently discovered that the discharge was obtained by fraud. The prevention of abuse is a significant concern in personal bankruptcy practice, particularly in cases where debtors attempt to conceal assets or to create artificial debts to the benefit of related parties.

Significance

The introduction of personal bankruptcy in Russia represented a major reform of the Russian insolvency system, extending the benefits of debt relief and financial rehabilitation to natural persons. The framework provides for the restructuring of debts where feasible and the sale of property and discharge of debts where restructuring is not possible. The discharge of debts gives debtors a fresh start and encourages economic activity by reducing the burden of unmanageable debt. The extrajudicial procedure has expanded access to bankruptcy relief for low-income debtors. The personal bankruptcy framework continues to evolve, with amendments to address practical problems, to simplify procedures, and to prevent abuse. The growing number of personal bankruptcy cases demonstrates the demand for debt relief mechanisms in Russia and the importance of the bankruptcy framework for the functioning of the consumer credit market.