Between restriction and protection: the experience, problems, and improvement path of judicial recognition of personal bankruptcy exempt property in China

The paper examines the core component of a personal bankruptcy system—exempt (free) property that is preserved from distribution to creditors to protect a debtor’s basic livelihood and career development. While many advanced jurisdictions (e.g., the United States, Germany, Japan) and the UNCITRAL Legislative Guide endorse such regimes, mainland China historically lacked a personal bankruptcy law, relying on the Enterprise Bankruptcy Law that excludes natural persons. Against a backdrop of elevated household indebtedness (over 20 trillion yuan total resident debt in 2022; average 140,000 yuan per capita) and policy signals from the Supreme People’s Court and central authorities, Shenzhen enacted China’s first local Personal Bankruptcy Regulations in 2021, followed by further national reform signals in 2024 and local implementation guidelines. The study analyzes existing Chinese legal norms and judicial texts, employing legal hermeneutics and case analysis to identify problems in judicial recognition of exempt property, and uses comparative research to design an improvement path tailored to China’s conditions. The research addresses three questions: (RQ1) current research status of the exemption property system; (RQ2) its connotation and value; (RQ3) existing problems and improvement paths in judicial recognition in China. The contribution is a new scheme and specific path for judicial recognition of personal bankruptcy exempt property in China, with implications for international comparative study.

Historically, personal bankruptcy evolved from creditor-centric enforcement in ancient Rome and early English and American law to modern regimes balancing or favoring debtor protection, influenced by concepts of debt forgiveness and humanitarianism. U.S. developments, especially after the Great Depression, reoriented consumer bankruptcy toward debtor rehabilitation, with exempt property serving as a key safeguard for subsistence and development. In China, scholarly discussion began in the 1990s (e.g., Xu Ming and Li Zhiyi, 1994; Tang Weijian, 1995), moving from feasibility debates to design questions by the late 2010s. Recent domestic research circles around Shenzhen’s 2021 regulations—assessing feasibility, thresholds, voting rules, costs, and scope—while views differ on the regime’s nature and practical effects (e.g., Kilborn, 2024; Ou and Zhang, 2022; Xie, 2021; Wei and Ma, 2023). International empirical work links personal bankruptcy to insurance coverage, regional economic heterogeneity, corporate policies, consumption, worker performance, investment behavior, macro indicators, and credit supply shocks (e.g., Kuroki, 2021; Keys and Mahoney, 2023; Chen et al., 2020; Agarwal et al., 2021; Lin et al., 2024; Borgo, 2021; Ahmad et al., 2022; Danisewicz et al., 2023). In China, focused studies on exempt property address recognition criteria, types, conversion/disposal, and limitations (e.g., Hu Liling, 2020; Xie Keshi and Yang Fuying, 2021; Xu and Chen, 2020). Gaps remain regarding the depth of analysis on exempted property and resolving the practical controversies: fixationism vs. expansionism in property scope over time; setting value limits vs. specifying only types; and enumeration vs. generalization. There is also insufficient synthesis of practical experiences from cases to refine the system.

The study employs: (1) Legal hermeneutics to interpret existing Chinese legal norms and judicial texts on personal bankruptcy and exempt property, including Shenzhen’s Personal Bankruptcy Regulations and multiple local court guidelines and opinions on centralized liquidation of personal debts (e.g., Zhejiang, Taizhou, Wenzhou, Dongying, Chengdu, Wujiang, Longmatan). (2) Case analysis using judicial documents and cases disclosed by courts, with data drawn primarily from the Peking University legal database. The authors identified cases explicitly addressing exempt property, ultimately selecting six cases (five with disclosed exempt-property content) for detailed synthesis (Table 3). They also compile system-level statistics (e.g., 2023 Zhejiang Provincial High Court and Guangdong Bankruptcy Management White Paper) and observe filing trends (2019–2023). (3) Comparative research contrasting foreign models (U.S., U.K., Germany, Japan, Taiwan region) on exempt-property scope, value limits, and construction modes (fixationism vs. expansionism; enumeration vs. generalization), to derive an improvement path suitable for China. Additionally, the study constructs a digital portrait of Shenzhen debtors based on 1031 applications (through February 28, 2022), covering gender, age, liability reasons, debt sizes, occupational status, income, and solvency.

- Judicial practice landscape: Multiple Chinese jurisdictions have issued judicial texts for centralized liquidation of personal debts, while Shenzhen enacted the first local personal bankruptcy regulation (2021). These texts variably define exempt property, often by types, with limited or no explicit value caps, and differ in treatment of property acquired post-filing. - Case volume and outcomes: Zhejiang courts (2023) accepted 1,275 personal debt liquidation cases and concluded 1,122; of the concluded cases, 352 were cleared (~31%). In Shenzhen (2023), there were 166 new liquidation cases, 622 reorganization, 36 settlement cases, and 147 cases accepted by courts; total applications increased vs. 2022 but remained below the first pilot year. Filings for centralized personal debt liquidation peaked in 2022. - Debtor portrait (Shenzhen, up to Feb 28, 2022; 1,031 applications): 686 male and 314 female (7:3). Ages 24–76; 76% aged 30–49; average ~40. Reasons for liability: 593 (57.5%) business failure/mismanagement (with 119 where living liabilities exceed 50%), 221 (21.4%) purely living liabilities, 176 (17.1%) speculation/infringement/fraud/gambling, 41 (4%) borrowing or guaranteeing for others. Debt size: 546 (53.0%) <1m yuan; 371 (36.0%) 1–5m; 46 (4.5%) 5–10m; 68 (6.6%) >10m (8 >100m). Occupation/income: 860 declared income; 569 (66.1%) fixed jobs; 134 part-time; monthly salary range 300–105,000 yuan; average 8,674; median 15,568; 151 unemployed (6 receiving benefits); 271 undisclosed. Solvency: 16.4% declared total property value 0; 59.3% assets 0–100k; 11.2% 100k–500k; 3% 500k–1m; 10.2% >1m. - Three core problem areas in judicial recognition of exempt property: 1) Scope over time (fixationism vs. expansionism): Most Chinese regions adopt expansionism (post-commencement acquisitions included in the estate), favoring creditor protection but potentially dampening debtor incentives to file and to generate income during proceedings. 2) Identification standards (value limits vs. types only): Most texts specify types without value caps, which grants broad discretion to judges/administrators and risks inconsistent or overly restrictive application; Shenzhen uniquely combines type listing with a total value cap for certain necessities. 3) Construction pattern (enumeration vs. generalization): Enumeration clarifies scope but is inherently limiting and still relies on judicial discretion for terms like “special commemorative items.” Generalization offers flexibility but demands high judicial quality and may be misaligned with China’s written-law tradition. - Comparative insights: U.S./Japan tend toward fixationism (greater debtor protection); Germany/U.K. toward expansionism (greater creditor protection) but with statutory income protections (e.g., German tiered wage exemptions). U.S. enumerates detailed categories with per-type caps; Germany/Japan/Taiwan region link to non-seizable assets without fixed value caps. - Policy alignment with national conditions: Given China’s unitary system, vast regional disparities, lower overall welfare level, and creditor-protection tradition, wholesale adoption of per-type fixed caps (U.S.-style) or unlimited generalization is ill-suited. A calibrated approach is needed to balance interests and ensure subsistence and redevelopment capacity for debtors.

The findings directly address the research questions by (a) mapping current research and practice around exempt property, (b) articulating its functional value in safeguarding subsistence and development rights and in stabilizing the economic and social order, and (c) identifying concrete judicial challenges. The debtor portrait and case statistics reveal that many applicants are economically active, young to middle-aged, with modest assets and ongoing income—underscoring the importance of leaving sufficient exempt property and income to facilitate rehabilitation rather than pushing debtors into deeper hardship. The predominance of expansionism in Chinese local practice secures creditor interests but risks undercutting debtor incentives and post-filing income generation; comparative experience (e.g., German wage protection) shows that expansionism can be tempered through exceptions that reserve necessary living and work-related income. Similarly, specifying only property types without value limits preserves flexibility but creates wide discretion and potential inconsistency; adding regional ceilings can channel discretion toward moderate protection suitable for local economic conditions while avoiding rigid one-size-fits-all national caps. Finally, combining generalization (principled clauses pointing to non-seizable necessities) with targeted enumeration (key categories such as essential living, work tools, social security benefits, commemorative items) operationalizes a flexible yet predictable framework, guided by principles of balance of interests, proportionality (moderate protection), and flexibility. In sum, the proposed improvement path aligns legal design with China’s socio-economic heterogeneity and legal tradition, aiming to enhance fairness, predictability, and rehabilitative efficacy.

Exempt property in personal bankruptcy is essential to protect debtors’ subsistence and development rights and to reflect humanitarian values. Based on Chinese legal norms and judicial texts since 2019 and illustrative cases, the paper identifies key issues in judicial recognition—scope over time, identification standards, and construction modes—and proposes a China-suited path: adopt expansionism with exceptions (especially to preserve necessary post-filing income under the balance-of-interests principle); use identification standards that specify property types while introducing regionalized overall value ceilings under the principle of moderate protection; and construct the scope through a hybrid of generalization and enumeration, applying the flexibility principle to accommodate diverse circumstances. These proposals account for China’s population scale, regional economic disparities, creditor-protection tradition, and unitary system. The study contributes theoretically by integrating the principles of balance of interests, proportionality of protection, and flexibility, and practically by compiling judicial texts and case data to inform future legislation and high-quality adjudication. It also offers a new sample for international comparative research on exempt property in personal insolvency.

Owing to the limited rollout of local personal bankruptcy systems in parts of China and variation in courts’ disclosure of personal bankruptcy cases, the sample size may be constrained, potentially affecting the robustness of evaluation. As China’s market economy continues to evolve, further empirical research with broader, more consistent data is needed to refine exempt property rules, with continued emphasis on human rights protection.