The paper focuses on personal bankruptcy exempt property (free property) in China, a crucial element lacking in previous legislation. The high personal debt levels in China, exceeding 20 trillion yuan in 2022, highlight the need for such a system. While the Enterprise Bankruptcy Law exists, the absence of personal bankruptcy provisions necessitates exploration. The Shenzhen Special Economic Zone Personal Bankruptcy Regulations (2021) represent a significant step, followed by further governmental emphasis on establishing a personal bankruptcy system. This paper uses legal hermeneutics and case analysis methods to examine the judicial practice of exempting property, aiming to identify problems and propose solutions. The research questions address the current research status, the connotation and value of exempt property, and the improvement paths for judicial recognition in China. The paper reviews the historical evolution of personal bankruptcy systems globally, noting the shift from creditor protection to a more balanced approach emphasizing debtor rights, a shift influenced by the 'debt forgiveness concept' and 'humanitarian theory'. In China, research on personal bankruptcy began later, with initial focus on the feasibility of implementation. Post-2021 regulations, research shifted to analyzing the feasibility of the Shenzhen model, addressing scope of protection, the regulatory framework, entry thresholds, and the supporting system. The paper explores the existing gaps in the literature regarding the in-depth study of exempt property within the personal bankruptcy system and proposes a new scheme and pathway for its judicial recognition within the Chinese context.

The literature review traces the historical evolution of personal bankruptcy, starting from ancient Rome where creditor self-help predominated, to modern systems in the US, Germany, and Japan that increasingly emphasize debtor protection. The study notes the influence of the “debt forgiveness concept” and “humanitarian theory” in shifting the focus towards debtor rehabilitation and the importance of exempt property systems. The review then examines the relatively recent development of personal bankruptcy research in China, highlighting the early discussions regarding the feasibility of such a system and the subsequent focus on the Shenzhen regulations. It analyzes existing research on the advantages and disadvantages of these regulations, noting the lack of in-depth analysis of the exempt property system itself. The review contrasts foreign research, which focuses on the impact of other systems (e.g., healthcare) on personal bankruptcy and the effect of personal bankruptcy on the market economy, with Chinese research, which centers on specific aspects of the personal bankruptcy system, including exempt property criteria, conversion, and disposal issues. The review identifies key gaps in the existing literature: disputes in the judicial determination of exempt property (regarding “fixationism” vs. “expansionism,” value limits, and generalization vs. enumeration) and the limited incorporation of practical experience and case analysis in developing improved systems.

This research uses a mixed-methods approach. It employs a legal hermeneutics method to interpret existing legal norms and judicial texts related to personal bankruptcy exempt property in China. A case analysis method is used to examine specific judicial cases, allowing for an in-depth understanding of how the exempt property system operates in practice. The comparative research method is applied to examine the approaches taken in other countries, facilitating the development of recommendations for improvement. Data sources include the Shenzhen Personal Bankruptcy Regulations, other relevant judicial documents from various Chinese courts, and case data obtained from Peking University's legal database. Data on bankruptcy cases are used to establish a digital portrait of debtors in Shenzhen, providing insights into their demographics, reasons for bankruptcy, debt levels, occupational status, and solvency. This descriptive analysis helps to contextualize the challenges and opportunities associated with implementing an effective exempt property system. The study specifically selects cases focusing on exempt property to analyze inconsistencies and problems.

The analysis reveals significant issues in the current Chinese judicial recognition of personal bankruptcy exempt property. First, the determination of the scope of exempt property shows inconsistency across regions. The paper identifies a debate between “fixationism” (exempting only assets held before bankruptcy proceedings) and “expansionism” (including assets acquired after the proceedings begin). Most regions in China currently adopt expansionism but this may not be conducive to debtor rehabilitation. Second, inconsistencies exist in identifying standards for exempt property. Some jurisdictions set a value limit on exempt property, while others only specify the types of property that may be exempted. The lack of clear value limits leads to considerable judicial discretion, potentially leading to unfair outcomes for debtors. Third, the construction of the exempt property system varies across regions, employing different models of “enumeration” (explicitly listing exempt assets) and “generalization” (using general language to define the scope). The findings highlight an imbalance between the two, with a lack of clarity and inconsistency in practice. A digital portrait of debtors in Shenzhen is created based on data analysis. It indicates that most debtors are young to middle-aged, primarily facing debt due to business failures. The findings also reveal a large variation in debt and asset levels among debtors. The analysis of six selected cases further illuminates these issues, demonstrating inconsistencies in the application of exempt property provisions and lack of clear guidance on the types and value limits of exempt assets.

The findings highlight the need for significant improvements in the judicial recognition of personal bankruptcy exempt property in China. The current system, characterized by inconsistencies and lack of clarity, needs a more balanced approach that protects both creditor and debtor rights. The paper proposes three key improvements: (1) adopting a modified “expansionism” with exceptions for objectively unavoidable situations, ensuring fair treatment of debtors; (2) establishing clearer recognition standards by specifying property types while introducing regional value ceilings based on economic development levels, acknowledging the diversity within China; and (3) implementing a combined “enumeration” and “generalization” model to offer both clarity and flexibility in defining exempt property. These recommendations aim to strike a balance between protecting debtors’ basic needs and ensuring fair repayment to creditors, promoting social stability and economic development. The paper underscores the necessity of considering China's unique social and economic context, particularly its underdeveloped social security system, when designing such a system.

This paper contributes to the understanding of personal bankruptcy exempt property systems by analyzing the Chinese experience. It reveals significant problems with the current system and proposes a framework for improvement, incorporating a balanced approach that considers the interests of both creditors and debtors. Future research should focus on evaluating the effectiveness of the proposed improvements and exploring the long-term impacts of these changes on the Chinese economy and society. Further research on the impact of social security systems on personal bankruptcy is also crucial.

The study's reliance on available data from a limited number of jurisdictions and court cases might limit the generalizability of its findings. The lack of comprehensive data from across all regions of China could affect the representativeness of the findings. Future research should aim to collect more comprehensive data to validate the findings and generalize to a wider range of situations. Furthermore, the study primarily focuses on legal and judicial aspects and does not fully delve into the sociological and economic impacts of the personal bankruptcy system, which could provide further insights into the effectiveness of policy changes.