Dispute Resolution Mechanisms in the Resolution of 2006 Taiwan Card-debt Problems

In 2006, Taiwan card-debt problems erupted. That is, credit and cash cards’ bad loans surged. The local banks lost NT$ 7.4 billion as a result, whereas in 2005 the banks made profits of NT$ 78.6 billion. Worse than that, bank’s debt collection measures caused debtors to run away or commit suicide. In this thesis, I intend to explore the causes of the card-debt problems and the mechanisms used to resolve the problems.

In recent years, banks, which were lured by high interest rates on credit and cash cards, issued cards without adequate checks on customers’ credit-worthiness. In the second half of 2005, consumer bad loans began to increase sharply. In 2005, the provisioning expenses, which were made to cover potential bad debts, was NT$ 71 billion. The figure rose to NT$ 162.9 billion in 2006.

Another cause of card debt problems was that Taiwanese society has turned into a consumer society. Consumers were controlled and exploited by the new means of consumption, such as department stores and cybermalls. They were encouraged to spend more. The prevalence of advertisements and the banks’ reckless lending also led to hyper-consumption and deeper indebtedness for consumers.

The Financial Supervisory Commission (FSC) and the Bankers Association established the card-debt negotiation mechanism in 2006 in attempt to resolve consumer bad loan problems. The mechanism allowed debtors to pay off debts with lower interest rates within longer period of time if they met the requirements. In the end of 2006, about 222,000 cases reached agreements on payback plans, with total card debts amounting to NT$ 320 billion, or NT$ 1.44 million per capita. The FSC also fined some banks because of their improper debt-collection measures.

Creditor banks also sued card-debt defaulters. This thesis investigates the card-debt collection cases that were beyond NT$ 500,000 in Taiwan Taipei District Court in August, 2006. Most importantly, in these cases, 98% of the claimants were Cathay United Bank. In June and October, 2006, most of the claimants were Cathay United Bank as well. Other main banks, such as Chinatrust Commercial Bank and Taishin International Bank, seldom took card debtors to court.

Some card debtors applied for bankruptcy and hoped the court would exempt them from some liabilities. However, it was unlikely consumer debtors qualified for bankruptcy. In 2005, there were only 514 bankruptcy applications and most of them were business bankruptcy, instead of consumer bankruptcy. 52 applications were permitted that year. In June, 2007, the legislature passed the Consumer Debt Clearance Regulation, so consumer debtors will qualify for bankruptcy more easily.

When the disputant capabilities in adjudication are asymmetrical, the court ruling is usually more favorable to the competent party. In card-debt cases, banks wrote form contracts in advance and were represented by lawyers; debtors, in contrast, had little bargaining power in contract negotiations and most of them could not afford to hire lawyers. Therefore, in card-debt collection and bankruptcy cases, banks had the upper hand over consumer debtors.

On the other hand, Chinatrust Commercial Bank and Taishin International Bank resorted to extra-legal measures to recover delinquent loans. They made debt-collection phone calls, visited debtors, and negotiated repayment plans. The extra-legal measures were often more effective than suing card-debt defaulters because the defaulters had few assets. The banks put pressure on debtors so that they would need to negotiate with the banks.

In conclusion, the mechanisms of resolving 2006 card-debt problems included legal means and extra-legal means. Legal means such as debt-collection cases and consumer bankruptcy were neither the only nor the most effective way to solve the problem. Instead, the banks and debtors often interacted and settled out of court. This thesis suggests the government should place more emphasis on extra-legal means of resolution. The government can utilize this to resolve card-debt problems and ease the case burdens on courts.