Law Changed to Address Injustice of Inherited Debt

Family structure in Taiwan has become more diverse, with divorce and remarriage frequent. Family members sometimes leave their homes and fall out of sight. The successor generation is by no means always aware of the financial situation of their elders, yet, under the old law, if a relative died leaving behind a large debt, the blameless heirs had to take full responsibility for it.

To rectify the injustice of this system, on May 22, 2009 the Legislative Yuan passed amendments to that part of the Civil Code devoted to "Succession." Under the amendments, the inheritance system universally adopts the principle of "limited succession." For example, if the inherited debt is NT$10 million, and the estate is worth NT$2 million, the heirs need only pay off NT$2 million of the debt (not including insurance premiums).

However, the amendments are only conditionally retroactive. Persons who have already taken on inherited debts will not necessarily get full relief, and future heirs must be careful not to misunderstand the new law and assume that there is no obligation under any circumstances to repay any part of inherited debt.

A three-month-old infant in Chiayi surnamed Zhao was, while still in his mother's womb, the cross-generational heir to an NT$20,000-plus tax debt of his grandfather, achieving the dubious honor of being the youngest debtor in Taiwan.

The deceased was the father of Mrs. Zhao, Baby Zhao's mom. Her parents had been divorced for over 20 years. When the old man died in February of 2007, Mrs. Zhao's sisters, fearing they would inherit their father's debts, hurriedly waived their right to inherit, and Mrs. Zhao also wavied inhertance rights on behalf of herself and her five-year-old son. Her second son was still in the womb at that time, and did not have a name, much less an ID card, and the Zhaos were told that they could take the necessary measures to waive this child's right to inheritance after he was born. But when they went to the Hsinchu District Court to take care of the matter, the judge ruled that a waiver should have been filed within two months of the family's becoming aware of the inheritance, and the Zhao family, having missed this deadline by 20 or so days, had their request rejected, leaving Baby Zhao holding the debt.

After going through two sets of amendments, the part of the ROC Civil Code setting the rules for "Succession" (i.e. inheritance) has, since May 22 of 2009, universally adopted the principle of "limited succession" to inherited debts. This limits an heir's liability for the debts of the deceased to the total assets inherited by the heir from the deceased. The photo shows a press conference held two years ago by the Taiwan Foundation for Children and Families as part of their campaign to have the law changed to exempt minors (under 20) from inherited debt.

The law was an ass

This absurd legal outcome of "being born into debt" is by no means unique. Two years ago, the Taiwan Fund for Children and Families (TFCF) discovered that of the more than 18,000 disadvantaged families receiving assistance, 20% inherited loan debt or credit card debt from relatives.

For example, a National Chung Cheng University student named Ho unwittingly inherited a debt of NT$45 million from his late grandfather. Twenty years ago the grandfather's first wife died, after which he remarried, leaving Ho's father to make his own way in life. After Ho's father passed away, he and his mother were left to fend for themselves. When Ho's grandfather died in 1999 (when Ho was in his third year of junior high school) the grandfather's second wife and their children rushed to waive their inheritance rights, leaving the huge debt to fall on Ho, who had no idea of what was going on. In fact, he only became aware of the seriousness of his situation when, in 2005, he discovered that the NT$1700 subsidy that the TFCF transferred into his account each month was being confiscated by the court for compulsory debt repayment.

Responding to appeals from the TFCF, on December 14, 2007 the Legislative Yuan amended the law to provide a protective umbrella to minors (below age 20). Specifically, minors or handicapped persons who inherit debt and assets only have to repay the debts to the extent of the inherited assets. Moreover, the amendments were retroactive with no time limit.

Question of life and debt

The most important reform in this May's latest amendments by the Legislative Yuan is uniform adoption of the limited succession system, and expansion of its scope to cover all citizens. In the future, the heirs (whether adult or not) of a deceased person who leaves behind debts will only have limited liability for those debts.

However, it is worth noting that, to avoid moral hazard and to protect the interests of creditors, exceptions are written into the new system. For example, if there are suspicions that heirs are engaging in any one of three behaviors damaging to the legitimate interests of creditors-hiding cash, valuable antiques, or other assets; filing a false report with the National Tax Administration; or conspiring to transfer title to inherited assets-they cannot claim limited succession.

Moreover, to prevent the new system from having an excessive impact on current realities, it is only "conditionally retroactive." This leaves doubts about application of the law to persons who have already inherited debt, and has left a lot of people in the legal community regretting that the future benefits might not be as comprehensive as they could have been. "Although the new law marks progress, it is not universally applicable. There are a lot of word games in it, causing headaches for heirs and really putting lawyers and judges to the test!" says attorney Lin Chyong-jia, a member of the advisory committee of the TFCF branch office in Taichung County, who has helped many debt-heirs file appeals.

For instance, the first article of the amended Enforcement Provisions for the Part on Succession in the Civil Code stipulates that in cases where the obligation of the deceased arises from a guarantee of a debt that the deceased had contractually assumed for a third party, the heirs must still pay off that obligation. Although the Enforcement Provisions also say that "in cases where continued responsibility for the obligation leads to manifest unfairness, the obligation shall be repayable only to the extent of inherited assets," terms such as "obligation from a contract of guarantee" and "manifest unfairness" create many pitfalls for the unwary.

Lin Chyong-jia explains that in cases of loans to individuals or juridical persons (such as banks), if the creditor-debtor relationship is based on negotiable instruments such as a personal check (to be paid off by a financial institution) or promissory note (to be paid off by the individual signatory, like an IOU), then this relationship does not fall within the exemption from liability of an obligation undertaken by a contract of guarantee. Therefore, if the father served as a guarantor for another person prior to the father's death, and signed a check or promissory note worth NT$10 million to guarantee that person's loan, adult heirs are liable to repay this amount just the same.

When such cases get to court, although some judges will be sympathetic to debt-heirs and feel that the principle that "the son shall repay the debts of the father" is unjust, other judges may feel that children have a duty to take on the obligations of the parents who gave them life, food, clothing, and shelter. Such judges may reason that if a child makes a decent living, it is not "manifestly unfair" to ask him or her to pay a little each month over 20 or 30 years to repay the inherited debt, and they will rule that the creditor may compel repayment from the heir. This raises the question of what the standard for "unfair" should be.

Promoting transparency

Chung Jui-lan, senior specialist in the Department of Legal Affairs in the Ministry of Justice, says that every law must take social stability heavily into account. The fact is that some negotiable instruments become similar in function to cash, and circulate from hand-to-hand, with each party assuming that they are equivalent to their face value in cash, so it is hard for the authorities to decide how to classify or regulate them. However, so long as the heir can prove at the time of inheritance that he or she had no knowledge of the existence of the debt of the negotiable instrument in question, the heir can seek relief through the normal appeals channels.

With respect to the ambiguities in the new system, Chen Yeh-shin, formerly a judge in the Kaohsiung District Court and currently chairman of the Administrative Appeals Commission of the Taipei City Government, says, "The amendments are naturally the result of compromise among all the interested parties. But anyway they mark a great improvement over the old rules; at least debt-heirs no longer are helpless victims." Of course, judges decide specific cases independently, so it is impossible to predict their positions beforehand. One can only hope that in interpreting the new law they will take into account the heir's income, the amount of the deceased's assets received in the past as "gifts," and the like.

From another angle, one may wonder why creditors feel justified in pursuing heirs for repayment of loans. Chen Yeh-shin relates: "It is said, 'individual debt should be the responsibility of the individual.' Banks know this, and realize that it is unfair to pursue heirs for the collection of debts. After all, banks have specialized capabilities and should take responsibility for checking out a person's credit before loaning them money. How can they possibly consider incalculable factors-such as when a loan applicant might give birth to an heir or who the legal heir might eventually be-in deciding whether to loan money?" However, Chen adds, if a bank gives up trying to collect a debt, it goes onto the books as a "non-performing loan," and when the authorities come to do an audit, they will be suspicious that the bank is failing to pursue repayment because of collusion or fraud.

Chen suggests that the Financial Supervisory Commission take its cue from current practice regarding compulsory negotiation for settlement of disputes over sales of Lehman Brothers structured notes to unwary investors (especially elderly or inexperienced investors). The FSC could likewise create criteria that will provide banks with a mechanism for clearing cases of inherited debt for which the new law does not apply.

As for the problem of heirs hiding inherited assets from creditors by transferring legal title to others, Lin Chyong-jia suggests that the best way to prevent this is to promote the transparency of all financial transactions. "If all of the transactions of the deceased when he or she was still alive are reported to the Joint Credit Information Center, then creditors will have protection, the National Tax Bureau will be completely informed regarding inheritance tax, and there will be no opportunities for laundering dirty money. It just depends on whether everybody is willing to do it or not!"

An old proverb says that nobody goes into business to lose money. Banks, for whom "business is business," are already coming up with measures to control risk in this new era of limited succession. For example, for disadvantaged loan applicants who cannot provide collateral, they will buy life insurance with the bank as the beneficiary, and will restrict the amounts that can be lent to such persons, with the "invisible hand" of the market finding the right balance.

"Law is the last line of defense for social justice," but at the same time it can be "manipulated by the rich to torture the poor." For the concept of universal limited succession to work, the public, financial institutions, and legal professionals will have to provide their support; only then can both social stability and justice be upheld.