Foreign Debt

Foreign debt

In legal terms, foreign debt refers to all liabilities of a debtor with domicile or residence within the country towards creditors with domicile or residence abroad. They constitute a significant component of the international financial system and can be incurred by states (sovereign debt owed to foreign entities), companies, as well as individuals, within the scope of cross-border legal relationships. The legal treatment of foreign debt is complex and requires consideration of national and international norms, particularly regarding applicable law, legal enforcement, and specific regulations on capital controls.

Conceptual and legal foundations

Definition and distinctions

Foreign debt includes all obligations to pay money or provide other economic value to a foreign person or entity. In international financial statistics, foreign debt is specifically recorded as the liabilities of a state, company, or individual to foreign creditors.

Foreign debt must be distinguished from domestic debt, where both debtor and creditor are domiciled in the same country. The decisive factor is typically the domicile principle, i.e., the registered office or permanent residence of the parties involved.

Legal sources

The legal treatment of foreign debt arises in particular from the following sources:

• National law: Regulations of the relevant debtor’s and creditor’s countries, in particular from the Civil Code (BGB) or comparable civil law codes, as well as commercial and insolvency law provisions.
• Private International Law (PIL): Rules for determining the applicable law in cross-border matters, especially in Europe the Rome I and Rome II Regulations (Regulations (EC) No. 593/2008 and 864/2007).
• International law and international agreements: Bilateral and multilateral treaties, particularly regarding sovereign debts and debt restructuring measures.
• Capital movement control law: Regulations for restricting or monitoring capital movements between countries.

Origin and types of foreign debt

Causes

Foreign debt can arise in various ways, such as through:

• Borrowing from abroad (e.g., government bonds, corporate loans)
• Foreign trade transactions with deferred payment (supplier credits)
• Payment arrears from services or other contracts
• Guarantees, sureties, and other securities for foreign obligations

Types of foreign debt

• Public foreign debt: Debt of a state to foreign public or private creditors.
• Private foreign debt: Debt of companies or individuals to foreign lenders.
• Short-term and long-term debt: Depending on the maturity, a distinction is made between short-term (up to one year) and long-term foreign debt.
• Debt in foreign currency: Foreign debt is usually incurred in foreign currencies, which involves exchange rate risks.

Legal peculiarities and issues concerning foreign debt

Applicable law

The law applicable to foreign debt relationships is determined by private international law. Contractual partners often agree on the law of a specific country (choice of law clause). If there is no choice of law, the applicable law is determined by statutory conflict-of-law rules (e.g., Art. 4 Rome I Regulation: place of performance, habitual residence).

Jurisdiction and enforcement

The judicial enforcement of foreign debt is governed by the provisions on international jurisdiction. Within the EU, these are mainly regulated by the Brussels Ia Regulation. Outside the EU, differing national jurisdiction rules and international treaties apply (e.g., the Lugano Convention). The recognition and enforcement of foreign judgments are governed by the relevant bilateral or multilateral agreements or national law.

Insolvency law aspects

In the event of insolvency of a debtor with foreign debts, the issue of international jurisdiction and the inclusion of foreign creditors arises. In the European context, the EU Insolvency Regulation and relevant national provisions apply, which ensure an orderly insolvency proceeding, including consideration of foreign debt.

Foreign exchange and capital transaction regulations

Foreign exchange control and capital movement regulations represent another area of legal concern. States may impose legal restrictions on the outflow of capital abroad, such as reporting obligations, requirements for approval, or transfer restrictions. Violations can have civil law as well as criminal or administrative consequences.

Special problem areas

Sovereign foreign debt and restructuring

In the area of sovereign debt, international debt restructuring law is of particular significance. Restructurings are often coordinated by international organizations such as the Paris Club or London Club. Since there is no supranational insolvency law for states, an international consensus process prevails. Creditor agreements and debt restructuring contracts are the relevant instruments for the restructuring of sovereign foreign debt.

Compliance and money laundering

Payments related to foreign debt are subject to special requirements regarding transparency and traceability. Anti-money laundering laws and regulations oblige institutions to identify the beneficial owners and to report suspicious transactions to national authorities.

Outlook

Foreign debt will remain a central topic of international economic law due to globalized economies and financial markets. The legal frameworks are constantly evolving, particularly through new international standards, further developments in capital controls, and the ongoing digitization of payment transactions. In assessing foreign debt, not only national law but also the relevant international agreements and developments at the level of international law must always be considered.

See also:

• [Internationale Staatsschuldenkrisen]
• [Internationales Privatrecht]
• [Kapitalverkehrskontrolle]
• [Insolvenzrecht]
• [Währungsrecht]

Frequently asked questions

How can a foreign claim be enforced in Germany?

To enforce a claim adjudicated abroad in Germany, a so-called recognition and enforcement procedure must generally be completed. The applicable procedure depends on the country of origin of the title. If the title comes from an EU member state, the Brussels Ia Regulation (Regulation (EU) No. 1215/2012) applies, which, in certain cases, provides for automatic recognition and enforceability without further exequatur proceedings. For titles from non-EU countries, the respective bilateral or multilateral agreement applies, if available; otherwise, §§ 722 ff. ZPO. The prerequisite is that the foreign title is issued by a competent court, is final and enforceable, and that there are no grounds for refusing recognition (e.g., breach of ordre public). Enforcement is then carried out under German law and by German enforcement authorities such as bailiffs or the enforcement court.

What legal options does a German debtor have against foreign debt collection?

German debtors can defend themselves against the assertion of foreign claims through various legal means. During the recognition and enforcement proceedings, for example, they may argue that the foreign title was not properly obtained, fundamental procedural principles were violated (e.g., right to be heard), the title is not final or enforceable, or the foreign court lacked jurisdiction. It can also be examined whether the title violates German ordre public. For enforcement measures under German law, ordinary remedies such as opposition to enforcement or enforcement defense action (§ 767 ZPO) are available.

What role do bilateral agreements and international conventions play in foreign debt?

Bilateral agreements and international conventions, such as the Lugano Convention, the Hague Convention, or certain interstate recognition and enforcement treaties, govern mutual recognition and enforcement of court decisions and thus have a significant impact on the legal handling of foreign debt. If such an agreement exists between Germany and the country of origin of the debt title, the process of recognition and enforcement is usually simplified and binding. Without a basis in international law, only the less certain case-by-case assessment under domestic law remains, including possible grounds for refusal.

Which law applies in the event of a dispute over foreign debt?

The law applicable to foreign debt is primarily determined by private international law. For contractual obligations, the Rome I Regulation (Regulation (EC) No. 593/2008) generally applies, which allows for party autonomy in the choice of law, but provides a subsidiary rule if no choice of law has been made. For non-contractual claims, the Rome II Regulation is relevant. In addition, mandatory protective provisions of the debtor’s country and, if applicable, consumer protection regulations may apply. In legal disputes, it is always necessary to examine which law is pertinent and competent for resolving the conflict.

How does international service of legal documents work in cases of foreign debt?

The service of judicial documents in an international context depends on the countries involved and any existing agreements. Within the EU, this is governed by Regulation (EC) No. 1393/2007 (EU Service Regulation), which provides for the direct transmission of documents to the designated domestic ‘transmitting agencies.’ In relations with non-EU countries, the Hague Service Convention often applies, which stipulates a formal, standardized transmission and may entail translation requirements. Regardless of the method, it must always be ensured that the recipient can properly acknowledge receipt of the document. Deficiencies in service may impair subsequent enforceability and recognition.

What limitation periods apply to foreign debt?

The limitation period for foreign debt can be complex, as fundamentally the substantive law governing the debt relationship (according to private international law) applies. Under German law, the court considers limitation a matter of substantive law (Art. 12 EGBGB). This means the period for asserting a claim is determined by the relevant foreign law, provided there is a corresponding conflict-of-law connection. Conversely, a foreign title enforceable in Germany is subject to the limitation periods under the German Code of Civil Procedure (ZPO, § 197 para. 1 nos. 3 and 4), according to which the limitation period for judgments is 30 years – as long as the title has been recognized and declared enforceable in Germany.

What are the consequences of not paying foreign debt?

The consequences of not paying foreign debt are diverse: Initially, legal action may be taken in the creditor’s country, such as a court claim and subsequent enforcement measures. If the resulting foreign judgment is recognized and declared enforceable in Germany, all German enforcement measures, such as account garnishment, wage garnishment, or foreclosure on real estate, may be applied. Furthermore, negative entries in credit agencies, such as Schufa or other reference agencies, may occur if a valid claim exists. In some cases, international insolvency may result, which is regulated across countries (e.g., European Insolvency Regulation). Legal defense should always be examined in all affected countries.