What does the word ‘Bankruptcy’ make you feel?
For most, the somber word strikes fear in their hearts. Immediately, visions of being a complete financial failure, of having lost all worldly possessions come to the mind. Bankruptcy is definitely a challenge, the kind you never hope to come across. But knowing about it eases some of those fears, especially if you are dealing with it.
Bankruptcy, in simple terms, is a financial condition where a person or an organization becomes unable to repay debts to his or their creditors. Bankruptcy is a legal process, an option for an individual, family or corporation who find themselves unable to pay off their debts.
Three types of bankruptcy
Chapter 7 Bankruptcy – Traditional bankruptcy is called ‘Chapter 7’ of the Bankruptcy Code. Under Chapter 7, you either pay for or give up your properties for secured debts. You also surrender any non-exempt property to pay off as much of your other debt as possible. Further, you keep all of your other exempt property and are thus released from any obligation to repay the remaining dis-chargeable debt.
One important requirement for a Chapter 7 bankruptcy is that you do not have any real income to allow you to pay off any portion of your debts.
Chapter 13 Bankruptcy – If you have any kind of possible income that can be termed ‘enough’, you need to file under Chapter 13. In this, you do not need to get rid of all of your debt entirely, but try and do a combination as below:
- Consider your income and restructure your payments OR
- Get rid of a part of your total debt so that you can manage payments.
You can do so by spreading your payments over a longer period of time or by paying only a part of the loan. This way, your monthly/weekly payment amounts will be reduced and you can stretch this system for upto five years. However, do keep in mind that your finances will be under constant supervision of the trustee during this entire time. In a Chapter 13 case, you may spend some time negotiating with creditors as they try to get you to change your plan so they get more money or get it faster. It is preferable to get the creditors onboard with your plan, but if they object, it can still be approved as long as the judge deems it fair and if each creditor gets as much as if you had filed under Chapter 7.
Chapter 11 Bankruptcy – A person or company become a debtor-in-possession if they file for Chapter 11 Bankruptcy. It means that while they continue to have most of their responsibilities for operating the business, they have to additionally work with the trustee for a plan to reorganize their debts. If both the judge and the creditors approve, the plan to do so can be put into action.
How to File for Bankruptcy
Bankruptcy, also known as insolvency is governed by two acts in India. The Presidency Towns Insolvency Act, 1909 is applicable in Chennai, Mumbai and Kolkata and the Provincial Insolvency Act, 1920 is applicable in the rest of India.
Under the Provincial Insolvency Act, you can file for bankruptcy if you are unable to repay a debt greater than ₹500. The following steps take place thereafter:
- You can file for a stay against all recovery procedures by your creditors.
- An official who is appointed to take control of your assets, then distributes them accordingly among your creditors. This is the only way ahead unless you can propose a compromise that is accepted by your creditors and the court.
- Once the above procedure is complete, the court discharges you, allowing you to begin again financially and as a debt free man.
Remember, while a bankruptcy or insolvency proceeding is on before the court, you can apply for a minimum maintenance amount for yourself. However, you cannot file for bankruptcy on behalf of your spouse. Neither can you hold a position in any company or public office while the proceedings are on.
Why should you file?
Most importantly, you should file for bankruptcy for peace of mind and to be rid of abusive creditors. Also, unless you have debts caused by fraudulent means, chances are that a bankruptcy proceeding will allow you a fresh lease in life. It is also good to note that debtors in India are not sent to prison unless fraud of any kind has been committed.
India’s game changing IBC for corporate entities
Under India’s Insolvency and Bankruptcy Code 2016 (IBC), a bankrupt entity is a corporate entity or debtor who has been labeled as bankrupt by a legitimate authority by passing a bankruptcy order.
It may sound harsh but no economy can flourish if it cannot figure out how to deal with failed institutions or non-performing assets. A situation where good money gets stuck in litigation’s is the least preferred situation for business partners or lenders. Insolvency and Bankruptcy Code 2016 provides with a speedy process for early identification of financial distress and resolution of entities if various conditions are met.
Within three years of its functioning, IBC, that became operational on 21 July 2016, is being called a game changer. In May 2018, a debt-laden Bhushan Steel Ltd had become the first successful resolution under the IBC, when it was acquired by Tata Steel. Infact, according to this Mint article , one can now see clearly the resolution of ‘the Reserve Bank of India’s (RBI) so-called dirty dozen or the group of 12 corporate defaulters that accountfor the single-largest share of non-performing assets, amounting to ₹ 2.77 trillion.’
With flourishing incomes and dispensable cash in most Indian households, debt is becoming more and more common. This means that cases of bankruptcies will only grow. This makes an effective bankruptcy law particularly important in a bulging economy like ours. As both the Provincial Insolvency Act and the Presidency Towns Insolvency Act are similar, they will eventually be replaced by the IBC. This will mean better timeframes and better structuring of solving bankruptcy cases for individuals.
So if you are in a place where bankruptcy seems to be looming large, don’t lose heart. Treading carefully and fairly will get you through to the other side. Best of luck!