HOW TO FILE FOR BANKRUPTCY?
By Lawfarm Team July 30, 2016
Written by Atrayee De:
What is bankruptcy?
An individual filing for bankruptcy legally announces that he is not in a position to service his debt obligations. The status of being 'bankrupt' relieves debtors from the legal obligation of debt payment to creditors.
An Introduction to the Bankruptcy Laws in India
At present, there are multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals in India. The contemporary legal and institutional framework does not aid lenders in effective and timely recovery or restructuring of defaulted assets and causes undue strain on the Indian credit system.
Recognising that reforms in the bankruptcy and insolvency regime are critical for improving the business environment and alleviating distressed credit markets, the Government announced the Insolvency and Bankruptcy Code Bill in November 2015, drafted by a specially constituted 'Bankruptcy Law Reforms Committee' (BLRC) under the Ministry of Finance. After a public consultation process and recommendations from a joint committee of Parliament, both houses of Parliament have now finally passed the Insolvency and Bankruptcy Code, 2016 (Code).
About the New Code
The Code offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms). The Government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities. One of the fundamental features of the Code is that it allows creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation. The Code creates a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, that will facilitate a formal and time bound insolvency resolution process and liquidation.
Steps to file for bankruptcy as an individual
If you are in a financial mess and your liabilities are too high as compared to your assets, filing for bankruptcy will act as a restart button. It will give an honest and burden-free start to your life as you will be relieved from all the debts. If you plan to file for bankruptcy, you'll need to consider these steps:
1. Organize your balance sheet: Bankruptcy is a legally-acquired status and one has to prove it in court. Court decisions are based on evidence and in this case evidence will be in the form of the assets and liabilities you hold.
2. Look up for a legal advisor: Talk to an expert advisor on this matter. Your advisor will study your balance sheet and explore the possibility of captivating the court case. The advisor will provide an insight on individual filing or joint filing in case you are married.
3. File a proceeding for bankrupt status: Ask your lawyer to file a petition under the Provincial Insolvency Act and fight the case in court. Once you win the case, you will be deemed bankrupt and will be relieved from continuous hounding of creditors.
What are the advantages of filing for bankruptcy?
Getting bankrupt is in no way a desirable state, but it is not the end of the road either. You may lose your self-confidence and sense of direction, but you can make a comeback with careful planning. There are a few advantages that come along with filing for bankruptcy:
Mental peace: Financial stress often pushes debtors to the wrong direction. Numerous cases of suicide and murder related to individuals' debt situation are reported commonly nowadays. By filing for bankruptcy, a debtor can avoid stress and harassment at the same time.
Opportunity to restart: Before filing for bankruptcy, debtors do not get enough time for planning their future since the focus remains on creditors. Remember, even will all your assets gone, you still possess your skills and intelligence. You can concentrate on your future plans once your debts are written off post-bankruptcy.
What are the disadvantages of filing for bankruptcy?
Financial distress caused by bankruptcy can disrupt your plans - both for the present and the future.
Here are discussed a few disadvantages of bankruptcy:
All your assets are going to be lost: All your assets are liquidated in case of bankruptcy. The amount obtained is simply drained out in settling creditors' claims. You are left empty-handed which makes a restart highly difficult.
Credibility goes for a toll: Once you file a suit for bankrupt status, the message is loud and clear that you are a defaulter. You lose credibility in the eyes of creditors. Lack of credibility makes it impossible for you to secure debt in the future.
Cost of filing bankruptcy: Filing for bankruptcy, a costly affair indeed, is the final nail in the coffin as you have to pay for fighting your case. It simply fuels the pain one is already going through.
How to avoid bankruptcy?
As it's quite evident that bankruptcy may adversely affect your future life, it is wise to avoid such a situation. Here are a few options which can be used as lifelines:
Access a financial advisor: Financial advisor can help you manage your situation better. An advisor can not only identify hidden sources of fund but can also help in disposing of some liabilities. This two-fold improvement might motivate you to defer your decision to declare bankruptcy.
Negotiate with your creditor: If you feel that buying little time might improve your situation a bit, negotiate with your creditor. Under normal circumstances, a creditor would not like you to file for bankruptcy and if you are able to convince him regarding your future cash flows, he will definitely listen to you.
Offer to sell your skills against debt: If you possess a sellable set of skills, you can offer the same to your creditors against the debt you owe. A creditor is likely to accept your offer if you have a skill that may be of use to your creditor.
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Author: Swechha Malik, Lawfarm Intern
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