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Author - Divyam Agarwal

What Is Bankruptcy?

Bankruptcy comes in the picture when an organization is unable to pay their financial obligations. A bankruptcy filing is a legal process initiated by the company where they free themselves from debt obligations. In India, filing bankruptcy does not go well with the credit ratings. That means it would be tough to get another loan. However, it saves the company from current financial trouble.

When Should One File For Bankruptcy?

A person can think about declaring bankruptcy when he or she owes more than he or she can afford to pay. It is required to collect all the assets, including property, shares, vehicles, savings, retirement plan, etc. and roughly estimate the value for it. If the collective sum value is less than the required amount of debt owed, then declaring bankruptcy would be one of the options to come out of the tricky financial situation.

The Consequences Of Bankruptcy

Nobody wants to proceed on the path of bankruptcy. To avoid it, the company tries to maintain the financial health of the business, whether it could be small even. But unfortunately, it happened due to the mismanaged or mishandling of the finances. Under bankruptcy, small companies have an opportunity to control the business debts else company owners/directors get held to recover it from their liability. People involved in proprietorship or partnership firms usually find its convenient solution. Perhaps, corporations or limited liability companies have more options available for them.

Let us have a look at consequences of bankruptcy:

• Faster and easier liquidation: During the bankruptcy of the business, the trustee manages the logistics of selling off business assets to recover the debt amount. Though the company loses all the assets, they should not be worried about the whole process and to whom and what will be dispensed.
• Credit score impact: The impact of the bankruptcy significantly can be shown on the credit scores of the owner of the company. In the case of proprietor or partnership firms, business entities already separated from the principal. Therefore, there are chances of less impact on their credit scores.
• Clarifies taxes: It helps the company to determine the full value of the business assets and debts that owe. By evaluating this, it is easier to calculate the accurate tax burden. It prevents overpaying the taxes as well as it may reduce the personal tax burden of the year as bankruptcy proceedings have started. It saves time and unnecessary and unwanted trouble.
• In some cases, the business can be saved by selling unnecessary assets to fulfil the most pressing debts. However, it would be better to avoid bankruptcy entirely by making sure underlying finances are sound.

How Do Prepare For Bankruptcy?

The fact of being unable to pay debts is very stressful and frightening. People usually are not able to find a solution for it. And they consider that filing bankruptcy may give them relief. However, they do not know how to proceed for that. 

In India, there are provisions for an individual where they can file for bankruptcy. The process is more streamline for corporate entities under the Insolvency and Bankruptcy Code (IBC). However, IBC has few rules for individuals too.

The bankruptcy process is governed by the Presidency Towns Insolvency Act, 1909 in metro cities like Mumbai, Kolkata or Chennai. And for all other places in India, it is governed by the Provincial Insolvency Act, 1920. Though both laws are similar and eventually they would be replaced by IBC. 

If the debt is more than Rs. 500, a person can file for bankruptcy under the Provincial Insolvency Act. The court may accept or reject the application of bankruptcy after analysing the conditions for filing bankruptcy have been met. A receiver can take possession of the property of the debtor until the decision on the application is received. The court can apply for a stay order on legal proceedings of the property or assets of the debtor if the application is admitted. Also, the property resides with the receiver appointed by the court. The debtor's assets are then distributed among the creditors unless the debtor finds a compromising proposal with the acceptance of the creditor and the court. On the completion of this process, the court discharges the debtor from bankruptcy, and they are ready to start afresh.

The debtor can ask for a minimum maintenance amount from the court for the survival during the proceedings of insolvency.

The court can apply few restrictions on the debtor, such as a person cannot act as a director in a company or a public servant or elected or sit or vote as of any local authority, etc. until the proceedings complete and the court declares discharge from bankruptcy. 

It is important to note that, when the court discharges from bankruptcy, it does not mean that it clears all debts. An order releases an insolvent or debtor from all obligations except those specified under relevant statutes, debts incurred by means of fraud, etc.

Conclusion

The government provided a solution called "bankruptcy" for those who are under the burden of debts and do not know how to get rid of it. The law is for the benefits of both creditors as well as debtors. The law helps debtors to get rid of the debt burden and creditors to get their due amounts. The process of filing bankruptcy is tricky and may be lengthy too. Experts may help to make the process simple and convenient. The expert knows tips and tricks to resolve the issue in due time and may help in a new start.