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What is Bankruptcy? How Does It Work? Research Team | Posted On Thursday, October 17,2019, 04:26 PM

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What is Bankruptcy? How Does It Work?



In India, businesses or individuals can file for bankruptcy in case they are in serious financial trouble and are unable to pay back its creditors. However, filing for bankruptcy in India will result in social stigma and will reflect very poorly on your credit score. It can be devastating but it is not the end of your path. Let’s try to understand bankruptcy in simple words:

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What is Bankruptcy?

Bankruptcy is a financial condition which can be declared by an individual when they are unable to pay back their creditors or lenders. It is not as simple as it sounds. Once declared, it affects your credit score badly and you will not be able to secure any credit from banks or any financial institution.

An organisation or individual files for bankruptcy when it is unable to meet its financial obligations or make due payments to the creditors. A petition is filed in the court when a person declares bankruptcy. A legal process then takes place where all the outstanding debts of the entity is measured and paid out (in full or partial) from the company’s assets.

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Types of Bankruptcy:

Chapter 7 Bankruptcy: This is the most traditional type of bankruptcy. When filed for such bankruptcy, an individual will have to pay or give up his properties and assets for secured debts. This type of bankruptcy is also called straight bankruptcy.

Here the court orders for the sale of assets like cars, equipments, factories or house and furniture to pay back as much of the debts possible. The remaining balance you owe is eliminated once the bankruptcy is discharged. However, chapter 7 bankruptcy does not release you from all your financial obligations. You will still have to pay alimony, child support, taxes and student loan if any.

Chapter 13 Bankruptcy: You can file for this bankruptcy if you have enough income to repay the debt partially or fully. If you file for this type of bankruptcy then the court allows you to keep your property in exchange for a term through which you partially or completely repay your debt. The bankruptcy court and your lawyer will negotiate repayment tenure which can be extended up to a period of five years. This way your weekly/monthly payment amounts will reduce but during this period your finances will be constantly supervised.

Though any kind of bankruptcy will severely affect your creditworthiness, filing for chapter 13 bankruptcy is a favourable option because here you will be able to pay back fully/partially the debt you owe and will be able to retain some of your assets.

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Chapter 11 Bankruptcy: This type of bankruptcy is referred to as “reorganisation bankruptcy” as it offers a chance to the businesses or organisation to operate while restructuring their business debts and assets. This type of bankruptcy can be filed by large organisations or partnership businesses and in rare cases individuals. The business decisions made by the entity filed for chapter 11 bankruptcies during the court proceedings will need court permission to be implemented.

Bankruptcy in India:

Bankruptcy in India is regulated by the following acts:

  • Presidency Towns Insolvency Act, 1909: under this act, the high courts of Chennai, Mumbai and Kolkata have been authorized to try insolvency cases.
  • Presidency Insolvency Act, 1920: applicable to areas which are outside the jurisdiction of Presidency Towns Insolvency Act, 1909.
  • The Insolvency and Bankruptcy Code 2016: this is a bankruptcy law that was passed to consolidate the existing framework to make a single law to govern bankruptcies in India.

Insolvency and Bankruptcy Board of India:

The insolvency and bankruptcy board of India was established on 1st October 2016 after the insolvency and bankruptcy code was passed. It is a regulatory body that is bestowed with the power to register and supervise the insolvency cases. It supervises and enforces rules for processes, such as corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy under the insolvency and bankruptcy Code. The body is recently authorised to promote the development of, and regulate the working and practices of insolvency professionals, insolvency professional agencies and businesses/firms and other institutions.

See Also: What is Bank Guarantee?

How to File for Bankruptcy?

You can file for bankruptcy if you have huge debt and you feel that you are not financially equipped to pay it. You cannot file for bankruptcy on behalf of your spouse or a family member. Once bankruptcy is filed, you cannot hold a position in a company or a government office while the court proceeding is on.

Take the following steps to file for bankruptcy:

  • Make a record of your debts, your unpaid bills and a complete list of your assets. The financial record of your income and expenditure will help you determine the amount of debt you owe. While filing for bankruptcy, the Indian laws as you to reveal all your assets. While the proceeding is on your financial record will be used at various stages of the court proceedings.
  • Hire a lawyer who will initiate the bankruptcy proceedings. A civil lawyer will help you and guide you through the court proceedings during your bankruptcy court case. A lawyer will advise you whether to proceed with bankruptcy case or not.
  • In India, filing for bankruptcy can be done singly or jointly with your spouse.
  • You may proceed to file for bankruptcy under the Presidency towns insolvency act, 1909 and declare you are bankrupt. You should not have any property or assets under your name or your spouse’s name while filing for the same. The act protects you from getting arrested due to the debts you owe.
  • The court proceeding starts and then the court decides how you will repay your creditors.

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