Bankruptcy is a legally declared inability or impairment of ability of an individual or organisation to pay its creditors. A bankruptcy happens when a person voluntarily declares herself as an insolvent and goes to the court. On declaring the person as ‘bankrupt’, the court becomes responsible for liquidating the personal property of the insolvent and distributing it among the creditors. This process is supposed to be amicable as it seeks to avoid threatening calls by creditors. However, in reality, it is not that smooth or easy. Delaying tactics are used by all concerned.
In some ways, bankruptcy has always been a remedy for creditors, not debtors. The law allows a creditor to seize all assets of the debtor. This could mean that the debtor’s family has to pay the debts to obtain the release of the debtor.
The Bankruptcy Law Reform Committee set up by the Department of Economic Affairs, Ministry of Finance, under the chairmanship of T.K. Viswanathan on 22 August 2014 to study and submit a report to the government for reforming the system. The proposed law is a great move but the focus is largely on companies, of all sizes—large, medium, small and micro—and not individuals.
In about 80% cases, the business fails due to cash flow problems, which can be overcome by talking to bankers to extend the loan, or with the help of short-term loans. Banks are amenable to lending to companies. But if an individual is not able to manage her finances, no institution wants to help her. There is need for comprehensive individual bankruptcy laws. This is because declaration of personal bankruptcy has its own disadvantages.
• Our laws and the financial ecosystem do not have mechanisms using which an individual can start afresh. For instance, we don’t have a social security system through which a person can sustain herself.
• Those declaring bankruptcy face societal stigma. In India, insolvency is considered extremely demeaning. People hesitate to declare bankruptcy because of the fear of being ostracized.
• Currently, credit bureaus do not report such persons any differently, i.e., a credit report will not mention that they have declared themselves as bankrupt. But this is likely to change in the future.
• Expenses involved are huge. The court’s involvement in the process is high, which complicates the matter and also makes it time-consuming. So, even if an individual wishes to put her past behind and move forward, she cannot because of such delays.
Further, Indian laws dealing with personal bankruptcy are inadequate and outdated. People continue to adopt traditional out-of-court settlement methods such as waiving the interest on the loan or restructuring it or settling with partial payment.
Of course, it is best to avoid such a situation. But if someone is faced with such a situation and plans to file for bankruptcy, then she can follow these steps.
Seek expert advise: A financial adviser can help you manage your finances better. There are options or solutions that may be available and which can be adopted to resolve the financial crisis.
Talk to the creditor(s): It is better to inform the creditor about the trouble rather than keeping them in the dark. Open and honest communication can lead to solutions.
Think practically and exhaust all options: In finance, there is no love; only numbers. So, selling your or the family’s jewellery or heirlooms or property that is lying unused (and is not encumbered) to repay lenders is better than declaring bankruptcy. This is also a better option since rehabilitation is almost absent and the road to recovery is painful to say the least.
When businesses fail, many individuals and families also get affected. Currently, while there is a lot of focus on non-performing assets (NPAs), the talk is about big-ticket NPAs. The efforts to reduce, resolve and rehabilitate is primarily for companies. But lender focus will move to retail accounts soon.
What is happening in the present circumstances is that if an individual is unable to manage her personal balance sheet, she resorts to seeking help from friends and family; rarely from professional debt counsellors. Moreover, the perception is that the bankruptcy is largely due to the individual’s waywardness and, therefore, she needs to be morally penalised. We are not thinking in terms of genuine cases.
In the future, changes to the way individual bankruptcy is handled is likely to change. Lenders will get together and see how the situation can be salvaged. At present, each lender talks of getting its pound of flesh. Options will be made available by banks and other financial institutions wherein rehabilitative packages will be made available to individuals. Resources will be made available for fresh starts, and once finances turn positive, the individual can repay her debts or return the assistance. Most importantly, there will be less (or no) stigma around bankruptcy.
Aparna Ramachandra is founder director of www.rectifycredit.com.