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File for bankruptcy to become debt-free

  • Insolvency code for individuals will make the process smother
  • A smooth and quick bankruptcy process can help thousands of borrowers repair and rebuild their financial lives

Imagine falling into a debt trap, exhausting all your sources of funding, and finding yourself at a dead end. In such situations, your only recourse may be filing for bankruptcy. Though Indian laws have the provision wherein individuals can file for bankruptcy, the process is not as streamlined as it is for corporate entities under the Insolvency and Bankruptcy Code (IBC). Though the IBC has rules for individual bankruptcy too, they have not been notified yet.

We tell you how the current bankruptcy law works and how can it change to your advantage under IBC.

The bankruptcy process

If you live in Mumbai, Kolkata or Chennai, you will be governed by the Presidency Towns Insolvency Act, 1909; for all other places in India, you will be governed by the Provincial Insolvency Act, 1920. Both laws are similar and eventually are meant to be replaced by the IBC.

Under the Provincial Insolvency Act, you can file for bankruptcy if you are unable to repay a debt greater than 500. According to Aishwarya Satija, research fellow, Vidhi Centre for Legal Policy, an independent legal advisory group, “After analysing whether the conditions for filing of bankruptcy have been met, the court may accept or reject the application. Until the decision on the application is taken, an interim receiver takes possession of the property of the debtor. If the application is admitted, the court can apply a stay on any legal proceedings against the property or assets of the debtor." In other words, you can get a stay order against further recovery efforts by your creditors.

Once your application is admitted, your property vests with the “receiver" appointed by the court. This official then distributes your assets among the creditors, unless a compromise proposed by you has been accepted by your creditors and the court. Once this process is completed, you will be “discharged from bankruptcy" by the court, giving you the opportunity to build your life and finances afresh, without being hounded by your previous creditors.

While the insolvency proceedings are pending before the court, you can apply for a minimum maintenance amount for your own and your family’s survival.

However, until you are discharged from bankruptcy, multiple restrictions apply to you. “An undischarged insolvent under the current law cannot act as a director in a company, be a public servant, be elected or sit or vote as a member of any local authority, etc. Once she is discharged, any disqualifications and restrictions are removed," said Satija.

Remember that the procedure does not discharge you from all debts, said L. Vishwanathan, partner and chair, finance and projects, Cyril Amarchand Mangaldas, a law firm. “An order of discharge by the court (which may be conditional) releases the insolvent from all debts except those specified under relevant statutes such as any debt due to the government, any debt incurred by means of any fraud or fraudulent breach of trust, debt in respect of which the insolvent has obtained forbearance by any fraud and liability to pay maintenance," he said.

Can you go to prison?

No. There are no prisons for debtors in India and any such imprisonment will be unconstitutional. However, you can go to prison if you commit any fraud relating to the debts you owe. For example, if you take a housing loan using fake papers or you take a business loan but transfer the amount to a friend showing fake expenses, you can be prosecuted against for fraud.

What can change?

IBC for individuals will bring in two important changes to the bankruptcy process. One, the process will become more timebound than what the current laws provide. Two, it will provide for an automatic moratorium or stay on debt recovery efforts, once you file an insolvency application before the “adjudicating authority" under IBC. Under the current laws, the grant of a stay is at the discretion of the court.

With rising non-performing assets in the corporate sector, banks are increasingly turning their attention to retail lending. According to Reserve Bank of India data, personal loans given out by Indian banks have surged from 10 trillion in January 2014 to 21 trillion in January 2019. As Indian households take more debt, case of delinquencies and bankruptcies are also set to grow, making an effective bankruptcy law particularly important. A smooth and quick bankruptcy process can help thousands of borrowers repair and rebuild their financial lives.

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