Due Diligence. How and when to file for bankruptcy

While India has taken steps towards bringing in a Bankruptcy Law for corporates, there are ways in which individuals can get similar protection when they are genuinely in debt and in no position to repay their creditors.

By filing for bankruptcy, you are announcing that you are in no position to pay off your debts and are an insolvent individual.

To safeguard yourself from your creditors, you file an application with the court requesting to waive off your debts.

The court will consider your application if it is proved genuine.

Increasing debt per se does not make you insolvent. You will be considered eligible to file for bankruptcy only if your liabilities exceed all your movable and immovable assets put together. While there is no minimum amount of debt at which you can file for bankruptcy, you will have to prove in the court that your current assets are insufficient to pay off your debt.

If the information stated in your application has been found to be false, the court can even penalise you for providing wrong information.

Bankruptcy may be used as a last resort, but is an important remedial tool when debts are mounting, as it gives you a chance to start afresh.

How to file

If you are a resident of Mumbai, Chennai or Kolkata, your bankruptcy application will come under the Presidency Towns Insolvency Act, 1909 (PTIA), while for all other cities and towns, the application will be submitted under the Provincial Insolvency Act, 1920 (PIA).

The underlying law is the same for both Acts except for some minor procedural differences. You need to file bankruptcy petition at a court in the city where you have either lived for more than a year or have conducted business for the same period.

You can hire a lawyer and prepare a petition on bankruptcy request by attaching all details of your assets and debts.

Once the court accepts your application, it will fix a date for a hearing when you will have to submit all your books of accounts.

The court will examine all documents and conduct an inquiry to know whether your case is genuine. All creditors will be made party to the case and will be legally bound to accept the court verdict.

Suppose you have taken bank loans, the bank is well within its right to put your name as a defaulter after non-payment of dues.

If it is a secured loan, banks can liquidate the security and obtain their dues, without waiting for any court verdict. For unsecured loans, the banks will wait for a court verdict and may have to agree with the final decision of the court.

By filing for bankruptcy, you may be able to ward off creditors and even restart your life, but do note that your credit score will take a big hit.

You may even be blacklisted by credit rating companies, making you ineligible for any further loans. File for bankruptcy only as a last resort and not just as a tool to escape repayments.

The writer is CEO, Bankbazaar.com

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