Bankruptcy derives its name from the Italian word “banca rotta,” which means “broken bench.” Since, traditionally, bankers used wooden benches, idiomatically, it means “broken bank.” Based on folk etymology or legends, when Italian bankers defaulted on payment, their wooden benches were smashed. Let’s define Bankruptcy in the current scenario under one statement; it can be defined as a legal process imposed by a court order, which is initiated by an insolvent debtor seeking relief on some or all of his/ her debts.
In simple words, when an individual or an organization is unable to pay its financial obligations or debts to the creditor, they file for Bankruptcy. It allows such insolvent businesses or individuals to get freedom from their financial obligations and liabilities via legal proceedings. The court assesses all the assets belonging to the debtor. These assets are measured and evaluated with the purpose of repayment of as much outstanding debt as possible. Hence, simultaneously providing creditors with the opportunity of collections from otherwise defaulters. Bankruptcy can allow debtors a fresh start, but at the same time, it stayed on the record of the debtor and referred for future creditworthiness.
Bankruptcy falls under the purview of federal courts, which work on rules or standards outlined by the given country’s Bankruptcy Code. For example, the U.S. Bankruptcy Code classifies various types of Bankruptcy by their chapters. The automatic stay is a significant feature for all kinds of Bankruptcy.
On receiving a request for Bankruptcy protection, this feature can halt any repossession, eviction, business or factory shut down, or any other debt collection activity. The U.S. Code describes six kinds of Bankruptcy under Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. We will talk about the most commonly used Chapters in this article. Chapter 7 and 13 account for personal Bankruptcy for individuals.
On filing Bankruptcy under Chapter 7, a trustee liquidates the debtor’s assets towards the repayment of his/ her debt obligations. It is often called straight or straightforward Bankruptcy and allows for eliminating all debt obligations within a period of three to four months. Most of the U.S. citizens who file to seek debt relief under Chapter 7 spend about $1.2K on hiring an attorney. Alternatively, a petition can also be generated by online software at much lower costs.
Only individuals can file bankruptcy under Chapter 13 and not corporations or partnerships. According to this Chapter, a debtor can retain the ownership of all his assets but must restructure his/ her cashflows and resources to repay the creditor within the next three to five years using his/ her future income or wage. This type is also known as Wage Earner Bankruptcy.
In Chapter 11 as well, the debtor can retain the ownership of all its assets. Only companies can apply for this type of Bankruptcy. Under Chapter 11, the debtor company is supposed to restructure its operations, cash flows, revenue streams towards the repayment of its debt in a planned way. This Chapter assures the creditors of the debtor’s willingness to pay back while simultaneously giving the debtor a chance to stay in business.
Now, let us look consider the Indian example. Before 2016, there was no clear law on Corporate Bankruptcy in India, although the Individual Bankruptcy laws existed since colonial times under the Provincial Insolvency Act. During the first week of May 2016, the Parliament of India launched the Insolvency and Bankruptcy Code 2016. This Code provides a legal definition of Bankruptcy, insolvency, liquidation, and dissolution. The courts’ jurisdiction applies to companies that declare themselves insolvent, while the Board of Industrial and Financial Reconstruction provides supervisory restructuring.
Presidency Towns Insolvency Act 1909, applies for the residents of Mumbai, Kolkata, and Chennai, on the other hand, the Provincial Insolvency Act, 1920 applies to individuals from any other state of India. The Insolvency and Bankruptcy Code2016 will eventually replace both of these laws. All an individual needs are INR 500 to file for Bankruptcy under the Indian laws. The court shall accept or reject the application after analyzing the conditions and assessing the debtors’ situation.
During this time period, a stay can be applied to any legal proceeding towards debt collection from the individual. Once the application is accepted, the debtor’s assets vest with the “receiver” as appointed by the court of justice. Unless a compromise is reached between the creditor and debtor, these debtor’s assets will be used towards repayment of the loans to creditors. The debtor’s remaining assets (if any) will be released once the process is finished, and the individual can start new.
During the entire process, the individual is entitled to apply for the minimum maintenance amount required for himself/ herself and his/ her family. Until the individual is discharged, he or she cannot assume the position of a director in a company or be a public servant or be eligible for an election. There is no provision for prison in such cases unless there is fraud involved.
Now that we have gone through the entire process of Bankruptcy let’s see how we can leverage the available technology that can make our lives easier. Softwares like Solvemint provide services to evaluate the best debt solution, compliance with the Code, Tracking Cashflows, and Planning or Restructuring for future debt payments.
These software solutions help customers with a user-friendly interface and guidance at each step. With increasing cases of non-performing assets, such software solutions can be of great use for the benefit of both creditors and debtors. Solvemint provides an Online Software for Corporate Insolvency Resolution Process (CIRP) Management for Insolvency Professionals & Resolution Professionals in India and manages insolvency issues through – Stakeholder Management, Claims and EOI Management, and Status Page, Reporting & Analytics. It comprises a complete suite of software to ease out the process of CIRP.
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