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What is Bankruptcy?
Shiv Nanda
Aug 01 • 2 mins read

What is Bankruptcy?

2 mins read

What bankruptcy? How does one get bankrupt? If you finish your salary before the next pay day, are you bankrupt? Can a person get bankrupt? Or is it only businesses that become bankrupt? So many questions, so much confusion.

Let’s begin by answering the question, “What is bankruptcy?” The term can be loosely defined as a legal status wherein a person or business is unable to repay its debts. In most economies, it is initiated by the debtor and imposed by a court order.

So, what are the different types of Bankruptcy?

An individual or a business can declare being bankrupt under corporate or individual bankruptcy.

Bankruptcy Law

Under the Indian legal system, the law of insolvency is historically based on the Roman principle of cession bonarum, meaning ‘surrender’ of all his goods by the debtor for the benefit of his creditor, in return for immunity from the process. The law originated in British India. And it was administered through ‘The Presidency-Towns Insolvency Act of 1909’ and ‘The Provincial Insolvency Act of 1920’. While these two laws deal with consumer insolvency, corporate insolvency is dealt under the Companies Act of 1956.

India is currently ranked 136 among 189 countries on the parameter of resolving insolvency. World Bank statistics show that currently, it takes 4.3 years to resolve such a case in India. 

Bankruptcy Act

With multiple, often archaic laws relating to business going bankrupt, individuals going bankrupt, etc., a need was felt to reform the term and insolvency laws. The government of India introduced and passed the Insolvency and Bankruptcy Code 2016. The law replaced existing bankruptcy laws. It covers individuals, companies, limited liability partnerships and partnership firms. The Insolvency and Bankruptcy Code 2016 amends many laws including the Companies Act.

Before the implementation of this law, it was a time-consuming process to declare yourself bankrupt and wind up a company. But the Insolvency and Bankruptcy Code 2016 has put in place a system wherein the Debt Recovery Tribunal adjudicates for individual and partnership firms while The National Company Law Tribunal does the same with regard to cases for companies and limited liability partnerships. The system is monitored by the Insolvency and Bankruptcy Board of India which also regulates insolvency professionals and companies that store credit information of corporates.

For Business: The Insolvency and Bankruptcy Code 2016 deems that to start an insolvency process for corporate debtors, the default should be at least Rs. 100,000. Businesses are then put through two independent stages Insolvency Resolution Process and Liquidation.

For Individuals: For individuals and unlimited partnerships, the Insolvency and Bankruptcy Code applies in all cases where the minimum default amount is Rs. 1000. The government may revise this to a higher limit at a later date.

How to Recover from Bankruptcy?

The first thing to remember when you are looking for ways to get out of being bankrupt is that you are not alone. There are millions of people who have faced the issue and come out of the situation. Perform a self-evaluation to know where you stand, what your weak points are and the habits that led to this situation. Plan a budget and pay your bills on time, avoid unscrupulous lenders and monitor your credit report.  

Thus, what does bankruptcy get rid of? In brief, it helps do away with bad debts, but in an organised and time-bound manner, within the parameters of the law of the land.

Read more on other financial topics at MoneyTap – Your Personal Line of Credit.

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