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High On Debt! Bankruptcy Protection Law Is Coming

According to bankruptcy attorney last year government passed the Insolvency and Bankruptcy Law in both houses of parliament for corporates. 3 days ago the discussion started to bring the Bankruptcy Protection Law for individuals. Rightly so as many surveys now reveal that Indians are moving to high debt situations where many are not far from bankruptcy. Thankfully people can use ASX 200 to invest their money on debt to eventually get out it! In the current scenario, there are laws like The President Town Insolvency Act (1909) primarily applicable for Chennai, Kolkatta and Mumbai and The Provincial Insolvency Act 1920 applicable to other states. Then there is Debt Recovery Tribunal for Individuals and unlimited liability partnerships. But all these laws suffer from inefficient legal system and implementation. As a result, the legal process for debt recovery from individuals is more tilted towards private money lenders where harassment is the means and where the debtor does not have access to any good formal legal process. The new Bankruptcy Law For Individuals will aim to improve this.

Debt Status Of Individuals

National Sample Survey Offices released A data on ‘Household Indebtedness’, in 2016. The data is from the NSSO’s 2012-13 household survey and was conducted on a nationally representative sample of over 1 lakh households. The survey shows that nearly one in three rural households and over one in five urban households is in debt.  The average indebted rural household’s debt is Rs 1.03 lakh, while urban households in debt have loans of over Rs 3.78 lakh outstanding. The data further reveals that among the richest 10% of rural Indians, the average outstanding loan of an indebted household is over Rs 12.5 lakh.

Knowhow Of Bankruptcy Law

The study further establishes the facts that most of the availed debt is not for the productive purpose like a business but for heavy expenditures like weddings and the purchase of household assets. Medical treatment is the next most common purpose of a loan in urban India, especially among the poorest, while loans for housing are most common among the richest. Read the complete report here-

Household Indebtedness

Below are few more reports which establish the need for a Bankruptcy Protection Law In India –

Credit Card

Student Loans

Put simply the default on unsecured loans is increasing and the situation is slowly reaching to what we are witnessing in other countries. Take for US where student loan and medical cost are the 2 main reasons for individuals filing for bankruptcy. Canada has the same story. But these countries have an efficient bankruptcy law in place which has helped many individuals restart their life. India is in dire need of having access to such an efficient legal process for individuals and the sole reason why the discussion has started.

So as individuals and as beneficiaries lets understand what’s Bankruptcy Protection Law all about and how it works in other countries.

What Is Bankruptcy Protection Law?

Insolvency or Bankruptcy Law is a legal process that basically put stay on all current legal proceedings which are happening against any individual to recover the debt s/he owns. This means the moment an individual file a petition for bankruptcy all lenders have to stop calling or sending their goons to demand the outstanding debt. Once the petition is accepted the proceedings under Bankruptcy Law will start superseding’s all proceedings by lenders. There is eligibility for individuals such as a maximum debt one own, to file a petition for bankruptcy.

Bankruptcy Law (Code) in the US/Canada

In the US one can file a petition for relief under a number of different chapters of the Bankruptcy Code, depending on circumstances. The ultimate goal of personal bankruptcy, from the viewpoint of the debtor, is receiving a discharge. These chapters are listed as chapter 7 which is Liquidation and chapter 9 to13 which is for Reorganization. Chapter 7 is the most common form of bankruptcy. Under this Chapter, the assets of the debtor are liquidated and proceeds are distributed to the creditors. Contrary to this chapter 9-13 deals with reorganization of debts. Among these chapter 9 deals with Municipalities only while chapter 12 deals with family farmers and family fisherman. Chapter 12 is available to individuals but we don’t see much cases under this code. Chapter 13 is the other most common chapter under where individuals file for bankruptcy for the reorganization of debt. Here, the debtor is allowed to keep some or all of his or her property and to use future earnings to pay off creditors. Some of the debt can be recovered by selling some of the assets.

All the legal proceeding under Bankruptcy petitions are filed with Bankruptcy Courts which is below the State District Courts. Decisions of the bankruptcy court are generally appealable to the district court and higher though in some cases a separate court called Bankruptcy Appellate Panel hears the cases.

Ideally, in the bankruptcy cases, the moment a petition is filed an Estate is created with the debtor’s assets subject to exclusions and exemptions available. This estate is in the custody of United States Trustees appointed by US Attorney General to administer the case. There are 21 geographical regions and so 21 Trustees are appointed for each region. We also have car accident attorneys from Russell & Hill: Everett DUI attorney. These trustees then maintain regional offices and have a panel of private trustees to manage the efforts especially in cases of the petition under chapter 7.

In Canada too the process is more or less the same. The bankruptcy law is defined under The Bankruptcy and Insolvency Act but does not have different chapters as in the US. Here also the Licensed Insolvency Trustee appointed by the Federal administer a bankruptcy case in Canada. The concept behind bankruptcy law in Canada is that the individual will surrender everything to the trustee in bankruptcy in exchange for the elimination of debt.

What Can Be Filed For Bankruptcy?

In general bankruptcy law in most of the countries deal with unsecured loans such as PL, credit cards, Income Tax, Overdraft etc. In some situations, unsecured debt like student loans can also be included. Any asset which is mortgaged with security like a home loan will not be the part of the bankruptcy petition since the lender can recover the dues from the security mortgaged against the loan.

What Is Excluded?

In both these countries under bankruptcy law there are some assets which in general may not be included such as household items, clothes, etc., In Canada, even a car with less than $6600 value is not included. The idea behind is that the objective of bankruptcy is to give the individual a fresh start and not humiliate or punish. Thus assets which any individual required for his/her survival are not covered under bankruptcy petitions.

The Cost

Yes, there is the cost to bankruptcy proceedings which include trustee fees, etc. These costs the petitioner has to bear and so gets deducted from individual assets or income.

The Surplus Income

There are trustee fee and loss of assets. Still, If there is any income which is bringing a surplus of more than the money one needs for survival then that surplus will generally be paid to the trustee to repay the creditors.

What In India?

For corporate, the law was passed on 2016. For individuals, the thinking has begun. Though it’s early days the framework is yet to be decided. What will be the structure, will there be trustees in each states who can hire a private trustees , what assets will be included and what not, where an individual will get exemption, who will be eligible for filing under bankruptcy protection, will there be separate bankruptcy court whose decision can be challenged in district courts and higher or there will be separate Appellate Tribunal. Simultaneously, much work has to be done to ensure the legal system do not stretch these cases for years. Like these, there are many questions which need to be answered to set up an efficient Bankruptcy Law In India. I am sure they will and soon a formal legal process for individuals will be in place which will help them to restart their life.

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