The Covid crisis and the following lockdown of global economy has brought commerce to a standstill. This has resulted in the closure of many small sized companies and a few large ones filing for bankruptcy. Are we looking at a new normal with debt levels rising and companies declaring themselves insolvent and unable to pay debts as the pandemic continues?
Let’s understand this a bit more in detail.
When is one considered bankrupt?
A person or company is considered bankrupt/insolvent when it is unable to clear the debts or loans. Some times this is an inevitable outcome of careless expenditure and low returns, but more often than not the problems/challenges are much deeper. Markets and stock prices are unpredictable, things can go on a downward spiral at the blink of an eye. When your firm goes bankrupt, you may receive endless calls from the investors and banks asking you to repay the loans immediately.
What are the key causes of bankruptcy?
Whenever you start a company, you start with an immense will and determination to make sure the company is a success. You might have invested a lot in money and effort, but returns play a key role in determining your profit. If your returns do not equal your expenditure, you begin to incur serious losses, which then amount to bankruptcy as the situation deteriorates.
Some of the other reasons can be bad budgeting and resource management. Overspending and careless investment can have a devastating effect on the company. Many times an overall market condition or a COVID 19 like pandemic can lead to major business losses in your region of operation.
What are the alternatives to filing bankruptcy?
When you face a tough situation, filing bankruptcy should be the last resort. Here are a few alternatives to filing bankruptcy that you could consider:
Debt Settlement :
You can try to strike a deal with your investors/creditors to pay less than the actual debt amount if there is an overall lull in the market. The method is called debt forgiveness and works best when the creditors know they are at risk of getting nothing at all, so they might be willing to strike a deal.
Selling your Assets:
While running businesses you sometimes may have assets that you may want to sell off and clear some percentage of your debt. However, keep in mind, to not sell off the assets that are essential to run the company in case the situation gets better over time.
Many companies help you plan and structure your debt re-payment. Credit counselors can try to work out a lower rate of interest and you could avoid filing for bankruptcy.
How to file for bankruptcy, if it becomes necessary?
You can file for bankruptcy when your loans and debts exceed the value of your assets. When you file a petition for bankruptcy, you declare that you will not be in a position to repay your loans or service the investors now, or even in the near future. With this, you are then free from the legality of paying back to the creditors.
Earlier, two laws used to govern bankruptcy in India were :
Presidency towns Insolvency Act, 1909- applying to companies in Chennai, Mumbai, and Kolkata only.
Provincial Insolvency Act, 1920- applying to the rest of India.
In the year 2016, the Government of India passed the Insolvency and Bankruptcy Act to facilitate speedy trials and easy step by step procedures for a court case.
What happens after you file bankruptcy?
When you file for bankruptcy, an interim receiver is appointed by the court. The receiver takes immediate control of all the assets/company profits listed by the individual.
On the date of hearing, if the court is satisfied with the petition, it makes an order of adjudication. After this, the person is declared an undischarged insolvent. The property of the debtor is handed over to an Official Assignee ( Presidency act ) or an Official receiver ( Provincial act )
These officials then must have those assets sold and profits/sales proceeds are given to the creditors.
In light of the Corona pandemic, the Govt. has relaxed the legal regulations for 1 year.
Getting back up is a difficult task. You might get a breather due to the methods or negotiations you would have tried, but the fact that you were bankrupt can affect prospects of procuring a job/loan. The status of “bankruptcy” many times stays as a blot on your credit score for a while. However, you can still make amends, and re-initiate your business ideas and plans, with some careful ways.
This article can shed some insight: Planning for the next financial year
Make a streamlined budget plan:
Given the mishap of bankruptcy, you would now have an idea as to what and how you must structure your budget. Continuous monitoring of your financial outputs should be done so that you know where your investment is headed. If you don’t know how to go about this, do look up resources and videos on the net. You can also visit a financial advisor, who can help you streamline your budget plan. Impulsive expenditure has been the cause of many bankruptcies. If you have some money saved, discipline yourself while using it, and make wise decisions before spending money.
For regular updates, follow our social media handles on Facebook and Linkedin.