Written by Rohina Mahadik, a grade 10 student.
Generally, the first thought that comes to our minds on hearing the term ‘bankruptcy’ is related to a person being moneyless or thinking that a person has lost all their savings.
So, what does it mean when you say a company has filed for bankruptcy?
Often, we relate the term bankrupt only with individuals. While it is true that individuals do go bankrupt, the definition of the term refers to both people and organizations. Hence, put in simple words, an organization files for bankruptcy when it is unable to repay loans to banks or financial institutes (loan is money you take for somrtrh8ing that you are supposed to give back).
The way many companies work is that they take a loan to start or grow their business from banks and financial institutions. This is supposed to be paid back in small amounts every month, till the whole money is returned.
However, when the company is unable to repay its loans, it falls into debt with the financial institution. In such a situation, the company can either immediately file for bankruptcy or ask for a concession in which case the bank can grant them a moratorium – which is a legal authorization wherein the company is allowed to postpone payment or get extra time to pay off their debt.
Once a company does declare itself bankrupt and is unable to pay back its debt, it is supposed to go to court and legally file for bankruptcy. Once this happens, the court appoints someone who basically becomes in charge of winding up the company’s businesses and affairs. Thereafter, the company gets officially shut down and its assets (like land or anything valuable it has) are sold.
Now, the procedure for filing for bankruptcy for companies is well organized. However, this is not the case when it comes to personal bankruptcy. Under the current law (in India) there is no set procedure for individuals going bankrupt.
It is, however, important to remember that the laws for bankruptcy in one country do not apply the same everywhere. For example, in the US, filing for bankruptcy is done under three separate chapters (like rule numbers) – Chapter 7, 11 and 13 respectively. Each of these chapters contain separate rules and procedures for the nature of filing for bankruptcy.
For example, wherein India there is no definite set of rules to file for personal bankruptcy, chapter 13 of the US bankruptcy law deals entirely with cases of personal bankruptcy and gives individuals the chance to rebuild their resources to pay off debt.
In the end, it all comes down to selecting the right plan to pay off your loan. It is also important to understand the procedure of filing for bankruptcy in your country before taking further action since it is a very serious case to make. And if you ever do fall into a situation where you are in debt and need to file for bankruptcy, it is always better to take legal action instead of averting the situation since it could lead to a series of legal issues. The drawback of filing for bankruptcy in India is that if you ever decide to start afresh and want to take a new loan, it can be tough to do so since banks tend to get wary in such cases. However, it is always better to do the right thing since it can potentially save you from any financial trouble.
The reason I am telling you about this today is because, in the past few months, because of Coronavirus many companies have lost money and are filing for bankruptcy. Some of the oldest and biggest companies in the US are closing down – from food stores to department stores