Extreme solutions

Borrowers like Kapoor who are stuck in a debt trap themselves may consider the following options: approaching their lenders for an out-of-court settlement,enlisting the help of credit counselling centres to work out a debt management plan through negotiations with banks,and filing for insolvency.

Debt counselling

In 2008,the Reserve Bank of India RBI set up Financial Literacy and Credit Counselling Centres FLCCs. These centres such as Abhay Bank of India,Disha ICICI Bank and many more provide financial literacy and credit counselling which is both preventive and curative. They charge zero or minimum fee. Under preventive counselling,they create awareness regarding the cost of credit,the need to save and budget. They also tell clients what is a prudent level of debt based on their earnings. In case of curative counselling,they prepare debt management and repayment plans and help borrowers negotiate with banks for restructuring debt.

Filing for bankruptcy

This is the Hobsons choice for borrowers unable to service their debts and wishing to escape harassment by creditors. A petition for being declared an insolvent has to be moved before the court under the Provincial Insolvency Act,1920,or the Presidency Towns Insolvency Act,1909. While the Presidency Insolvency Act is applicable to Presidency Towns such as Kolkata,Mumbai,and Chennai,the Provincial Insolvency Act pertains to the rest of India. Such a petition can be filed by a creditor too.

Who can file?

The borrower,through his legal advisor,files the petition in an insolvency court. He can do this if he is unable to pay his debts when due,when he is under arrest or imprisonment in execution of the decree of any court for payment of money,or when an order of attachment stands against his property. Insolvency laws protect the debtor from harassment by all creditors. Similarly,a creditor,who has a decree or an award of recovery,can also file a petition against a debtor whose assets are not enough to pay off the debt.

After verification of the petition,if the court finds that there is a debt and that the debtor is not in a position to discharge it,the debtors property vests with the court or the official receiver. The debtor receives a summon from the court stating when he has to submit his tax papers,bank statements,ledger book,cheque book and all other documents that would prove his net worth.

Any property under the debtors name such as house,car,shares and other investments that can be liquidated are handed over to the official assignee for distribution purpose. Moreover,before discharge from the court,if the debtor wins a lottery,acquires a property or receives an inheritance,even these can be used for the purpose of distribution.

PAYING OFF CREDITORS

Once the court gives the green signal to the insolvency proceedings,the first thing that is done is publishing a notice stating the name and other relevant information regarding the insolvent in the official gazette and local papers so that all creditors have a chance to get their claims. In case any creditor does not come forward to claim his share,then the insolvent will not have any liability towards him once he is discharged.

All persons claiming to be creditors must produce evidence of the amount of debt and other particulars. Their claims need to be backed by a book of accounts and the statement of transactions reflecting the amount owed by the borrower. An enquiry is made by the court about the genuineness of these claims.

Settlement procedure

After deducting the courts expenses for liquidation of assets,the claims are paid out. According to Prerna Mehta,an advocate,During the settlement of claims,first preference is given to statutory dues,then to secured creditors,and then the remaining money is distributed among unsecured creditors in the ratio decided by the official liquidator. For instance,Kapoor had debt of Rs 1.5 crore,of which Rs 50 lakh was secured loan taken against mortgage. The total amount realised from his assets was

Rs 80 lakh. Rs 50 lakh was paid to secured creditors and the balance Rs 30 lakh was distributed proportionately among unsecured creditors.

Discharge from court

Being insolvent is not a permanent status. To remove this tag,the insolvent has to apply to the court seeking permission to annul the insolvency. If the court is satisfied with the debt repayment,it will discharge the person from the state of insolvency. However,the court may also ask for an undertaking if the claims are not fully settled. Then the debtor will be obliged to repay these claims out of his future earnings.

Why legal recourse is not popular

Lack of awareness. The major reason is lack of awareness among those caught in a debt trap. Though RBI has taken initiatives to expand the coverage of credit counselling centres and formalise credit counselling in the country,very little is being done to make legal aid available.

Social boycott and disqualifications. Most borrowers believe that they will suffer social ignominy once the word insolvent gets attached to their names. Several restrictions also come into force. An insolvent cannot be a director or a partner in a firm. He cannot contest elections or hold a public office. He is prohibited from entering into any contract or agreement. Above all,he will not get credit from any public or financial institution until he is discharged.

Lengthy procedure. The entire process from filing of petition to getting discharge can be quite time consuming.

Finally,as Mehta warns,Filing for insolvency shouldnt be looked upon as a means to evade repayments. It could result in detention in a civil prison for a few months. If you really dont have the money,only then should you agree to declare yourself insolvent and take legal recourse.

Do everything possible to get out of the abyss of debt. Only when all fails should you declare yourself bankrupt.