Want to escape creditors? Declare bankruptcy!

There's a lesson in the turnaround story of India's most famous actor, Amitabh Bachchan.

In the late 90s, he was almost bankrupt. With a debt of Rs. 90 crore on his head, he worked in films, television shows and commercials to get out of it.

By his own admission, he is still scared of the situation and wants to work as long as possible.

In India, bankruptcy is often considered a taboo, whereas in western countries, declaring oneself bankrupt is almost like pressing a restart button in life.

In 2010, 1.59 million Americans filed for bankruptcy. The average age: 38 years.

Simply put, the word bankrupt is a legal status of a person who cannot repay his/her debt to creditors.

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Filing for insolvency is simple enough. It can be done by either filing an insolvency suit with the local civil court and getting a certificate declaring oneself insolvent or by filing a petition with the district court.

The only criterion is that liabilities should be more than assets, and this position should not look reversible in the foreseeable future.

The next steps involve the court appointing an officer of the court to be in charge of the insolvency. This officer (who usually has no professional insolvency expertise) then proceeds to collect all the assets.

There is a complete lockdown of all assets till they are sold and the creditors are paid their dues.

This method is rather insensitive and impractical, as it does not even consider a person's accommodation or other expenses during the period of the insolvency case, which could last for months.

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"The advantage of bankruptcy is that one is discharged of all payments owed to creditors, and during the insolvency process (which is usually very slow), all creditors hounding you can be directed straight to the court where the matter is," says Ramesh K Vaidyanathan, partner, Adavaya Legal.

After filing for bankruptcy, a person remains on the Cibil list for usually a period of 10 years.

However, this does not mean one cannot improve one's credit score, nor does it make one untouchable.

There is, for instance, car financing. One can improve one's credit scores and get loans for a car, if the record is good subsequently.

When in such situations, one can take the help of a debt counsellor or a bankruptcy lawyer.

Taking extension on payments and restructuring loans is ideal. Typically, banks are not proactive when it comes to extending tenure because they find it difficult to weed out genuine defaulters from wilful ones.

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However, in case of insolvency, they would rather look at recovery because of the long process involved otherwise.

The laws governing insolvency and personal bankruptcy are the Provisional Insolvency Act, 1920, and The Presidency Towns Insolvency Act, 1908.

However, lawyers believe these are outdated.

Vaidyanathan adds: "These insolvency legislations are not very effective. Many declare themselves insolvent wilfully after having transferred their assets, leaving what's left for the officer of the court to pay off the liabilities with." According to Sumant Batra, managing partner, Kessar Dass B & Associates, internationally, in genuine cases of insolvency, one approaches an appropriate forum through which creditors can be repaid, without leaving the person concerned looked down upon and nowhere to turn to.

But the process in India lacks dignity, making the concept of fresh start harder.