personal finances

Only cowards pay debts

18.06.2009 | Borys Beletskiy, special for, PH: Sutterstock

The financial crisis makes some business people running to extremes. Some even declare themselves bankrupt to avoid paying back loans owed to banks especially considering that the procedure is not as difficult as it may seem

The art of going belly up
Nobody can envy the dire straits that many businesses today are stranded in. Having taken out bank loans in the fat days, today many of them cannot pay off their debts ever since the financial crisis hit. Banks are putting pressure on deadbeats and the latter are fortunate if this is only demands. Indeed, there are cases when banks shamelessly suck blood from the debtor by raising interest rates, refuse to restructure debts or offer extension on repayments. Some even demand to pay back the debt in full all at once. The only way to escape the tenacity of lenders is to file for bankruptcy. This allows a business to freeze all operations with creditors for half a year or even more, or go as far as liquidation and write off the debts that are not backed by collateral. After that you can bid farewell to banks and live happily ever after.

Bankrupts of their own making
There are several ways to file for bankruptcy. One can submit an application to a court or ask a real or fictitious lender (a close friend, for example) to do so. Filing for bankruptcy is ideal for those that are being pressured by a bank and do not have money to clear their debt. Pursuant to the law On Rehabilitating a Debtors Solvency, the founder of a company must submit to the court a plan for the companys financial recovery together with the application. A private entrepreneur can also submit a plan of settlement with creditors. A serious advantage for borrowers here is that they can ask for the maximum extension of payments in order to settle all accounts with banks. Meanwhile, the court can compromise by declaring a six-month moratorium on repayment of debts with the possibility of a six-month extension and postpone review of the bankruptcy case for two months when it concerns private entities. This is enough time to resolve pecuniary issues and pull out of a tight situation. Their reputation and credit history will suffer, but as they say business is business.
A 6-month moratorium on repaying bank loans seems entirely logical in this case, especially when a bank is under provisional administration and is not returning deposits to customers. Banks should know how does it feel not being able to recover their money.

Please make me broke!
There is another bankruptcy scheme an entrepreneur can use if he or she plan to close shop in order to pay off debts to a bank. One must find a friendly lender, which an entrepreneur will owe no less than UAH 196,500 hryvnia for the services that have been provided. Also important, this debt should be extended more than three months from the date of repayment. Such a debt is usually is backdated. After that the friendly lender files a bankruptcy case with the court demanding that a moratorium on repayment of debts to other creditors, including banks, be extended, says lawyer Denys Telcharov.
Essentially, the ban, means that a bank can no longer demand paying off a loan in full for a designated period and cannot levy penalties or fines for delinquency. The moratorium also prohibits withdrawing money from an entrepreneurs account by a court order and basically exempts them from paying taxes and duties while the moratorium is in effect. Needless to say, this is a great relief for borrowers.
Before initiating bankruptcy procedures it is important to note that pursuant to Article 52, Section 2 of the Civil Code of Ukraine, if a physical person (entrepreneur) is married any liabilities related to business activity apply to that persons share in and the joint property of the spouse. In other words, before filing in for bankruptcy the joint property of spouses must be bestowed or sold so that it cannot be sequestered in the future or sold like mortgaged property in order to pay off debts.
Another obstacle is that the law requires that creditors prove to a court attempts to collect unpaid debts from the very same deadbeat, but failed. A court can only initiate bankruptcy procedures when money cannot be withdrawn from a debtors account on the grounds of court executing documents due to its absence.
Though most citizens despise court litigations, organizing them is not that difficult with competent legal counsel and support, especially there is an opportunity to write off all debts through bankruptcy and eventually open a new business.

Sorry, were out of cash
So, how do entrepreneurs manage to write off debts? The law On Rehabilitating a Debtors Solvency, which stipulates that the unpaid amount of debts that bankrupt borrowers cannot pay off due to insufficient funds, shall be written off. In other words, if an owner of a small business does not have debts backed by collateral and owns practically no property, securing such a ruling of the court is not that difficult.
One can sympathize with the banks that at one time were cavalierly granting loans for business development that were not backed by property (i.e. collateral). Their requirements according to effective legislation will be satisfied only after wage arrears are paid off, taxes are paid and other payments are made. After settling all accounts the business is closed and the owner is stricken from the list of physical entities.
If all private property of the debtor that a lien can be put against was conveyed to another person, the bank will spend years in court in an attempt to sue a business owner and still come out empty handed. A loan issued on collateral real estate, equipment or an automobile is a different thing altogether. In such cases the liquidator should sell the property. If the proceeds from the sale are insufficient to cover the debt, the lender will be standing in line for a very long time to see payback.
For example, in cases of bankruptcy of a physical person the requirements of creditors secured by property are satisfied only in the third turn and if the property (as agreed to with the liquidator) was sold at a low price to friends, the bank will get sweet nothing and the debtor will eventually buy back the property at the same price.e.

Bankruptcy risks
All the bankruptcy schemes described above are actively applied in practice, but sometimes they can lead to problems with the law. According to Article No. 218 of the Criminal Code of Ukraine, deliberately false evidence that the founder, senior manager or owner of a company provides regarding their financial insolvency is punishable by a fine of 750 to 2,000 untaxed minimum wages (UAH 12,750 to 34,000) or up to three years imprisonment.
There is also an article on premeditated bankruptcy of a company (Article No. 219 of the Criminal Code) and deliberate concealment of steady financial insolvency (Article No. 229 of the Criminal Code).
In order to expose false bankrupts, creditors usually turn to the tax administration to find out the financial status of the debtor. If the bankruptcy turns out to be false, creditors can file a case with the prosecutors office with all the ensuing consequences, said Volodymyr Kyrylenko, General Director of the First Ukrainian Debt Collection Agency.
Noteworthy is that pursuant to all criminal articles either an entrepreneur or his top manager that filed for bankruptcy are the accused. In cases with schemes with friendly creditors, an entrepreneur bears no risks.
Besides the threat of being accused of falsifying a bankruptcy, a person also faces the risk of having their credit history annulled for good, which means they can forget about applying for a bank loan in the future.
Furthermore, debt write offs may not be the end of the story. An entrepreneur that filed for bankruptcy on their own will not able to file a second time for five years thereafter. Moreover, according to Article 49 of the law on On Rehabilitation of a Debtors Solvency, a debtor is not relieved of a creditors requirements for five years. Any property purchased during this period or any income received can be confiscation through a civil claim filed by the creditors in order to repay the outstanding debt, says Oleksandr Serebryakov, a consultant at the Arzinger law firm.
In other words, a person that files for bankruptcy cannot purchase any property over the next five years, meaning they should weigh all the pros and cons before doing so. Sometimes it is easier to agree with a bank for an extension or debt restructuring than filing suit. Moreover, every case has its nuances.
An entrepreneur may have taken an apartment on mortgage and in the first thing the lender will do is put it up for sale or the businessman can be he the loan warrantor and so on. Bankruptcy can be used as a shield from creditors, though not in all cases. So, before taking the bankruptcy route, you should seek legal counsel, Serebryakov advises.

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