What you need to know before filing for bankruptcy

Former Lugari MP Cyrus Jirongo; commercial court declared him bankrupt for failing to pay Sh700m debt

NAIROBI, KENYA: When faced with overwhelming debts obligations, some people turn to courts of law to file for bankruptcy.

They compel the courts to declare them bankrupt and insolvent, meaning that they no longer have capacity to clear their debts. They also set legal protection from creditors not to pursue them.

Companies’ can also file for bankruptcy if they find that their debt has grown so high over time such that they may not manage to clear it. They go to courts of law so as to be protected from the harassment from creditors.

So, is this a smart move or a case of digging oneself deeper into the hole? Personal finance experts say the move is only temporarily.

It doesn’t mean one will not have to pay all their debts after all. According to John Mungai, a personal finance expert, “being declared bankrupt only allows you to reorganise yourself on how you will clear the debts you owe without necessarily having to be harangued around by your creditors.”

A number of unforeseen causes can lead one unable to pay their debts such as sudden loss of income, sudden business loss thus rendering them unable to clear their debts including those of their suppliers.

The burden of proof since  such a turn can have disastrous consequences on one’s finances  as creditors start charging ridiculous interests on whatever you owe them, personal finance experts say that where the case is dire and  really deserving, exploring this option could  stop  further  pile up of debts in forms of interests.

The best starting point is to see a lawyer who is well versed with financial aspects.

“The lawyer should take the applicant through all what bankruptcy entails, and its implications,” Doreen Khavedi, a trained lawyer says.

She says that once the lawyer feels the person is really justified to file the case, they can be assisted to draft the petition by the private lawyer or, by the Attorney General chambers, through the department of public trustee.

If you are the type that doesn’t want pecuniary embarrassment by revealing your all financial and debts information, then filing for bankruptcy is not for you Khavedi says that you begin by revealing all your incomes, debts, and financial position in general.

The lawyer has to find out on their own however, that the position you are stating is the true financial position. All the creditors may be publicly called to meet with your lawyer and you the debtor in order to really ascertain the credit amount demanded from you.

The lawyer then, having found your petition convincing will commence the court process where the court of law has to hear the petition and decide if the case can proceed.

“But most cases  hardly go beyond this stage as the courts strike out petitions since  most people fail to convince the court that they are really unable to pay up their debts,” she says.

In that case, “the procedures for debt recovery commence. The very creditors you were running away from confront you with demands that you pay up whatever you owe them, “she says. Role of trustee “But as it happens often,” says Khavedi, “some petitions get granted and one is thus declared bankrupt.

What this implies is that henceforth, the applicant’s wealth is placed under receivership and a trustee is mandated to be dealing with the creditors. You lose authority over your assets/estate and your spending is limited: in fact, every spending is approved by the official receiver,” she says.

The statutes

There is a statue that would make a previously wealthy individual humiliated and cringe at the thought of filing for bankruptcy.

“The Bankruptcy Act provides that one spend no more than 100 shillings at any one given time once they are under the ‘bankrupt’ tag,”Khavedi says. With high inflation where 100 shillings can hardly buy anything substantial, it can be really humiliating for a person once used to spending millions,” says Mungai.

“It brings more social class problems since one might not be able to socialize with their friends in their haunts since the bankrupt person cannot spend on friends in such places,” he says.

Piqued egos

Then there is the little matter that could probably shatter one’s confidence and self pride-the public announcement in the Kenya Gazette that you are henceforth declared bankrupt.

“This piques one’s ego and can make some  previously prominent public figures fade from the public limelight, with further  personal finance implications since they might not  be able to mobilise for plum public posts that  might help rehabilitate them,” says Khavedi.

Personal finance experts say that before one files for bankruptcy petition, proper consideration of the consequences is paramount.

“No creditor will deal with you or your business once they know you are a declared bankrupt,” says John Mungai. 

“There is still that fear and suspicion that you will never honour your debts.” Still, there is a lingering stigma that follows a person afterwards even long after they were able to clear their debts. Then in the days of credit referencing where one’s credit scores should matter as a currency, the bankrupt tag shouldn’t be really enviable, according to Mungai. “These days, one’s financial information is shared among the various financial institutions: it’s impossible to mess on one end and then have an easy ride on the other,” he says. Way out “Manage your finances well, live within your means. Creating a budget and sticking to it can help one avoid bankruptcy,” says John Mungai.

Personal finance experts also say that having an emergency fund in place can help one mitigate temptations of having to pile up more creditors each time they face financial problems.  

“You cannot be reckless with your finances and expect that you will run to the courts to save you: the only relief bankruptcy can offer is temporary, otherwise the creditors will have their money paid,” says Mungai.

However, bad times do not last forever. After one’s financial position has started to improve or once one has re-organised themselves, they can apply to be discharged from the ‘bankrupt’ status.