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Indian bankruptcy laws and their impact on credit score

09-April-2015 written by : FSI-Team

Indians have a history of shying away from declaring bankruptcy or insolvency simply because of the social stigma attached to it. There have been cases where individuals have preferred to commit suicide rather than declaring that they have gone bankrupt because of huge loss in business, a personal tragedy or an accident that has left them handicapped. For such individuals there may be help in the horizon with the new Insolvency and Bankruptcy Code that was unveiled by the Government in May 2016.

Doing with multiple overlapping laws that dealt with financial failure of companies and individuals this code offers a comprehensive legislation that fundamentally allows the creditor to assess the viability of the debtor. Under the freshly framed institutional framework and adjudicatory mechanism, the debtor and the creditor can agree upon a plan of revival or liquidation under the supervision of insolvency officers and a regulator.

An individual can file for an insolvency too if his debts exceed his assets and he faces impending arrest to the Debt Recovery Tribunal (DRT) whereby he make seek discharge from certain debts (that do not exceed a specific threshold) and can start afresh. He must however prepare a repayment plan for the creditor to assess upon approval of which the DRT passes a binding order to meet the repayment plan as per the stipulated time frame.

The question that arises from this point onwards is what impact bankruptcy or insolvency has on the credit score of the concerned individual? Needless to say, The CIBIL score of the individual dips quite low making it rather difficult for him to access further credit. The silver lining however is that thanks to the implantation of the new Insolvency Code, your existing debt is eliminated and you get a chance to start afresh. This is a time that you need to build your CIBIL score from scratch make constant efforts to increase CIBIL score.

The following are some steps you can take to revive your credit karma:

Opt for a secured credit card

For those who believe that credit cards are by themselves a recipe for disaster are essentially witnessing only one side of the coin. Credit cards when used judiciously can help you increase CIBIL score. The wise thing to do after you have come out of a bankruptcy is to apply for secured credit cards that are available against fixed deposits. In such cards the credit limit is usually a certain percentage of the amount you have fixed. In order to revive your CIBIL score, you need to keep using this card regularly albeit making smaller transactions on the same and ensure that you always repay the entire outstanding within the billing cycle.

Timely repayment

When you are trying to make amends for the past, do bear in mind that the most important thing that has a bearing on your CIBIL score is your repayment schedule (accounts for nearly 35% of your score). Therefore, never miss or delay a repayment as schedules by the lender.

Take a loan

After having witnessed insolvency a loan once again may sound like a bad word, but in order to increase CIBIL score a loan for a low CIBIL score may not be such a bad idea. Wait for about two years and apply for a car loan. The top notch banks may not be willing to lend so easily on account of your low CIBIL score or ask for an exorbitant rate of interest, so you will need to dig a little deeper and find a lender who is willing to give a loan for a low CIBIL score. Also before you take a loan be absolutely sure that you will be able to make all repayments without missing

Keep your credit utilisation low

Working your way up to re-build your credit is a difficult task to say the least. Once you have managed to re-establish your credit, make sure that your credit utilisation does not exceed 30%. Be judicious with your credit card usage and ensure that you do not delay or default on any repayment.

Finally, keep a hawk eye on your CIBIL score and CIBIL report and see to it that your credit score is only increasing by the day. Living through a situation of bankruptcy is traumatic to say the least, but thanks to the new and improved bankruptcy code, you do get a chance to rise like a phoenix from the ashes and rebuild and re-establish your credit records. It is a difficult journey undoubtedly taking one baby step at a time, but not an impossible one!


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