Published 06 June 2018, The Daily Tribune

What are the remedies of a debtor short in cash but long in debts? First, let us tackle the individual debtor not registered as a sole proprietorship with the Department of Trade and Industry.  Sole proprietorships are categorized with partnerships and corporations under the Financial Rehabilitation and Insolvency Act (FRIA) as juridical debtors with distinct remedies from individual debtors. Reliefs available to juridical debtors will be spelled out in my next article.

The remedies of an individual debtor depend on whether he is technically insolvent or actually insolvent. Technical insolvency, interchangeable with illiquidity, is a financial condition where the debtor has sufficient properties to cover all his debts but foresees the impossibility of paying them as they fall due. His assets are not in cash or not readily convertible to cash or his properties can generate more cash if used in business than disposing of them.  By actual insolvency, it means that his assets are less than liabilities.

If the individual debtor is technically insolvent, he may file a petition for suspension of payments. His objective is not to be discharged from his debts but to simply bid for more time to settle his obligations. It should be stressed that the mere filing of the petition has the effect of suspending the enforcement of claims against the debtor.  No creditor shall sue or institute proceedings to collect his claim from the debtor from the time of the filing of the petition and for as long as the proceedings remain pending except those creditors having claims for personal labor, maintenance, expense of last illness and funeral of the wife or children of the debtor incurred in the sixty (60) days immediately prior to the filing of the petition; and secured creditors (meaning, the mortgagee or pledgee, if any). The petition effectively gives him a new lease of life and affords him time to attend to his business undistracted by court suits.

The debtor’s proposal, or a modification thereof, can be sustained if it is approved by at least 2/3 of the creditors representing at least 3/5 of the total liabilities of the debtor. If the decision of the majority of the creditors to approve the proposed agreement or any amendment thereof made during the creditors’ meeting is upheld by the court, or when no opposition or objection to said decision has been presented, the court shall order that the agreement be carried out and all parties bound thereby to comply with its terms. Conversely, the proposed agreement shall be deemed rejected if the number of creditors required for holding a meeting ( that is, creditors representing at least three-fifths ( 3/5 ) of total liabilities) does not attend thereat, or the double majority referred to above are not in favor thereof. In such instances, the proceedings shall be terminated and the parties shall be at liberty to enforce the rights which may correspond to them.

On the other hand,  an individual debtor whose properties are not sufficient to cover his liabilities, and owing debts exceeding Five hundred thousand pesos (Php500,000.00), may apply to be discharged from his debts and liabilities by filing a verified petition with the court of the province or city in which he has resided for six (6) months prior to the filing of such petition. If the court finds the petition sufficient in form and substance it shall, within five (5) working days issue the Liquidation Order. The liquidation order basically adjudicates the debtor as insolvent. The court has no authority to refuse the adjudication of insolvency if the petition clearly establishes that the individual debtor is insolvent. In liquidation proceedings, the assets of the insolvent debtor shall be equitably distributed to his creditors based on the statutory rules on concurrence and preference of credits.

A debtor who has been adjudged insolvent is given his discharge by the court after his properties have been applied to his debts. Supposing a year later, with those debts still not fully paid, he wins in the sweepstakes lotto and comes into a large fortune, the creditors can no longer sue him for the balance. The suit will no longer prosper on debts that are properly discharged in insolvency. There are debts, however, which are not discharged despite the adjudication of insolvency. These are taxes and assessments due the government, national or local; obligation arising from embezzlement or fraud; obligations of any person liable to the insolvent debtor for the same debt; alimony or claim for support; in general, debts that are not provable against the estate of the insolvent or not listed in the schedule submitted by the insolvent debtor.

Clearly, not everything is lost for the financially distressed individual debtor. Indeed, a debtor in need is not necessarily damned. Hope springs eternal. He simply has to know and properly exercise his remedies.