One concern of creditors in filing a case for collection is the possibility of getting nothing in the end because the debtor has no properties to satisfy the judgment award, while spending more money for legal fees. A pyrrhic victory, so to speak. In fact, I often come across debtors dropping the hint of filing, or actually filing, a case for insolvency or bankruptcy just to bring home the (alleged) point that they have nothing more to cough out.
It’s true that once a petition for insolvency is granted, the debtor-insolvent is discharged from his existing debts. The decision to file for insolvency, however, should not be taken lightly. Here are a few reasons why:
1. The alleged insolvent debtor may be subject to criminal prosecution. There are a number of criminal cases that an alleged insolvent debtor may face. For instance, the debtor may be charged with fraudulent insolvency, a criminal offense, if it is shown that he transferred his property to another place beyond the reach of the creditors. Article 314 of the Revised Penal Code (RPC) reads:
Fraudulent insolvency.- Any person who shall abscond with his property to the prejudice of his creditors, shall suffer the penalty of prision mayor, if he be a merchant and the penalty of prision correccional in its maximum period to prision mayor in its medium period, if he be not a merchant.
Technically, “Fraudulent insolvency” does not mean that the offender is insolvent. A debtor who has transferred his property to another place beyond the reach of the creditors has been found to be guilty of Fraudulent Insolvency.
2. A petition for insolvency does not extinguish a criminal case. Let’s say you’re facing a criminal case, perhaps BP 22 (Bouncing Checks) or estafa. Will the petition for insolvency adversely affect the pending criminal case?
Insolvency, with respect to individuals, is governed by Act No. 1956 (1909), as amended. This law, which is known as the “Insolvency Law”, provides that all actions against the petitioner-insolvent is suspended. There is nothing in the Insolvency Law which provides for the extinction of any criminal action against the petitioner.
3. Insolvency will adversely affect your credit standing. It’s true that there are people who were able to bounce back after being declared insolvent. Still, if you’re a businessman, a declaration of insolvency would be catastrophic to your credit standing.
By the way, a juridical person (example, a corporation) may also file a petition for insolvency, although there are other available options, such as suspension of payments and corporate rehabilitation. To read an extended discussion on criminal cases and insolvency, click here. Also posted here.