Does declaring bankruptcy reduce debts? Here is the full answer

Does declaring bankruptcy reduce debts? Here is the full answer

The office of lawyer Abdulmajeed Al Rashid for Law and Legal Consultations advises taking advice from specialists even after a survey and research.

Declaring bankruptcy is one of the legal tools that allows companies or individuals to confront major financial crises, but the most important question remains: Does declaring bankruptcy completely eliminate debts or is it subject to specific legal conditions? This question raises widespread controversy between creditors and debtors, as the answer varies according to the laws in force in each country, the nature of the debt, and the legal procedures that precede declaring bankruptcy. In some cases, bankruptcy may result in the cancellation or rescheduling of part of the debt, while in other cases the debtor may remain liable for certain obligations even after the liquidation of his assets.

At Abdul Majeed Al Rashid Law Firm and Legal Consultations, we are fully aware of the legal complexities surrounding bankruptcy proceedings and their impact on debt. Therefore, it is necessary to consult legal experts to accurately understand rights and obligations, and determine whether declaring bankruptcy is the best option or whether there are other, more appropriate legal solutions.

Does declaring bankruptcy reduce debts?

Declaring bankruptcy is a legal procedure that gives a merchant the opportunity to deal with his financial crisis with an organized mechanism that protects him from the enormous pressures imposed by creditors. Through this procedure, many financial claims and collection procedures are suspended, giving the merchant space to rearrange his financial situation away from constant pressures and recurring claims. Saudi law is supportive of the merchant in certain cases, provided that specific legal conditions are met.

But does declaring bankruptcy lead to the complete cancellation of debts? The answer depends on the circumstances that led to bankruptcy. If the bankruptcy is the result of coercive factors beyond the merchant’s control, Saudi law gives him the opportunity to declare bankruptcy, which helps him overcome his financial crisis and exempt him from some obligations in accordance with legal controls. If the bankruptcy is the result of fraud or bad faith on the part of the merchant, the law does not protect him, but may expose him to legal accountability, and this is verified through the competent authorities to ensure justice and prevent abuse of this right.

Declaring bankruptcy is an important legal means to protect the merchant from pressing financial burdens, as he can, if the conditions are met, benefit from certain exemptions such as stopping claims for compensation for late payment, in addition to rescheduling debts in a fair manner consistent with his financial capabilities. So, if you need specialized advice on bankruptcy cases and know the cases in which debts can be forgiven, you can contact the office of Attorney Abdul Majeed Al Rashid Law Firm and Legal Consultations, which has deep experience in dealing with these cases and provides you with the most appropriate legal solutions according to your financial and legal situation.

Bankruptcy in Saudi law: a tight regulation to protect merchants

Bankruptcy is defined in the Saudi system, as defined by jurists and specialists, as the inability to pay commercial debts due on their specified dates, regardless of the size of the debtor’s assets. Bankruptcy is a purely commercial system, subject to the provisions of Saudi commercial law, and applies only to merchants.

In 1439 AH – 2016 AD, the Bankruptcy Law was issued in the Kingdom of Saudi Arabia with the aim of establishing a comprehensive legal framework that regulates all aspects of bankruptcy. This system includes seven legal procedures approved within Saudi commercial courts, which are used to address bankruptcy cases according to clear rules aimed at collective enforcement of the assets of the defaulting debtor merchant. The system also included means aimed at avoiding bankruptcy, or in the event of its occurrence, liquidating the debtor’s funds according to organized procedures that guarantee justice for both parties.

According to Article 2 of the Saudi Bankruptcy Law, the seven approved procedures include:

Preventive settlement
Financial reorganization
Filtering
Preventive settlement for small debtors
Financial reorganization of small debtors
Liquidation for small debtors
Administrative liquidation
Article 5 of the system addresses the objectives of these procedures in detail, clarifying the goals pursued by the new Saudi system in regulating bankruptcy, by providing balanced legal solutions that preserve the rights of creditors and give the debtor the opportunity to rearrange his financial situation according to a fair and effective legal framework.

Objectives of bankruptcy procedures in the Saudi system

Bankruptcy procedures in the Saudi system aim to achieve a delicate balance between enabling the defaulting debtor to overcome his financial crisis and guaranteeing the rights of creditors, which contributes to market stability and enhancing the growth of the national economy. Among the most prominent goals that these measures seek to achieve are:

Providing the bankrupt debtor with the opportunity to benefit from legal bankruptcy procedures, which helps him reorganize his business and correct his financial situation in a way that enhances economic development.

Protecting the rights of creditors by ensuring a fair distribution of the proceeds resulting from liquidation procedures, taking into account the interests of all parties concerned.

Maximizing the value of bankruptcy assets through organized sales aimed at achieving the highest possible return, and ensuring that returns are distributed fairly and systematically when implementing liquidation procedures.

Reducing the duration and costs of bankruptcy proceedings, particularly in cases of reorganization of the small debtor’s position, or when selling bankruptcy assets, ensuring a rapid distribution of proceeds to creditors in accordance with clear controls.

Implement administrative liquidation in cases where it is expected that no sufficient returns will be achieved from the sale of the debtor’s assets, so that losses are reduced and the termination of proceedings is expedited with the least possible damage.

To learn the exact details about the Saudi bankruptcy system and the legal procedures it regulates, you can contact a bankruptcy lawyer in Riyadh, who has deep experience in dealing with these cases, and provides you with the necessary legal support and consultations to help you get out of this crisis with the best possible solutions.

Conditions for declaring bankruptcy in the Saudi system

To declare bankruptcy for either a person or a company, a set of legal conditions determined by commercial regulations must be met, which ensure fair treatment of both the debtor and creditors. The most prominent of these conditions are:

Financial liquidation: When a merchant or company owner is unable to fulfill his financial obligations to creditors and is forced to liquidate his business assets to pay off his debts, his share of the profits (if any) is distributed among the partners or creditors in accordance with what the competent court decides.
Discontinuation of debts: The debtor’s inability to fulfill his financial obligations for a long period is the basic condition for declaring bankruptcy. If the merchant exceeds the period agreed upon with the creditors without making payment, he is considered bankrupt, which gives the creditors the right to take legal measures to recover their dues, while obligating him to settle his debts in accordance with the system.
Death of a merchant without sufficient financial assets: If a merchant dies burdened with debts and does not leave sufficient assets to repay them, his heirs must sell part of his property to pay the dues in accordance with Sharia and regulatory provisions.
It is worth noting that declaring bankruptcy does not necessarily mean dropping debts, but rather is subject to laws and procedures that regulate how to deal with the debtor’s funds and guarantee the rights of creditors in a fair and organized manner.

Types of bankruptcy in the Saudi commercial system

Bankruptcy is classified into several types, each of which varies according to the reason leading to it and the method of legal dealing with it. The following are the most prominent types of bankruptcy according to commercial law:

1. Fraudulent bankruptcy

This type is considered the most serious type of bankruptcy, as some merchants resort to financial fraud to escape their obligations, by hiding their assets or transferring them outside the country, which makes it difficult for creditors to recover their dues. This type of bankruptcy often occurs as a result of a merchant borrowing huge sums of money or purchasing real estate without any real intention of repaying it. In this case, legal authorities intervene to investigate the merchant’s assets, inventory his assets, take the necessary measures to sell them, and settle outstanding debts. If no legally seizeable assets are found, the case is dealt with in accordance with regulatory procedures to guarantee the rights of creditors.

2. simple bankruptcy

This type of bankruptcy arises as a result of the deterioration of the merchant’s financial situation due to factors beyond his control, such as economic crises, inflation, and a decrease in buying and selling activity, which leads to the accumulation of goods without their disposal, a decrease in profits, and thus the accumulation of debts and inability to repay them. Simple bankruptcy is a situation in which a merchant may obtain mitigating measures that help him settle his financial obligations and rearrange his business situation.

3. Bankruptcy by default

This type occurs due to poor financial management and mismanagement of funds, where the merchant himself causes bankruptcy as a result of ill-considered spending, mixing his personal funds with trade funds, or failure to pay loans and financial obligations on time. Bankruptcy by default is classified as a legal misdemeanor, as a merchant can be subject to legal accountability and penalties if it is proven that he was negligent or negligent in managing his funds irresponsibly, which led to harm to creditors.

Legal procedures followed with the bankrupt in the Saudi system

After verifying the extent to which the bankruptcy declaration affects debt cancellation, legal authorities and creditors take a number of measures to ensure the protection of financial rights and ascertain the financial situation of the bankrupt debtor. These measures include:

First: Limiting the bankrupt’s assets and preventing him from disposing of his money

Once a merchant or institution officially declares bankruptcy, legal authorities intervene to restrict its financial powers and prevent it from disposing of its property, with the aim of guaranteeing the rights of creditors and protecting assets from manipulation or concealment. This process includes:

An inventory of all of the bankrupt’s assets, including bank accounts and business assets.
Inspecting financial accounting books to ensure their integrity and the absence of tampering or illegal operations.
Referring the bankrupt to trial if legal violations are found, as he may be required to submit financial settlements or face legal penalties when fraud or gross negligence is proven.
After completing these procedures, a bankruptcy trustee is appointed who is responsible for managing the bankrupt’s funds and supervising his assets, and an official budget is prepared to inventory financial assets and obligations.

Second: Managing the bankrupt’s assets and paying off debts

After transferring financial disposal powers to the bankruptcy trustee, the latter assumes responsibility for managing the bankrupt’s assets in a manner that ensures the maximum possible benefit to creditors. This stage includes:

Protect and manage remaining assets wisely until creditors’ claims are decided.
Collect potential revenue from existing projects or investments that are still profitable.
Manage funds effectively to ensure that dues are paid according to legally defined priorities.
Close all unnecessary financial activities that may lead to further financial losses.
The bankrupt’s right to make any financial decisions or commercial actions is also restricted, as the creditors’ agent is given full authority to control the assets until fair liquidation is achieved and debts are paid in accordance with regulatory procedures.

The impact of bankruptcy on debt in the legal system

Declaring bankruptcy directly affects debt, but its impact varies depending on the type of debt and its legal nature. The most prominent effects of bankruptcy on debt are as follows:

1. Debt cancellation and interest

In some cases, bankruptcy exempts the debtor from paying the original debt and its interest, as determined by the local laws of each country. For example, some legal systems forfeit interest due when bankruptcy is declared, reducing the financial burden on the debtor.

2. Suspension of outstanding debts

When bankruptcy is declared, some debts are suspended for a specified period of time, meaning financial claims are temporarily frozen until bankruptcy proceedings are completed. In some cases, if certain conditions are met, the legal obligation can be permanently dropped, preventing its future implementation.

3. Debt cancellation upon presentation of a guarantor

In some cases, the law allows for the cancellation of outstanding debts when there is a guarantor who pays the dues on behalf of the bankrupt, giving him the opportunity to rearrange his financial situation without remaining burdened with debt.

4. Government bankruptcy and its impact on sovereign debt

When a government declares bankruptcy, it is obligated to cancel or restructure certain public debts, especially those related to deferred interest, taxes due, and unpaid wages. These debts include taxes deducted from salaries, financial dues to government agencies, and any other debts deferred under special financial laws.

5. The necessity of verifying the legitimacy of debts

When dealing with bankruptcy, debts must be legitimate according to the applicable legal system, otherwise they may be automatically forgiven. Therefore, debtors are advised to ensure the legality of their debts and work to settle them in accordance with legal provisions.

6. Determine the type of debt that can be forgiven

Not all debts are automatically cancelled when bankruptcy is declared, as the possibility of forgiveness depends on the type of debt and the circumstances of the bankruptcy. Therefore, it is essential to understand the nature of debts and the conditions that can lead to their cancellation, to ensure that the right financial and legal decisions are made.

Declaring bankruptcy on debt cancellation

Declaring bankruptcy raises important legal questions regarding the fate of debts owed by the debtor, as legal opinions differ on the extent to which debts can be forgiven under bankruptcy laws. Legal experts have divided into two schools of thought on this matter:

Opinion 1: Drop all debts after bankruptcy declaration

Some experts believe that all debts owed by the debtor, whether ordinary or commercial, are confiscated after bankruptcy is declared, and are placed under the management of creditors or the competent liquidation authorities. According to this principle, the debtor loses any legal obligation to these debts once the bankruptcy proceedings are completed.

Opinion 2: Differentiating between ordinary debt and secured debt

On the other hand, another group of legal experts believes that declaring bankruptcy does not lead to the cancellation of all debts, but only ordinary debts that do not have any guarantees are cancelled, while secured debts remain in place, such as mortgages and franchise rights, as their cancellation is not allowed, but must be settled in accordance with established legal procedures.

The impact of bankruptcy on outstanding debts

Debts pending in bankruptcy are subject to specific legal conditions that affect how they are settled. These debts are suspended based on two main conditions:

1. The first condition: the connection between religion and the fulfillment of a specific event

This means that the debt does not become due or enforceable unless the condition specified in the original agreement is met. That is, it remains suspended until the event that obliges the debtor to pay occurs.

2. The second condition: the impact of bankruptcy on outstanding debts

If the outstanding obligation is not fulfilled, it may result in bankruptcy, raising the question of whether bankruptcy affects these debts, whether they are outstanding debts with a binding condition or debts conditional on future changes.

Many commercial laws have addressed this issue, including Egyptian law, which stipulates that debts due on a cancelled condition can be claimed in bankruptcy proceedings provided a guarantor is provided, while conditional debts are suspended until the specified condition is met, after which they are included in the distributions.

In the end, the question remains “Does declaring bankruptcy cancel debts?” Related to complex legal factors that require careful study of each individual case. While bankruptcy may contribute to alleviating the financial burdens on the debtor by dropping or restructuring some debts, it does not always mean completely eliminating financial obligations, especially in light of the existence of legal exceptions that include some types of debts that remain in place despite bankruptcy.

Therefore, it is always advisable to obtain specialized legal advice before making any decisive decision. Abdulmajeed Al Rashid Law Firm and Legal Consultations provides you with the necessary legal expertise to help you understand your options and make the best decision according to your legal situation, to ensure that your rights are protected and your debts are dealt with in a sound legal manner.