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Home arrow Business & Finance arrow The art of RF (riba-free) Islamic banking and finance

Bankruptcy Laws

[1]

One important and sometimes abused privilege available to U.S. citizens and businesses is the ability of the person or entity that obtained a credit facility to stand before a special bankruptcy judge in court to present the reasons why the person or the entity cannot meet their financial and other obligations by paying back what he/she owes the bank or the financial institution. These bankruptcy laws are given different titles, depending on the nature of the problem and the solution proposed and adopted by court. If there is an economic slowdown and demand declines, resulting in lower sales and hence lower net profits, the owner of the business can file for a request to the court to protect him/her and his/her business against foreclosure by creditors. The owner of the business would be requested to present the court with a plan to reorganize the business. The reorganization plan usually contains steps that will be taken by management to revive the business like reduction of overhead, increased sales, reduction of raw materials cost, reduction of labor, and a reduction of the monthly payment on a loan, and/or partial loan forgiveness as well as a timetable to get out of this dire situation. Another purpose of the bankruptcy laws is to maximize returns under adverse conditions by providing an orderly distribution of assets and debts.

This facility is considered an important development and a fair “safety valve” in the business of giving credit and in financing. Very disturbing situations and penalties have been reported regarding the failure of a borrower to meet his/her obligations to a bank for good and justifiable causes in other countries — including Islamic countries. Borrowers who do not fulfill their credit obligations are systematically jailed by the government, which resorts to throwing the business owner in jail and taking over the facility. In most cases, the facility is pillaged, the employees are laid off, and the facility is sold for next to nothing. Many developing countries practice such painful and unproductive but revengeful “therapy.” I understand that this action can be condoned, and that this approach should be applied to those who defraud others by lying on an application for credit, intentionally misusing and siphoning funds outside the company or country, and/or outright racketeering. Punishment must be done by following due process according to the law and in the courts of law. However, the world has seen wonderful, honorable businesspeople end up in jail in one country or another in Africa, Asia, or the Middle East, and their facilities — along with the households of many of their employees — are shut down just because the economy is in decline or a government official wants to settle a political grudge with a particular family or a businessperson. That is another area that needs pioneering and dedicated work among the RF (Islamic) banking scholars who believe in applying the credible and attractive Judeo-Christian-Islamic value system to the RF banking system that we all aspire to grow. It is strongly recommended that similar provisions be included in the RF law guidelines by which RF banks operate.

  • [1] uscourts.gov/bankruptcycourts/bankruptcybasics/discharge. html.Chapter 7: The chapter of the Bankruptcy Code providing for liquidation (i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors). Chapter 9: The chapter of the Bankruptcy Code providing for reorganization of municipalities (which includes cities and towns as well as villages, counties, taxing districts, municipal utilities, and school districts). Chapter 11: The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. (A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in Chapter 11.) Chapter 12: The chapter of the Bankruptcy Code providing for adjustment of debts of a “family farmer” or “family fisherman” as those terms are defined in the Bankruptcy Code. Chapter 13: The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.) Chapter 15: The chapter of the Bankruptcy Code dealing with cases of cross-border insolvency.
 
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