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 is true that once a petition for insolvency is granted, the debtor-insolvent is discharged from all his existing debts. The decision to file for insolvency, however, should not be taken lightly. Here are a few reasons why:

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 aganst the petitioner-insolvent is suspended. Section 18 of the Insolvency Law, governing voluntary petitions, reads:

Order of court declaring petitioner insolvent; Publication notice. – Upon receiving and filing said petition, schedule, andinventory, the court, or the judge thereof in vacation, shall make an order declaring the petitioner insolvent . . . Upon the granting of said order all civil proceedings pending against said insolvent shall be stayed.

There is nothing in the Insolvency Law which provides for the extinction of any criminal action against the petitioner. The Philippine Insolvency Law, insofar as it relates to voluntary insolvency, is essentially a bankruptcy law because it discharges the honest debtor. The legislative history of the part which deals with voluntary and involuntary insolvency clearly shows that the legislature intended to establish the essential features of the American system. We may refer to U.S. Supreme Court decisions for guidance on this matter.

Under U.S. Bankruptcy Law, a discharge in bankruptcy releases the bankrupt person from the personal or legal obligation to pay the claims and judgments released thereby and bars the remedy therefore. However, it is not res judicata in a criminal case, for the parties are not identical. In fact, a fine imposed in a criminal prosecution is not a debt dischargeable in bankruptcy.

The foregoing discussion applies in particular to a natural person. 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.