Alternative Remedies for Bankruptcy

In the Philippines, bankruptcy is governed by the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, which provides a legal framework for addressing financial distress through rehabilitation or liquidation. Rehabilitation aims to restore debtors to solvency, whereas liquidation involves distributing assets to creditors. While these procedures offer structured solutions, the consequences of bankruptcy can be severe, both for individuals and businesses, and often leave long-lasting scars on the economy and society. This underscores the need to advocate for alternative remedies and reforms that mitigate its detrimental effects.

Bankruptcy provides individuals with an opportunity to start over by discharging debts following liquidation. However, this "fresh start" often comes at a high cost. Non-exempt assets are liquidated, leaving individuals without the resources needed to rebuild their financial footing. For corporations and partnerships, liquidation typically results in the dissolution of the entity, leading to job losses, disruptions to supply chains, and a decline in economic activity. Rehabilitation, while less destructive, is often uncertain and complex. If unsuccessful, it transitions into liquidation, compounding the harm to employees, creditors, and the broader business ecosystem.

One of the most damaging consequences of bankruptcy is its long-term impact on creditworthiness. Individuals and businesses that file for insolvency often face significant difficulties in securing loans or attracting future investments. This impairs their ability to recover and re-enter the economy, creating a cycle of financial exclusion. Additionally, the FRIA penalizes fraudulent acts, such as concealing assets or making preferential transfers. While these measures protect creditors, they also place immense stress on debtors, who must navigate complex legal requirements to avoid penalties.

Given these consequences, it is vital to explore alternatives to formal bankruptcy proceedings. Debt restructuring, for instance, enables debtors and creditors to renegotiate payment terms without requiring court intervention. This approach is less formal, less costly, and preserves the debtor’s reputation while allowing businesses to continue operating. Similarly, extended payment arrangements offered by banks and lenders provide debtors with more time to recover, as long as they demonstrate transparency and the potential for rehabilitation. Voluntary settlements or compromises are another viable option, where debtors negotiate to pay a reduced amount or agree on new terms to settle obligations. These alternatives are often more flexible and less adversarial, fostering cooperation between debtors and creditors.

To maximize the effectiveness of these alternatives, debtors must take proactive steps to manage financial distress. Seeking legal and financial counsel early can help assess options and prevent irreversible damage. Accurate and up-to-date financial records are essential for building credibility with creditors and demonstrating viability for rehabilitation or restructuring. Transparency and compliance with legal requirements are also crucial, as fraudulent acts can result in severe penalties, further complicating the resolution process.

While the FRIA provides a comprehensive framework, reforms are needed to address its limitations and reduce the negative impact of bankruptcy. Strengthening support for rehabilitation is essential to encourage debtors and creditors to work toward recovery rather than liquidation. For example, the government could offer tax incentives or guarantees to creditors who support rehabilitation efforts, increasing the likelihood of success. Promoting out-of-court settlements through standardized procedures and government-backed mediation could also streamline the process, saving time and resources while fostering collaboration.

Financial literacy programs should be prioritized to help individuals and businesses manage their finances more effectively and avoid insolvency. Many cases of financial distress stem from poor financial management or a lack of risk assessment, which could be mitigated through education. Finally, establishing a post-bankruptcy support system is crucial to help individuals and businesses reintegrate into the economy. Programs that assist in rebuilding credit and accessing capital can empower debtors to recover more quickly, thereby contributing to economic growth.

Bankruptcy under the FRIA offers a structured path for resolving financial distress, but its consequences—business closures, credit impairment, and economic disruption—often outweigh its benefits. Exploring alternatives such as debt restructuring, payment extensions, and voluntary settlements provides more constructive ways to address financial challenges while preserving economic stability. Reforms that focus on rehabilitation, financial literacy, and post-bankruptcy recovery are essential to creating a fairer and more sustainable system. By adopting these measures, the Philippines can foster a more resilient business community and minimize the long-term damage caused by bankruptcy.

Read More at: https://www.manilatimes.net/2025/09/30/business/top-business/alternative-remedies-for-bankruptcy/2191978 

Severo C. Madrona Jr. is a Professional Lecturer at the Department of Commercial Law, RVR College of Business, De La Salle University. With a public policy and business development background, he writes about strategic leadership, labor economics, and fiscal policy.