Introduction

In Türkiye, creditors have multiple legal options under execution and bankruptcy law to compel debtors to fulfill their obligations. Among these, general execution proceedings are the most commonly used method, where a debtor’s failure to pay results in asset seizure through execution offices. However, this method often faces delays due to procedural formalities and excessive court workload.

An alternative but less frequently used method is bankruptcy proceedings for debt collection. Unlike general execution proceedings, bankruptcy proceedings put greater pressure on debtors by threatening their financial stability and business reputation. This article provides a comprehensive overview of the conditions required for initiating bankruptcy proceedings, the procedural steps, the legal remedies available to debtors, and an analysis of the advantages and disadvantages of bankruptcy proceedings compared to general execution proceedings.

Conditions for Initiating Bankruptcy Proceedings

To initiate bankruptcy proceedings against a debtor, certain legal conditions must be met:

1. The Debt Must Be Monetary or Security Obligation

Bankruptcy proceedings can only be initiated for debts that are[1]:

  • Monetary debts (cash obligations)
  • Security debts (guarantees, pledges, or collateral-based obligations)

Non-monetary obligations (such as the delivery of goods) do not qualify for bankruptcy execution[2].

Additionally, the legal origin of the monetary obligation is irrelevant[3]. The debt may arise from:

  • Contracts,
  • Unjust enrichment,
  • Torts, or
  • Legal provisions.

Thus, a creditor may proceed with bankruptcy execution regardless of the underlying legal basis of the claim.

2. The Debtor Must Be Subject to Bankruptcy

Bankruptcy execution only applies to debtors who can be declared bankrupt under Turkish law. Whether the debtor is subject to bankruptcy or not is considered a matter of public order and shall be considered ex officio by the court[4]. The debtors who can be declared bankrupt include:

a. Merchants

Under Article 12 of the Turkish Commercial Code (“TCC”), any real person who operates a commercial enterprise in their own name is considered a merchant. Additionally, those who notify the public of the opening of a commercial enterprise through various announcements or who register and announce the opening of a commercial enterprise with the trade registry are deemed to be merchants pursuant to Article 12/2 TCC.

Moreover, commercial companies such as:

  • Joint-stock companies,
  • Limited liability companies,
  • Unlimited companies and limited partnerships,
  • Cooperatives,

are automatically considered merchants upon registration in the trade registry (Article 123 TCC).

b. Persons Treated as Merchants

Individuals who do not formally operate a commercial business but act as if they do are also subject to merchant regulations. For instance, if an individual publicly announces a business operation without registration, they may still be held liable as a merchant.

c. Others Subject to Bankruptcy by Law

Certain individuals who are not merchants may still be subject to bankruptcy, including:

  • Partners of specific company types (e.g., general partners in unlimited and limited partnerships),
  • Former merchants for one year after ceasing business (per Article 44/2 of the Execution and Bankruptcy Law),
  • Bank administrators and auditors (regulated under the Banking Law),
  • Estate assets under specific legal conditions.

Thus, before initiating bankruptcy proceedings, creditors must ensure that the debtor falls within one of these categories.

3. Insolvency Is Not a Requirement

Unlike voluntary or forced liquidation bankruptcies, bankruptcy execution proceedings do not require the debtor to be insolvent. Even if a debtor has sufficient assets, failing to pay a due debt can still result in bankruptcy execution.

In practice, this feature makes bankruptcy execution a particularly effective pressure mechanism on debtors, as even financially stable businesses would seek to avoid bankruptcy due to its negative consequences.

4. The Requirement of Following of Foreclosure Process at First Step

If a debt is secured by a mortgage or pledge, the creditor must first initiate foreclosure proceedings before resorting to bankruptcy execution (Article 45 of the Execution and Bankruptcy Law)[5]. If the creditor bypasses this step and files for bankruptcy directly, the debtor may challenge the proceedings in court.

Stages of Bankruptcy Proceedings

The bankruptcy execution process consists of the following steps:

1. Filing Bankruptcy Proceedings Request and Issuance of a Payment Order

Proceedings through bankruptcy are initiated with a request for proceedings issued per Article 58 of the EBL. In this framework, it must be clearly stated that “bankruptcy” is chosen as the way of proceeding[6]. The creditor files a bankruptcy proceedings request with the execution office at the debtor’s business location[7]. The execution office issues a bankruptcy payment order, instructing the debtor to pay the debt within seven days or face bankruptcy.

2. Objection to the Payment Order

The debtor may file an objection within seven days of receiving the payment order[8]. If an objection is filed, the bankruptcy proceedings are suspended until the creditor successfully annuls the objection through a bankruptcy lawsuit before the commercial court. The concordat proposal is another action that the debtor notified of the payment order may take other than the objection. The debtor is not subject to a 7-day period to propose concordat[9].

3. Bankruptcy Lawsuit

If the debtor objects to the payment order, the creditor must file a bankruptcy lawsuit in the commercial court. The court examines whether the debt is valid and due. In this regard, the debtor is not dependent on previous grounds of objection to debt in a bankruptcy lawsuit[10].

If the debtor fails to provide a legitimate defense, the court may issue a debt deposit order, giving the debtor one last chance to avoid bankruptcy by depositing the owed amount within seven days[11].

4. Court Decision on Bankruptcy

If the debtor does not comply with the deposit order, the court may issue a bankruptcy ruling, triggering the liquidation process. The moment of bankruptcy declaration is recorded with an exact date and time, and the debtor’s assets are seized and distributed among creditors[12].

Advantages and Disadvantages of Bankruptcy Proceedings vs. General execution Proceedings Criteria

Execution Pressure

  • Bankruptcy Proceedings: Higher (risk of financial and commercial reputation loss)
  • General Execution: Lower (threat of asset seizure only)

Speed of Proceedings

  • Bankruptcy Proceedings: Faster (simplified court procedures)
  • General Execution: Slower (multiple procedural steps)

Scope of Asset Seizure

  • Bankruptcy Proceedings: Entire assets of the debtor are included
  • General Execution: Only specific attached assets

Distribution to Creditors

  • Bankruptcy Proceedings: Pro-rata sharing among all creditors
  • General Execution: Priority given to previous creditors

Impact on Other Creditors

  • Bankruptcy Proceedings: Affects all creditors equally
  • General Execution: Benefits only initiating creditor

Legal Costs

  • Bankruptcy Proceedings: Lower (fixed court fees)
  • General Execution: Higher (proportional court fees)

Liquidation Complexity

  • Bankruptcy Proceedings: Lengthy and detailed process
  • General Execution: More straightforward asset seizure

Conclusion

Bankruptcy proceedings provide a stronger execution tool than general execution proceedings by exerting significant financial and reputational pressure on debtors. This method is often faster and less costly due to streamlined court procedures.

However, bankruptcy liquidation can be lengthy and complex, requiring creditors to navigate various administrative hurdles. Additionally, creditors must confirm that the debtor is subject to bankruptcy before initiating proceedings.

Ultimately, creditors must carefully evaluate their situation and choose the most effective execution method based on their specific claim and debtor profile.

If you would like to receive more detailed information on this matter, you can contact our office.

[1] Article 42 of the Execution and Bankruptcy Law No. 2004: “The execution proceedings relating to the payment of a sum of money or the provision of a security shall commence with the request for execution proceedings and... shall be executed through bankruptcy.”.

[2] For instance, for the decision of the General Assembly of Civil Chambers of the Court of Cassation dated 11.05.2011 and numbered 12-724/289 on gold receivables not being subject to proceedings through bankruptcy, see: Yılmaz, Ejder: İcra ve İflas Kanunu Şerhi (Commentary on the Execution and Bankruptcy Law), Yetkin Yayınları, Ankara, 2016, p. 850.

[3] Altay, Sümer: Türk İflas Hukuku (Turkish Bankruptcy Law), Vedat Kitapçılık, İstanbul, 2004, p. 18.

[4] Yılmaz, ibid., p. 855; For the theoretical opinions on the subject, see: Üstündağ, Saim: İflas Hukuku (Bankruptcy Law), 8th Edition, Yaylacık Matbaa, Istanbul, 2009, pp. 30-31.

[5] Yılmaz, ibid, p. 856.

[6] Yılmaz, ibid, p. 855; Muşul, Timuçin: İcra ve İflas Hukuku Esasları (Principles of Execution and Bankruptcy Law), 6th Edition, Adalet Yayınevi, Ankara, 2017, p. 771; Kuru, Baki / Aydın, Burak: İcra ve İflas Hukuku Ders Kitabı (Execution and Bankruptcy Law Textbook), 7th Edition, Yetkin Yayınları, Ankara, 2022, p. 377.

[7] It is not an absolute competence rule, the execution office does not take it into consideration ex officio. On this matter: Muşul, ibid, p. 771.

[8] For instance, the debtor may claim that the proceedings were not initiated at the competent execution office. In this case, the court will primarily examine this issue in the bankruptcy lawsuit. If the proceeding was not initiated at the competent execution office, the court may dismiss the bankruptcy lawsuit for this reason solely. On this issue, see the decision of the 19th Civil Chamber of the Court of Cassation dated 07.04.2005 and numbered 1881/3759: Yılmaz, ibid., p. 860.

[9] Muşul, ibid., p. 774.

[10] Kuru / Aydın, ibid, p. 379; Muşul, ibid, pp. 777-778.

[11] Muşul, ibid. p. 779; Kuru / Aydın, ibid., p. 380.

[12] Muşul, ibid, pp. 779-780; “...the creditor who has obtained a bankruptcy judgment against the debtor loses all his power over the debtor and the debtor is no longer confronted with the individual creditor who has filed a bankruptcy proceeding against him, but with all his creditors.” Üstündağ, Saim: İflas Hukuku (Bankruptcy Law), 8th Edition, Yaylacık Matbaa, Istanbul, 2009, pp. 30-31.