Fresh Start and Bankruptcy under IBC: Case Studies

Part III offers individuals two ends: a fresh start that wipes out small debts for the very poor, and bankruptcy, which takes the debtor's estate for creditors and imposes disabilities until discharge. Apart from personal guarantors, Part III is not yet in force for individuals and firms, so an answer should note the status and then apply the provisions as enacted. The four questions below cover eligibility, the route into bankruptcy, the bankrupt's disabilities and discharge.

1. The Law in Brief

• Status. Part III is in force for personal guarantors to corporate debtors; the fresh start process and Part III for other individuals and firms, before the DRT, await notification.
• Fresh start, section 80. For a debtor with gross annual income up to ₹60,000, assets up to ₹20,000 and qualifying debts up to ₹35,000, who owns no dwelling unit; qualifying debts are discharged after a 180-day moratorium, but excluded debts such as fines, maintenance, damages and student loans are not.
• Bankruptcy, section 121. Only after insolvency resolution fails: the application is rejected, the repayment plan is rejected, or it ends prematurely; the application must be made within three months.
• Discharge, section 138. The trustee applies after one year from the bankruptcy commencement date, or earlier on completion of administration.

Figure 1: Eligibility for a fresh start

2. Who Is Eligible for a Fresh Start?

• Issue. Eligibility for the fresh start process, and which debts it can discharge.
• Law. Section 80(2) requires gross annual income of not more than ₹60,000, assets of not more than ₹20,000, qualifying debts of not more than ₹35,000, and that the debtor does not own a dwelling unit, whether or not encumbered. Excluded debts, including maintenance payable under any law, are not qualifying debts and are not discharged (sections 79(15) and 92)
• Application. Mr A's income, assets and qualifying debts of ₹30,000 are within the limits. But he owns a house, which disqualifies him. The maintenance arrears are an excluded debt in any case.
• Conclusion. Mr A is not eligible for a fresh start because he owns a dwelling unit. Even if he were eligible, only the ₹30,000 owed to moneylenders could be discharged; the maintenance arrears would survive. He may instead seek insolvency resolution under sections 94 to 120, once in force for him.

3. Can a Creditor Apply Directly for Bankruptcy?

• Issue. Whether a creditor may apply for bankruptcy directly, and how a secured creditor applies.
• Law. Under section 121, a bankruptcy application lies only after the insolvency resolution application is rejected under section 100(4), the repayment plan is rejected under section 115(2), or the plan ends prematurely under section 118, and must be filed within three months of that order. Under section 123, a secured creditor must either relinquish its security for the benefit of all creditors or apply only for the unsecured part of its debt. After 2026, no interim moratorium applies on a bankruptcy application against a personal guarantor (section 124(4))
• Application. No insolvency resolution process has been attempted against Mr B, so the gateway in section 121 is not met.
• Conclusion. CD Bank must first apply under section 95. Only if that fails in one of the ways listed may it apply for bankruptcy within three months, either relinquishing its mortgage or claiming only the unsecured balance. If Mr B conceals assets, he risks prosecution under section 186 once bankrupt, and dispositions after filing may be void under section 158.

Figure 2: Effects of a bankruptcy order

4. What Can an Undischarged Bankrupt Not Do?

• Issue. The disqualifications and restrictions on an undischarged bankrupt.
• Law. Section 140 disqualifies a bankrupt from being a trustee of any trust or estate, being appointed a public servant, and being elected to public office or a local authority. Section 141 restricts the bankrupt from acting as a director or taking part in management of a company, from borrowing beyond prescribed limits without disclosing the bankruptcy and obtaining the trustee's approval, and requires disclosure to business counterparties. These continue until discharge. Breach is an offence under section 186.
• Application. Ms C is undischarged. The directorship, the election nomination and the undisclosed borrowing each breach these provisions.
• Conclusion. None of these is permitted. She must resign the directorship, her nomination is liable to rejection, and the undisclosed borrowing may lead to prosecution under section 186. The trustee should report the breaches to the adjudicating authority.

5. What Does a Bankruptcy Discharge Cover?

• Issue. What forms the bankruptcy estate, the effect of dispositions after filing, and the scope of discharge.
• Law. The estate vests in the trustee on appointment (section 154), but excludes tools needed for the bankrupt's work, basic household items and a dwelling unit of prescribed value. A disposition after filing and before commencement is void without the authority's consent, subject to protection for persons acting in good faith, for value and without notice (section 158). Under section 138, the trustee applies for discharge after one year; discharge releases bankruptcy debts but not debts incurred through fraud or breach of trust, nor excluded debts such as fines.
• Application. The car and shares are in the estate; the tools are excluded, and the flat is excluded if within the prescribed value. The transfer to his brother, a gratuitous transfer to a relative, is void. One year from 1 February 2026 has passed.
• Conclusion. The trustee should recover the shares and realise the car, then apply for discharge. Discharge will not release Mr D from the fraud debt or the court fine, and it will not release anyone jointly liable with him.

6. Frequently Asked Questions

Who adjudicates fresh start and bankruptcy for ordinary individuals?

The Debts Recovery Tribunal under section 179, once those provisions are notified; for personal guarantors, the NCLT.

Can a bankruptcy order be recalled?

Yes, under section 142, for an error apparent on the face of the record, or where the debts and expenses have been paid or secured.

What is the order of distribution in bankruptcy?

Section 178: costs; workmen's dues for 24 months with secured debts; employees' dues for 12 months; government dues for two years; and then other debts, mirroring section 53 with adjustments.

7. Related Topics

• Topic 67: Fresh Start Process. Sections 80 to 93.
• Topic 70: Bankruptcy Order and Trustee. Sections 121 to 157.
• Topic 135: NCLT Jurisdiction under Section 60(5) IBC. Section 60(5)