Fresh Start Process under IBC: Sections 80 to 93

For a street vendor or daily wage earner trapped by small debts, bankruptcy is too costly and a repayment plan pointless, because there is little income and nothing to sell. The fresh start process in Chapter II of Part III was designed for such debtors. It allows the poorest individuals to have small unsecured debts written off after a short moratorium, without a bankruptcy. This note explains who may use it, how it works and why it has not yet been brought into force.

1. Purpose

The Bankruptcy Law Reforms Committee proposed the fresh start process as a form of debt relief for individuals who are unable to pay but have so little that a formal process would achieve nothing for creditors. Similar debt relief orders exist in other jurisdictions, such as England and Wales. The process discharges qualifying debts at the end of the moratorium, with no distribution to creditors.

2. Eligibility, Section 80

Figure 1: Conditions for a fresh start

• Section 80(1). A debtor who is unable to pay his debt and fulfils the conditions in section 80(2) may apply for a fresh start for discharge of his qualifying debts.
• Financial limits. The debtor's gross annual income must not exceed sixty thousand rupees, the aggregate value of his assets must not exceed twenty thousand rupees, and the aggregate value of qualifying debts must not exceed thirty-five thousand rupees.
• Other conditions. He must not be an undischarged bankrupt, must not own a dwelling unit, whether or not encumbered, must not be subject to a pending fresh start, insolvency resolution or bankruptcy process, and must not have had a fresh start order in the preceding twelve months.
• Mode. The debtor applies to the Debts Recovery Tribunal personally or through a resolution professional.

3. Debts That Can Be Discharged

Figure 2: Qualifying and excluded debts

• Qualifying debt, section 79(19). An amount due, including interest, that is a liquidated sum payable immediately or at a certain future time, but not an excluded debt, not the secured part of a debt, and not a debt incurred three months before the application.
• Excluded debt, section 79(15). Liability for fines imposed by a court or tribunal, liability for damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation, maintenance payable under any law, student loans, and other prescribed debts.
• Reason for exclusions. Fines and maintenance serve purposes beyond private debt recovery, and debts incurred just before the application suggest abuse.

4. Procedure

Figure 3: Stages of the fresh start process

• Application and interim moratorium, section 81. The application, supported by an affidavit with details of debts, creditors, income and assets, triggers an interim moratorium on all debts until admission or rejection.
• Resolution professional, sections 82 and 83. A professional confirmed or nominated by the IBBI examines the application and reports on whether the debtor is eligible and on the qualifying debts.
• Admission, section 84. The adjudicating authority admits or rejects the application within 14 days of the report, specifying the qualifying debts, and the order is sent to creditors.
• Moratorium, section 85. On admission, a moratorium of 180 days applies to all debts; the debtor may not act as a director or be involved in managing a company, may not dispose of assets, must inform business counterparties, and may not travel abroad without permission.
• Objections, section 86. Creditors may object within 10 days, only on the inclusion or details of a debt; the resolution professional decides within 10 days.
• Discharge, section 92. At the end of the moratorium, the authority passes a discharge order for the qualifying debts listed in the final list, but other debts and persons jointly liable are not discharged.

5. Safeguards and Status

• Revocation, section 91. The order may be revoked if the debtor's circumstances change so that he is no longer eligible, or if there is fraud or non-compliance.
• Offences. Chapter VII of Part III punishes false information and concealment by a debtor in the fresh start process.
• Not in force. Chapter II has not yet been brought into force; Part III operates only for personal guarantors to corporate debtors, who would not in any case meet the fresh start limits (Topic 65)
• Criticism. The monetary limits, fixed in 2016, are low, and the scheme depends on the capacity of Debts Recovery Tribunals.

6. Frequently Asked Questions

Can a debtor who owns a small mortgaged house apply for a fresh start?

No. Section 80(2)(e) disqualifies a debtor who owns a dwelling unit, whether or not it is encumbered.

Will a fresh start discharge a maintenance order in favour of the debtor's spouse?

No. Maintenance payable under any law is an excluded debt under section 79(15), so it is not discharged.

Is a co-borrower also released when the debtor gets a discharge order?

No. Section 92 provides that the discharge order does not release any other person from liability for the debt.

Can the fresh start process be used today?

No. Chapter II of Part III has not yet been brought into force.

Is a loan taken two months before the application a qualifying debt?

No. Section 79(19) excludes any debt incurred within three months before the date of the fresh start application, to prevent debtors from borrowing in anticipation of a discharge.

Can the debtor travel abroad during the fresh start moratorium?

Only with the permission of the adjudicating authority. Section 85 also bars him from acting as a director or managing a company, and from disposing of his assets, during the moratorium.

7. Related Topics

• Topic 65: Part III. Insolvency of individuals and firms.
• Topic 69: Insolvency Resolution of Individuals. Sections 94 to 120.
• Topic 88: Fresh Start vs Bankruptcy. The two outcomes compared.