Bankruptcy in India

Bankruptcy is the last resort for overwhelming debt. In India, the Insolvency and Bankruptcy Code provides a framework for individuals to get a fresh start.

Understanding Bankruptcy in India

The Legal Framework

Insolvency and Bankruptcy Code (IBC), 2016:

• Covers both corporate and individual insolvency
• Individual provisions became effective in 2019
• Provides structured process for debt resolution

Key Concepts

Who Can File

Fresh Start Process (small debts):

• Gross annual income < ₹60,000
• Assets < ₹20,000
• Total debt < ₹35,000
• No home ownership

Insolvency Resolution Process:

• Anyone with debts ≥ ₹1,000
• Both debtor and creditor can initiate

When to Consider Bankruptcy

Signs You May Need It

• Debt exceeds annual income significantly
• No realistic way to repay in 5-7 years
• Facing multiple lawsuits
• Wage garnishment affecting survival
• Creditors seizing assets
• Mental health suffering from debt stress

Bankruptcy Is NOT For

• Avoiding debts you can pay
• Protecting assets from legitimate claims
• Escaping recent luxury purchases
• Hiding from temporary setback

Alternatives to Consider First

Fresh Start Process

Eligibility (All Must Be Met)

• Annual income < ₹60,000
• Assets < ₹20,000 (excluding essentials)
• Qualifying debts < ₹35,000
• Don’t own a home
• Haven’t been bankrupt before
• Haven’t used Fresh Start in 12 months
• Not partner in firm
• Not undischarged insolvent

What Debts Can Be Discharged

✅ Dischargeable:

• Credit card debt
• Personal loans
• Medical bills
• Unpaid bills

❌ Non-dischargeable:

• Tax debts
• Student loans (usually)
• Alimony/maintenance
• Fines/penalties
• Fraud-related debts
• Recent luxury purchases

Process

1. Apply to National Company Law Tribunal (NCLT)
2. Resolution Professional appointed
3. Examination of eligibility
4. If eligible, debts discharged
5. Bankruptcy status for 1 year

Consequences

Insolvency Resolution Process

For Larger Debts

When Fresh Start doesn’t apply, this process helps:

• Repay debts over time
• Potentially discharge remaining amounts
• More complex than Fresh Start

Process Overview

1. Application to NCLT
2. Resolution Professional appointed
3. Creditors submit claims
4. Repayment plan developed
5. Creditors vote on plan
6. If approved, payments begin
7. After completion, discharge

Timeline

Protected Assets

What You Can Keep

Under IBC, certain assets are protected:

• Essential household items
• Tools of trade (limited)
• Personal effects
• Provident fund

What You May Lose

• Non-essential property
• Second home
• Luxury items
• Investments
• Bank balances above threshold

Impact of Bankruptcy

Immediate Effects

• All collection actions stop
• Creditors must go through tribunal
• Wages no longer garnished (usually)
• Breathing room to restructure

Long-Term Effects

Credit Impact

• CIBIL score drops to 300-400 range
• Stays on report for 7+ years
• Loans extremely difficult to get
• Higher interest rates when available
• May affect employment (some industries)

The Fresh Start Path

Detailed Steps

Step 1: Verify Eligibility

Confirm you meet ALL criteria:

• Income < ₹60,000/year
• Assets < ₹20,000 (non-essential)
• Debts < ₹35,000
• No home ownership
• First-time bankruptcy

Step 2: Gather Documentation

• List of all debts with amounts
• List of all assets
• Income proof
• Bank statements
• ID and address proof

Step 3: File Application

Submit to National Company Law Tribunal:

• Prescribed form
• All documentation
• Filing fee

Step 4: Resolution Professional

Appointed to:

• Verify your information
• Examine your finances
• Report to tribunal

Step 5: Discharge

If everything checks out:

• Debts discharged
• Bankruptcy order issued
• Restrictions begin

Life During and After Bankruptcy

During Bankruptcy Period

Restrictions:

• Cannot be company director
• Limited access to credit
• Must disclose status if asked
• Financial transactions monitored

Requirements:

• Cooperate with Resolution Professional
• Disclose all assets/income
• Don’t hide assets
• Report changes in circumstances

After Discharge

What changes:

• No longer legally obligated on discharged debts
• Bankruptcy status ends (after period)
• Can start rebuilding credit
• Fresh financial start

What doesn’t change:

• Non-dischargeable debts remain
• Credit history shows bankruptcy
• May still face questions from employers/lenders

Rebuilding After Bankruptcy

Immediate Steps

1. Budget strictly — live below means
2. Build emergency fund — prevent future crisis
3. Monitor credit — check for errors
4. Secured credit card — rebuild payment history

Timeline to Recovery

Future Credit

Alternatives Summary

Before Filing, Try

1. Negotiate with creditors

   • Payment plans
   • Interest reduction
   • Settlement

2. Debt consolidation

   • Lower interest rate
   • Single payment
   • If you can qualify

3. Credit counseling

   • Professional help
   • Structured plan
   • May negotiate with creditors

4. Family assistance

   • Loan from family
   • Gift if offered
   • No interest, flexible terms

5. Income increase

   • Second job
   • Side hustle
   • Sell assets

Common Myths

Myth 1: You Lose Everything

Reality: Essential assets are protected. You keep basics for living.

Myth 2: You Can Never Get Credit Again

Reality: Difficult for years, but not forever. Many rebuild credit within 5-7 years.

Myth 3: Bankruptcy Erases All Debts

Reality: Some debts survive—taxes, maintenance, fraud, student loans.

Myth 4: Everyone Will Know

Reality: It’s public record, but most people won’t check.

Myth 5: It’s Easy Way Out

Reality: Serious consequences for years. Not a casual decision.

Professional Help

When You Need a Lawyer

• Complex asset situation
• Business involved
• Disputes with creditors
• Unsure about eligibility
• First time through process

Finding Help

• Insolvency Professionals (IBBI registered)
• Legal aid societies
• Lawyer referral services
• Consumer rights organizations

Key Takeaways

• Bankruptcy is last resort — try alternatives first
• Fresh Start for small debts — strict eligibility criteria
• Credit impact is severe — 7+ years
• Some debts survive — taxes, maintenance, fraud
• Protected assets exist — essentials kept
• Rebuilding is possible — but takes years
• Get professional advice — complex process
• It’s a fresh start — not the end of financial life

Next: Building an Emergency Fund — Balancing savings with debt repayment.