Declaring Bankruptcy in India: The IBC Explained

Few financial decisions feel as final, or as frightening, as deciding to declare bankruptcy. In India, the word still carries heavy social weight, yet the legal reality is more structured and far less mysterious than most people assume. Since 2016, the country has had a single, modern framework that decides exactly what happens when an individual or a company can no longer pay what it owes. Understanding how that framework actually works is the difference between panicking and planning.

So what really happens when you declare bankruptcy in India? In short: you (or a creditor) file an application before a specialised tribunal, a licensed professional is appointed to examine your finances, a moratorium pauses recovery action against you, and the law then tries first to rescue or restructure the debt. Only if rescue fails does formal bankruptcy and the sale of assets follow, ending eventually in a discharge that releases you from most remaining debts. This guide walks through that journey for both people and businesses, what it costs, and the routes you should weigh before you take it.

The law that governs bankruptcy in India

The cornerstone is the Insolvency and Bankruptcy Code, 2016, almost always shortened to the IBC. It received presidential assent on 28 May 2016 and replaced a tangle of older, overlapping laws with one consolidated code covering companies, partnership firms and individuals alike. The Code’s central promise is a time-bound, predictable process rather than the open-ended litigation that defined Indian insolvency for decades.

Three institutions make the IBC work in practice:

The Insolvency and Bankruptcy Board of India (IBBI) is the regulator. It frames the detailed rules and registers and oversees the insolvency professionals who run cases.
The National Company Law Tribunal (NCLT) is the adjudicating authority for companies, limited liability partnerships and the personal guarantors who stand behind corporate loans.
The Debt Recovery Tribunal (DRT) is the adjudicating authority for other individuals and partnership firms. Appeals from the DRT go to the Debt Recovery Appellate Tribunal (DRAT); appeals from the NCLT go to the NCLAT.

One important point of vocabulary: Indian law treats “insolvency” and “bankruptcy” as distinct stages. Insolvency is the broad state of being unable to pay debts, and the first thing the Code attempts is a resolution or repayment plan to fix that state. Bankruptcy is the later, more drastic outcome that arises only when resolution has failed and assets must be realised. You do not simply “declare bankruptcy” overnight; you enter a process that may end in a bankruptcy order.

Personal insolvency versus corporate insolvency

The IBC runs on two broad tracks. Part II deals with corporate debtors, companies and LLPs, through the Corporate Insolvency Resolution Process (CIRP) and, failing that, liquidation. Part III deals with individuals and partnership firms. The track that applies to you determines which tribunal hears the case, who can file, and what the thresholds are.

For individuals and partnership firms

Part III sets out two distinct routes for people who cannot pay:

The Fresh Start Process — a simplified discharge mechanism aimed at low-income debtors with very small debts and almost no assets.
The Insolvency Resolution Process — a structured negotiation in which the debtor proposes a repayment plan to creditors, which, if approved, becomes binding. If it fails, the matter can move to a bankruptcy order.

It is worth being candid here: the individual provisions of Part III have been brought into force only in stages, and chiefly for personal guarantors to corporate debtors. The full machinery for ordinary salaried borrowers and small firms remains only partly operational in practice, which is why most everyday consumer-debt distress in India is still handled through bank settlements, lok adalats and DRT recovery proceedings rather than a formal personal bankruptcy order. Neighbouring jurisdictions face the same gap between a modern code and its everyday use — see our companion guides on declaring bankruptcy in Pakistan and in Bangladesh.

For companies and LLPs

When a company defaults, the IBC’s flagship mechanism is the Corporate Insolvency Resolution Process. CIRP can be triggered against a corporate debtor only where the default is at least ₹1 crore — a threshold the government raised from ₹1 lakh in 2020 to keep smaller disputes out of the tribunals. The aim is rescue, not destruction: control of the company is handed to an insolvency professional, and the market is invited to bid resolution plans that keep the business alive. Liquidation is the fallback of last resort.

How to declare bankruptcy: who files, where, and the steps

Individuals: filing before the DRT

For an individual or partnership firm, insolvency proceedings can be started voluntarily by the debtor or by a creditor. The minimum default that lets a case proceed is just ₹1,000, though the government may raise this. The broad sequence runs as follows:

Application to the DRT. The debtor (or creditor) files an application, usually through a registered resolution professional, before the Debt Recovery Tribunal with jurisdiction over where the debtor lives or works.
Interim moratorium. Crucially, for an individual the moratorium begins the moment the application is filed. From that point, pending legal actions over the debt are stayed and fresh recovery suits cannot be launched, giving the debtor breathing room.
Appointment of a resolution professional (RP). The tribunal appoints, or confirms, an IBBI-registered RP to examine the application and report whether it should be accepted or rejected.
Admission and a full moratorium. If the tribunal admits the case, a moratorium of up to 180 days protects the debtor while a solution is worked out.
The repayment plan. The debtor, with the RP’s help, prepares a repayment plan. The RP reports on it and convenes a meeting of creditors, who vote. If approved, the tribunal’s order makes the plan binding on the debtor and the listed creditors.
Bankruptcy order, if resolution fails. Where no plan is agreed or the plan collapses, the debtor or creditors may apply for a bankruptcy order. A bankruptcy trustee then takes charge of the debtor’s estate, realises assets and distributes the proceeds.
Discharge. Once the plan is fully implemented, or the estate has been administered, the RP or trustee applies for a discharge order that releases the debtor from the covered debts.

Companies: filing before the NCLT

For a corporate debtor, an application to begin CIRP can be filed by a financial creditor (such as a bank), an operational creditor (such as a supplier or employee), or the company itself, before the NCLT. On admission, the tribunal declares a moratorium, suspends the existing board, and appoints an interim resolution professional who takes over day-to-day management. A committee of creditors is formed, resolution plans are invited and voted on, and an approved plan is implemented under tribunal supervision. The law sets a target of completing CIRP within 330 days, including time spent in litigation — though, in reality, a large share of cases run past that limit.

What it costs — and the “I have no money” problem

There is no single sticker price for declaring bankruptcy in India, and anyone quoting you an exact all-in figure is guessing. Costs fall into a few buckets: the tribunal’s filing fee, the fees of the insolvency or resolution professional, and lawyers’ charges if you engage counsel. The statutory application fees themselves are modest, but professional and process costs are the larger expense, and for corporate cases they can be substantial.

This raises the obvious question that brings many readers here: what if I genuinely have no money left to file? The IBC anticipated exactly this for the poorest debtors through the Fresh Start Process. Under Section 80, an individual may apply to the DRT for discharge of qualifying debts if, broadly, their gross annual income does not exceed ₹60,000, the aggregate value of their assets is not more than ₹20,000, and their qualifying debts do not exceed ₹35,000, with no home owned. If accepted, those qualifying debts are simply discharged and need not be repaid. It is a no-asset, low-cost route designed precisely for people the formal process would otherwise price out.

For those above these thresholds but still cash-strapped, the realistic answer is usually negotiation rather than a filing fee you cannot afford: a one-time settlement with the bank, a restructured EMI, or relief through a lok adalat. The same practical tension exists in other jurisdictions — our companion guide on what happens when you declare bankruptcy in the Philippines shows how a different legal system handles the same “no money to go bankrupt” paradox.

What happens to your debts, assets and credit record

The moment a moratorium takes effect, the relentless pressure of recovery calls, notices and lawsuits pauses. That alone is often the single biggest relief a distressed borrower experiences.

Your debts. The Code tries first to reorganise rather than erase. Through a repayment plan, debts may be rescheduled, reduced or partly written off by agreement. If matters reach a bankruptcy order and the estate is realised, any remaining liabilities that are not specifically excluded are typically wiped out at discharge. Some obligations, however, survive bankruptcy — for example, certain fines, dues arising from fraud, and family-maintenance obligations are not extinguished simply because you were declared bankrupt.

Your assets. In a bankruptcy, a trustee takes control of the debtor’s estate and sells it to pay creditors in the priority the law lays down. Not everything is fair game; basic personal effects and certain protected items generally fall outside the estate. For a company in liquidation, the liquidator gathers and sells the firm’s assets and distributes the proceeds under the statutory “waterfall,” after which the company is dissolved.

Your credit record. India has no separate “bankruptcy register” that brands you for life, but the practical credit consequences are real. Defaults, settlements and insolvency proceedings are reported to credit bureaus such as CIBIL, and a “settled” or “written-off” status on your report materially lowers your credit score and makes fresh borrowing difficult for years. Lenders are cautious with anyone who has been through insolvency, so expect rebuilding your creditworthiness to be a multi-year project.

How long bankruptcy lasts and when you are discharged

There is no fixed “you are bankrupt for X years” rule in India equivalent to some Western regimes. The duration depends on which track you are on and how the process resolves.

Under the Fresh Start Process, eligible qualifying debts can be discharged relatively quickly once the application is accepted, and a fresh-start order generally cannot be sought again within the following 12 months.
Under the Insolvency Resolution Process, the moratorium runs up to 180 days while a repayment plan is negotiated; discharge follows once the plan is fully implemented, and the plan itself can provide for an early discharge.
Where a bankruptcy order is made, the trustee administers the estate and then applies for a discharge order that formally releases the debtor from the covered debts. Discharge marks the legal end of the bankruptcy and the point at which a genuine financial fresh start begins.

The consequences and restrictions you should weigh

Declaring bankruptcy is not free of cost beyond money. The knock-on effects are worth taking seriously before you file:

Credit access. As noted, your ability to borrow — for a home, a car, a business — is curtailed for years, and at higher interest rates when it does return.
Company roles. Insolvency and the conduct surrounding it can lead to disqualification from acting as a company director, and undischarged bankrupts and wilful defaulters face restrictions on participating in resolution processes and holding certain positions.
Control of your affairs. Once a trustee or resolution professional is appointed, decisions over your assets pass largely out of your hands until the process concludes.
Reputation. Insolvency proceedings before the tribunals are matters of record, and the reputational dimension still matters in Indian business and personal life.
Employment and travel. There is no blanket bar on working or travelling for an ordinary discharged debtor, but a trustee can require cooperation and the surrender of relevant documents during the process, and certain regulated professions impose their own consequences.

Alternatives worth exploring before you file

For most people and many businesses, bankruptcy should be the last door, not the first. Several lighter routes can resolve distress without a formal insolvency order:

One-time settlement (OTS). Banks routinely accept a negotiated lump sum to close a defaulted loan. It dents your credit report but avoids tribunal proceedings entirely.
Loan restructuring. Lenders can reschedule tenure, reduce EMIs or grant a moratorium under RBI-permitted frameworks, particularly where the borrower’s difficulty is temporary.
Lok Adalats and conciliation. These forums offer a quicker, lower-cost path to a binding settlement for smaller debts.
Scheme of arrangement (for companies). Under the Companies Act, a company can propose a compromise or arrangement with creditors, sanctioned by the NCLT, to restructure its obligations without entering CIRP.
Pre-packaged insolvency (PPIRP). For eligible MSMEs, the IBC offers a faster, debtor-in-possession pre-pack route that lets a company agree a resolution plan with creditors before formally entering the process.

Each of these preserves more control and causes less lasting damage than a full bankruptcy. They are not always available, but they are almost always worth testing first.

Frequently asked questions

Can an ordinary individual actually be declared bankrupt in India today?

In principle yes, under Part III of the IBC, but in practice the individual-insolvency provisions have been operationalised mainly for personal guarantors of corporate loans. Everyday consumer debt is still more commonly resolved through bank settlements, DRT proceedings and lok adalats than through a formal personal bankruptcy order.

Where do I file — NCLT or DRT?

Companies, LLPs and personal guarantors of corporate debt go to the National Company Law Tribunal. Other individuals and partnership firms go to the Debt Recovery Tribunal. Filing the wrong forum will simply stall your case.

Will bankruptcy clear every debt I owe?

No. A discharge releases you from most covered debts, but obligations such as certain statutory fines, dues arising from fraud, and maintenance liabilities generally survive. Always confirm which of your specific debts qualify.

How badly does insolvency hurt my credit score?

Significantly. Defaults, settlements and “written-off” statuses are reported to bureaus like CIBIL and depress your score for years. You can rebuild it, but it takes disciplined, consistent repayment behaviour over time.

A final word

Declaring bankruptcy in India is no longer the open-ended ordeal it once was. The Insolvency and Bankruptcy Code, 2016 gives both individuals and companies a defined path — pause, resolve, restructure, and only as a last resort, realise assets and discharge what remains. But the right move depends entirely on the size of your debts, the assets behind them, and whether a settlement or restructuring could spare you the process altogether.

This article is general information, not legal or financial advice. Insolvency law in India is technical and still evolving, and individual provisions are being notified in stages. Before acting, consult a qualified lawyer or an IBBI-registered insolvency professional who can assess your specific circumstances.