Individual Insolvency and the Fresh Start Process Under IBC
Part III covers individuals and firms, but only the personal guarantor part is in force. Here's the rest, and why it still gets tested.
Part III of the Code was written for three groups (section 2(e)-(g)): personal guarantors to corporate debtors, partnership and proprietorship firms, and all other individuals. It sets out three processes: a fresh start for very small debtors, an insolvency resolution process built on a repayment plan, and bankruptcy.
Only the first group has it in force. The 15 November 2019 notification brought Part III into force from 1 December 2019 for personal guarantors to corporate debtors alone, and expressly left out the fresh start process. For a salaried individual, a sole proprietor or a partnership firm, these provisions are law on paper but not yet operative.
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The Map of Part III
I. Preliminary
Sections
78-79
What it covers
Minimum default of ₹1,000 (the Government may raise it to ₹1 lakh); definitions such as excluded and qualifying debt
II. Fresh start process
Sections
80-93
What it covers
Write-off of small qualifying debts after a 180-day moratorium
III. Insolvency resolution process
Sections
94-120
What it covers
Repayment plan negotiated with creditors
IV. Bankruptcy order
Sections
121-148
What it covers
Bankruptcy trustee takes the estate; discharge after one year
V. Administration and distribution
Sections
149-178
What it covers
Trustee's functions and the order of priority in bankruptcy (s. 178)
VI. Adjudicating Authority
Sections
179-183
What it covers
The Debt Recovery Tribunal (s. 79(1)), except that a personal guarantor's case goes to the NCLT (s. 60)
VII. Offences and penalties
Sections
184-187
What it covers
False information, concealment and similar offences
| Chapter | Sections | What it covers |
|---|---|---|
| I. Preliminary | 78-79 | Minimum default of ₹1,000 (the Government may raise it to ₹1 lakh); definitions such as excluded and qualifying debt |
| II. Fresh start process | 80-93 | Write-off of small qualifying debts after a 180-day moratorium |
| III. Insolvency resolution process | 94-120 | Repayment plan negotiated with creditors |
| IV. Bankruptcy order | 121-148 | Bankruptcy trustee takes the estate; discharge after one year |
| V. Administration and distribution | 149-178 | Trustee's functions and the order of priority in bankruptcy (s. 178) |
| VI. Adjudicating Authority | 179-183 | The Debt Recovery Tribunal (s. 79(1)), except that a personal guarantor's case goes to the NCLT (s. 60) |
| VII. Offences and penalties | 184-187 | False information, concealment and similar offences |
Who Qualifies for a Fresh Start (Section 80(2))
Every condition must be met.
- checkGross annual income does not exceed ₹60,000
- checkAggregate value of assets does not exceed ₹20,000
- checkAggregate qualifying debts do not exceed ₹35,000
- checkNot an undischarged bankrupt
- checkDoes not own a dwelling unit, whether or not it is encumbered
- checkNo fresh start, insolvency resolution or bankruptcy process subsisting against the debtor
- checkNo fresh start order made in the 12 months before the application
Terms the Questions Turn On
- Qualifying debt (s. 79(19))
- A liquidated sum owed under a contract, but not an excluded debt, not a debt to the extent it is secured, and not a debt incurred in the three months before the fresh start application.
- Excluded debt (s. 79(15))
- Fines imposed by a court or tribunal, damages for negligence, nuisance or breach of a legal obligation, maintenance, student loans, and any other debt prescribed. No Part III process discharges them.
- Fresh start moratorium (s. 85)
- Starts on admission and lasts 180 days. During it the debtor cannot act as a director, cannot dispose of assets and cannot travel abroad without the Tribunal's permission.
- Discharge order (s. 92)
- Passed at the end of the moratorium. It releases the debtor from the listed qualifying debts and from interest and penalties on them after the application, but releases no co-debtor or guarantor.
- Bankruptcy discharge (s. 138)
- The bankruptcy trustee applies on the expiry of one year from the bankruptcy commencement date, or earlier once the creditors approve completion of the administration.
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How the Limited Insolvency Examination Tests This
The individual insolvency case study (four two-mark questions) is usually about a personal guarantor, because that is the only part in force. Fresh start and firm-level provisions appear as one-mark questions on the Code itself, and they reward exact numbers. A typical item: a debtor earns ₹55,000 a year, owns no home, has assets of ₹15,000 and owes ₹30,000, of which ₹8,000 is a court fine. Is the debtor eligible, and what does the discharge cover?
The fine is an excluded debt, so it is not a qualifying debt and survives the discharge. The remaining ₹22,000 is within the ₹35,000 cap, and the income and asset tests are met, so the debtor qualifies on paper. The trap is answering as if the fresh start were operative: as at the exam cut-off, and still today, it has not been notified.
2026 Changes to Part III
From 26 May 2026 the amendment added a transactions-defrauding-creditors provision for Part III debtors (new section 164A), clarified that government dues in bankruptcy rank by period and not by any statutory security (Explanation to section 178(1)(d)), and allowed a penalty of ₹1 lakh to ₹2 crore for frivolous or vexatious Part III proceedings (new section 183A). These came after the exam cut-off of 4 February 2025. The personal-guarantor changes are on the personal guarantor page.
FAQs
Is individual insolvency under IBC in force?expand_more
Only for personal guarantors to corporate debtors, from 1 December 2019. Part III has not been brought into force for other individuals or for partnership and proprietorship firms.
What is the fresh start process under IBC?expand_more
A process in sections 80 to 93 for debtors with gross annual income up to ₹60,000, assets up to ₹20,000 and qualifying debts up to ₹35,000 who own no home. After a 180-day moratorium the qualifying debts are discharged. It has not been notified.
Which tribunal hears individual insolvency cases?expand_more
The Debt Recovery Tribunal under section 79(1). The exception is a personal guarantor to a corporate debtor, whose case goes to the NCLT under section 60.
Can a partner file insolvency for the firm?expand_more
Under section 94(2), a partner cannot apply in respect of the firm unless all or a majority of the partners file jointly. Like the rest of Part III for firms, this is not yet in force.
Next steps
- Personal Guarantorsarrow_forward
- IBC Overviewarrow_forward
- NCLT and NCLATarrow_forward
- Syllabusarrow_forward
65 questions, case-study format, negative marking.