A Second Chance Deferred: The Untapped Role of Fresh Start in India’s Personal Insolvency Framework
Ambika Chaturvedi
4th Year, BBA LL.B., AURO University, Surat & CS Professional level Student
Abstract
The Insolvency and Bankruptcy Code, 2016 (IBC) in India was designed to enhance revival of not only distressed companies but also individuals trapped under the weight of unmanageable debt. Among its lesser-known provisions is the Fresh Start Process, a mechanism aimed at giving low-income individuals a second chance at financial stability. Despite its promise, the process has remained largely dormant and underutilized since its introduction. For millions of people especially gig-workers, micro-entrepreneurs, and those struggling with credit card debt this absence of an personal insolvency resolution has only deepened their financial hardships
Individual business owners and entrepreneurs form the backbone of India’s economy. Many rely on small loans and advance credit to run and expand their businesses. However, like large corporate entities, they are vulnerable to the uncertainties of the market. When things go wrong whether due to sudden economic downturns, health crises, or shifting consumer demands these individuals often find themselves with no meaningful legal route to manage their debts and make a fresh start.
This study examines the Fresh Start Process’s untapped potential in India by focusing on the hardship that people experience due to personal debt. This Fresh Start procedure has the potential to be a potent instrument for social justice, financial inclusion, and economic resilience if it is carried out well. The research article highlights important areas where India’s strategy has room for improvement by drawing comparisons with other models, such as the United States’ Chapter 7 bankruptcy and the United Kingdom’s Debt Relief Orders. These include increasing qualifying requirements to take into account the state of the economy, digitizing processes to streamline them, offering debt counselling services, and enticing creditors to participate through incentives.
The study supports the revitalization of the Fresh Start Process as an essential step in providing vulnerable people with a true second opportunity, in addition to being a legislative reform. Through the empowerment of small company owners, gig workers, and other economically marginalized groups, India can foster inclusive growth, reduce poverty, and build a more resilient economy.
Keywords: Debt relief, Individual insolvency, Financial inclusion, Fresh start process.
Introduction: The Promise of Fresh Start
Personal debt has always been both a tool for survival and a source of vulnerability for the millions of Indians that work in the Informal sector. These informal sector employees include Micro-entrepreneurs, gig workers, and small business owners that rely upon small loans and short term credit on a routinely basis to sustain their livelihoods. Yet when financial shocks occur whether due to health crises, market downturns, or natural disasters these individuals find themselves trapped in cycles of debt with no realistic pathway to recovery. Despite the economic significance of these groups, India’s legal and financial systems offer them few viable mechanisms to address personal insolvency.
The Insolvency and Bankruptcy Code was introduced in the year 2016 and promised to change India’s insolvency landscape. While much attention has been given to corporate insolvency resolutions (CIRP), a lesser-known and far to be explored but crucial component of the Code is its framework for personal insolvency, particularly the Fresh Start Process. The fresh start process represents the goal of IBC to promote financial inclusivity and give a second chance to the economically-vulnerable persons by giving low-income individuals a chance to pay-off eligible debts and gain a clean financial slate.
This promise however is still largely unfulfilled. The Fresh Start Process has not been widely used, even though it was included in the legislation. Stringent eligibility requirements, like a Rs.35,000 debt threshold and an annual income cap of Rs.60,000, essentially limit the majority of distressed people from receiving any sort of assistance. Potential beneficiaries have been further excluded due to a lack of digital infrastructure, low public awareness, and poor institutional support.
The personal credit market in India is growing significantly in the meantime making it necessary for certain individual insolvency frameworks to be put in place. The personal loans market is expanding and the indications of financial strain are becoming more apparent, especially in the small-scale industries. However, in the lack of a formal framework for personal insolvency, borrowers are often subjected to social stigma and forceful debt collection techniques. These issues have wider implications in India’s lending landscape and financial stability in addition to prolonging individual financial misery.
Around the world, nations like the US and the UK have implemented personal insolvency procedures that strike a balance between the interests of creditors and the criteria for debtor rehabilitation. India’s Fresh Start Process has the potential to produce comparable social and economic advantages with the correct setup and implementation. India can turn the Fresh Start Process from a dormant legal provision into a dynamic vehicle for equitable economic growth by integrating global best practices.
This paper argues that revitalizing the Fresh Start Process is not merely a legislative necessity, but an ethical and economic imperative. It examines systemic impediments which have stalled progress, reviews profitable international models, and outlines an agenda for change. In doing so, it sees a time when personal insolvency regimes must serve not only creditors’ interests but also serve to protect dignity and rights the promise of a second chance realized, not just postponed.
The Fresh Start Process under India’s IBC: Dormant by Design?
When the Insolvency and Bankruptcy Code (IBC), 2016 was enacted, it was seen as a major piece of legislation with the objective of transforming India’s insolvency regime in a radical way. Part III, Chapter II covered the Fresh Start Process (FSP), which was one of its most innovative and comprehensive social aspects of the code. The FSP was intended to give low-income people who were drowning in debt a legal way to get all of their debts forgiven, which would allow them to recover financially and reintegrate into society. But even after over seven years, the Fresh Start Process is still essentially inert, which begs the important question of whether this dormancy is accidental or intentional.
The Bankruptcy Law Reforms Committee (BLRC) had conceptualized the Fresh Start Process as a “debt waiver mechanism” for low-asset, low-income individuals who were not likely to ever pay back their debts. It was intended to give such persons a fresh start, unencumbered by the vicious cycle of creditor harassment and socio-economic ostracism. As opposed to corporate insolvency, which is mainly creditor-led, the FSP was conceptualized as a debtor-led process that follows international trends in personal insolvency to give priority to social justice and financial inclusion.[1]
The Fresh Start Process (FSP) was designed to help debtors in need, but its out-of-date eligibility conditions make it inaccessible to the most. These criteria’s as per Section 80 of the IBC, include gross annual income below Rs.60,000, total assets below Rs.20,000, aggregate debts below Rs.35,000, and no ownership of a dwelling unit or agricultural land. These thresholds were derived from the Socio-Economic and Caste Census (SECC), 2011 data and have not been updated to reflect inflation, income growth, or regional economic disparities.[2] A research also showed that this restrictive criterion does not include even the poorest sections of the countries that are overly indebted. [3]
The eligibility thresholds under the Fresh Start process give annual income below Rs.60,000, total debt under Rs.35,000, and assets below Rs.20,000 which are so restrictive that they effectively exclude nearly the entire bottom section of the Indian population. Analysis of the All-India Debt and Investment Survey [4] reveals that even among the poorest rural households, typical debt burdens exceed Rs.35,000, and asset ownership (land, livestock, and basic dwellings) often surpasses the Rs.20,000 cut-off. As per NAFIS 2021–22, the average monthly income of rural households stands at Rs.12,698, making the majority of indebted individuals ineligible for relief under the current framework[5]. What was once envisioned as a safety valve for over-indebted, low-income individuals has now become an unworkable provision. The thresholds have remained static since 2016, while rural incomes, household debt, and asset ownership have all significantly increased, rendering the Fresh Start Process practically obsolete.
If we take a perspective from the Individual insolvency framework in the United Kingdom (UK), the Debt Relief Order (DRO) a comparable insolvency mechanism sets significantly higher income and asset limits and updates them periodically to match economic conditions. They are designed to be a potential individual insolvency solution aimed at people with debts lower than £15,000 and with assets not exceeding £300 (based on gross, not net value). DROs are also aimed at individuals with little to no disposable income (not exceeding £50 per month) with which to make contributions to creditors.[6]
In addition to the restrictive eligibility criteria’s there are also certain implementation barriers that exist in the fresh start procedure and individual insolvency frameworks that stall its operationalization in the country. Despite being a part of the IBC since 2016, the government has yet to officially notify Part III, which includes personal insolvency provisions like the Fresh Start Process. This lack of notification makes it legally inoperative, effectively rendering it a dormant provision in law with no real-world application. Individual insolvency cases are handled by Debt Recovery Tribunals (DRTs), unlike corporate insolvency, which has specialized National Company Law Tribunals (NCLTs). However, DRTs are already overburdened with banking and financial cases, and there is a shortage of insolvency professionals specializing in personal bankruptcy. The process lacks independent regulators overseeing individual insolvency matters, unlike the corporate insolvency framework governed by the Insolvency and Bankruptcy Board of India (IBBI).
The Social and Economic fallout of an inaccessible Fresh Start
The failure to implement the Fresh Start Process has had severe socio-economic effects which disproportionately impacts the financially vulnerable individuals. Many of the low-income earners, including gig workers, micro-entrepreneurs, and daily wage labourers, are therefore left with no choice but to turn to informal money lenders who charge exorbitant interest rates. Having no structured individual insolvency resolution mechanism makes these debtors become trapped in a cycle of unregulated borrowings, creditor harassment, and persistent financial instability. The absence of any legal solution to discharge their debts makes them perpetual targets of predatory lending that further deepen their financial distress.
The non-operational nature of the Fresh Start Process hinders entrepreneurship and financial inclusion. In developed countries a well-structured personal insolvency law enables individuals to take financial risks without the fear of irreversible financial damage. By giving a structured way to resolve personal debt these systems encourage innovation, small business creation, and economic mobility.
Beyond the financial repercussions, the inaccessibility of personal insolvency resolutions has significant psychological and social consequences. Debt-related stress has been linked to rising cases of mental health disorders, financial distress, and, in extreme situations, suicides among over-indebted individuals. The absence of institutional support mechanisms, such as debt counselling and structured insolvency relief, leaves individuals feeling hopeless and socially ostracized. The social stigma that surrounds debt along with the lack of awareness about legal options available forces many individuals to a state of prolonged financial distress, with little to no hope for financial recovery. Without any meaningful reform in the Fresh Start Process it remains a theoretical provision rather than a practical tool for economic and social rehabilitation.
The Global Landscape: How other countries handle Personal Insolvency
Individual insolvency laws may vary significantly across the different jurisdictions depending upon their social, legal and economic priorities. While some countries prioritize a swift discharge of debts to encourage entrepreneurship and financial recovery the others emphasize creditor repayment and financial discipline.
The United States gives one of the most well-structured personal insolvency systems that balance debtor relief with creditor protection. Under the U.S. Bankruptcy Code, Chapter 7 bankruptcy allows for liquidation, where non-exempt assets can be sold to repay creditors, and the remaining eligible debts are discharged, providing individuals with a “fresh start.” The Chapter 13 bankruptcy provides for an alternative mechanism for those with a stable income that enables them to restructure their debt through a three-to-five-year repayment plan.[7] The simplified discharge process in the U.S is more accessible to people as compared to India’s stringent eligibility criteria under the Fresh Start Process. The Trustees play a role in overseeing the bankruptcy proceeding which ensures a fair balance between debtor protection and interests of the creditors which India may consider to enhance its efficiency of individual insolvency.
The United Kingdom has made a comprehensive personal insolvency framework that caters to individuals at the different levels of financial distress. Debt Relief Orders (DROs) are designed for the low-income individuals with minimal assets and debts below £30,000 and also offers a one-year moratorium on repayments, after which their eligible debts are written off. The insolvency regime also provides Individual Voluntary Arrangements (IVAs) that allows debt restructuring over the next five years. The UK’s practice of periodically updating eligibility criteria reflects its adherence to their economic realities. In contrast India has a relatively out-dated Rs.35,000 debt cap for the Fresh Start Process which was made at the time of the making of the IBC. The UK also ensures that more people can access relief when needed and it also has a digitalized DRO process to reduce the bureaucratic delays and enhance accessibility, a feature India could adopt to improve efficiency in Fresh Start.
Apart from the countries like UK and the US, other countries also offer unique insolvency models that strike a balance between financial recovery and accountability. Germany for instance puts into force a Good Conduct Period of three years, during which debtors must demonstrate responsible financial behaviour before receiving a full discharge. It allows a system that fosters financial accountability and responsible borrowing, which India could incorporate by introducing mandatory financial counselling sessions before insolvency proceedings. Linking the debt discharge to good financial conduct could help impart responsible financial habits among Indian debtors as well.
The global models of individual insolvency demonstrate that an effective personal insolvency framework should be made in a way that is accessible, balanced, and time-bound. Countries like the U.S. and the UK ensure accessibility by broadening eligibility criteria and using digitalized processes, while Germany maintains a balance between debt forgiveness and structured repayment plans. A Mandatory financial counselling in Germany provides necessary support to the debtors. Regulated discharge periods in the U.S. also help create a certainty for the debtors. In India the reform of the Fresh Start Process requires aligning with these best global practices while considering the domestic socio-economic landscape of the country. The integration of these global standards with a structured, inclusive approach, India can develop a more effective insolvency framework that promotes financial stability and economic resilience.
From Dormancy to Dynamism: Policy and Tech Reforms
The Fresh Start Process (FSP) under the Part III of the Insolvency and Bankruptcy Code, 2016, was thought of as a critical tool to offer low-income individuals a clean slate from their unmanageable debt. However, it has remained largely dormant due to the several structural and institutional setbacks that continue to exist. Revival of the FSP and making it a dynamic legal instrument requires of an integrated approach focused on both the policy reforms as well as the technology-led innovations. One of the key issues is the non-notification of Part III of the IBC, which makes the legal mechanism inoperative. Without any notification, no Debt Recovery Tribunal (DRT) or Insolvency Professional (IP) can initiate or oversee fresh start applications. Drawing inspiration from jurisdictions such as the United Kingdom where Debt Relief Orders (DROs) have been successful due to clear legislative backing and institutional support the Indian framework too must be legally initiated with adequate operational readiness.
Another significant challenge that persists is the out dated eligibility thresholds, which no longer reflect the realities of a post-pandemic, inflation-adjusted economy. The original financial caps for income, assets, and debt were set over a decade ago, and their continued use excludes a large section of distressed individuals in the country. To enhance the inclusion in the economy India needs a dynamic eligibility framework where limits are indexed to the inflation in the country or tied to other socioeconomic indicators similar to the real-time eligibility models followed by the other countries. Digital innovation is also crucial to ensure the accessibility of the scheme. Currently the absence of a digital portal for filing FSP applications creates high friction, especially for those populations that are underserved. Moreover, the FSP should be seamlessly integrated with the broader financial and social infrastructure in the country. Access to credit history from agencies like CIBIL, identity data from UIDAI, and welfare status from schemes of the government can streamline the process, reduce the chances of fraud, and provide a holistic support to the applicants. To make this integration work, capacity-building of intermediaries is also essential. Many Insolvency Professionals are trained primarily in corporate insolvency and are not sensitized to the needs of personal debtors.
In essence, the transformation of the Fresh Start Process from a dormant provision to a dynamic instrument of financial justice will hinge on timely legal activation, adaptive policy mechanisms, and scalable technological infrastructure. Only then can it fulfil its promise of offering a true “fresh start” to millions of over-indebted individuals in India.
Conclusion
The Fresh Start Process under India’s Insolvency and Bankruptcy Code, although considered as a progressive and socially inclusive mechanism, remains a missed opportunity for a meaningful reform in the country’s personal insolvency landscape. Despite its potential to provide financial relief and dignity to the low-income individuals including gig workers, micro-entrepreneurs, and informal sector participants the process has been stifled by out-dated eligibility criteria’s and lack of institutional readiness. Not only has this undermined the constitutional promise of economic justice to all but also widen the socio-economic gap between those who have access to structured debt relief and those without.
By a comparative analysis of international best practices such as the U.S. Chapter 7 bankruptcy, the U.K.’s Debt Relief Orders, and Germany’s good conduct-linked discharge mechanisms this study underscores the urgency for India to reimagine its Fresh Start Process. Digitization, expansion of the eligibility thresholds, creditor incentives, and mandatory debt counselling are not just mere reforms but are the essential building blocks for a just and functional personal insolvency system in India.
Furthermore, incorporation of the ESG principles into the personal insolvency framework offers a transformative lens through which India can foster financial inclusion and promote long-term economic resilience in the country. By doing so the Fresh Start Process can evolve from a dormant statutory provision into a dynamic tool for an equitable development one that truly offers a second chance rather than merely deferring it.
References:
[1] Renuka Sane, “The Way Forward for Personal Insolvency in the Indian Insolvency and Bankruptcy Code”, SSRN, (2019).
[2] Ibid.
[3] Centre for Bankruptcy and Financial Laws, NLU Delhi, Fresh Start Process and the Plight of Individual Debtors, (Nov. 2, 2022), available at: https://www.cbflnludelhi.in/post/fresh-start-process-and-the-plight-of-individual-debtors (last visited Mar. 24, 2025).
[4] Press Information Bureau, ‘Indebtedness among Rural Households in India (AIDIS)’, Ministry of Finance (Aug. 17, 2021), available at https://pib.gov.in/PressReleasePage.aspx?PRID=1753935 (last visited Apr. 6, 2025).
[5] National Bank for Agriculture and Rural Development (NABARD), NABARD All India Rural Financial Inclusion Survey 2021–22, (NABARD, 2022), at 81.
[6] The Gazette, ‘A guide to personal insolvency’, available at: https://www.thegazette.co.uk/all-notices/content/70 (last visited Mar. 24, 2025).
[7] Chaitya Hiremath, “Doctrine of Fresh Start: A Critical Analysis”, Volume 5 Issue 1, Burnished Law Journal (2024).