Insolvency and Bankruptcy - Law and Practice · Insolvency Resolution of Individuals and Partnership Firms

Bankruptcy Order and Effects for Individuals under IBC

Updated 11 October 2026 · Fact-checked

A bankruptcy order is passed by the Debt Recovery Tribunal under section 126 within fourteen days of the bankruptcy trustee being confirmed or nominated. It vests the bankrupt's estate in the trustee, who divides it among creditors. It also stops creditors from acting against the bankrupt's property, except secured creditors. Solve questions by applying provision, facts and conclusion.

Understand Bankruptcy Order and Effects for Individuals

Bankruptcy is the last stage for an individual who cannot pay debts. In Part III of the Code, the Adjudicating Authority for individuals and firms is the Debt Recovery Tribunal (DRT). The process starts with an application for bankruptcy, made by the debtor or by a creditor. The application may propose an insolvency professional as bankruptcy trustee.

Before the order, the trustee has to be cleared. If a trustee is proposed, the DRT directs the Board (IBBI) within seven days of receiving the application to confirm that no disciplinary proceedings are pending against the professional. The Board has ten days to confirm, or to reject and nominate another. If no trustee is proposed, the DRT asks the Board to nominate one within seven days, and the Board has ten days to do so.

Once the trustee is confirmed or nominated, the DRT must pass the bankruptcy order within fourteen days (section 126). The order appoints that trustee. Within seven days of the order, the DRT gives the bankrupt, creditors and trustee a copy of the application and a copy of the order. The date of the order is the bankruptcy commencement date.

The effects follow from section 128. The estate of the bankrupt vests in the trustee and is divided among creditors. A creditor with a bankruptcy debt cannot start any action against the bankrupt's property for that debt. Nor can the creditor begin a suit or other legal proceedings without the DRT's leave and on its terms. If the order is made against a firm, it operates as an order against each individual who is a partner on the date of the order.

Secured creditors are treated differently. They can still realise their security as if no order had been passed, subject to section 123. But after the commencement date, a secured creditor who does not act to realise security within thirty days loses interest on the debt. The trustee also administers and distributes the estate under Chapter V (section 136), may declare interim dividends (section 174), and is paid fees from the distribution of the estate (section 144).

Key rules to remember

Pre-order trustee confirmation (section 125): DRT directs Board within 7 days of application; Board confirms or nominates within 10 days; Applies where a trustee is proposed (confirm no pending disciplinary proceedings) and where none is proposed (Board nominates).
Time to pass bankruptcy order (section 126(1)): Order within 14 days of confirmation or nomination of trustee; The clock runs from the confirmation or nomination, not from the application.
Supply of documents (section 126(2)): Copy of application and order to bankrupt, creditors and trustee within 7 days of the order; The DRT does this, not the trustee.
Effect of order (section 128(1)): Estate vests in trustee + estate divided among creditors + creditors barred from action against property and from suits without leave; The suit bar is lifted only with the DRT's leave and on its terms.
Secured creditor proviso (section 128(2)): No interest after commencement date if no action to realise security within 30 days; Secured creditors keep the right to realise security, subject to section 123.
Bankrupt's notice duty (section 150): Notice of new property, devolved property or higher income within 7 days; After discharge, the other duties continue but this notice duty does not.
Trustee replacement on resignation (section 146): DRT directs Board within 7 days of accepting resignation; Board recommends within 10 days; DRT appoints within 14 days; New trustee notifies the committee of creditors and the bankrupt within 7 days of appointment.

How to solve Bankruptcy Order and Effects for Individuals questions

Use the same sequence for every fact-based question on the bankruptcy order. It keeps your answer in the provision, facts, conclusion format.

1Identify who the person is: an individual debtor, a partner of a firm, or a creditor, and confirm the DRT is the Adjudicating Authority.
2Fix the stage: application, trustee confirmation or nomination, bankruptcy order, or post-order administration.
3Check each time limit in the facts (7, 10 and 14 days under sections 125 and 126) against the dates given.
4State the effect of the order under section 128: vesting of estate, division among creditors, and the bar on actions and suits.
5Classify the creditor as secured or unsecured. For a secured creditor, apply the 30-day interest proviso.
6Check excluded assets and excluded debts in section 79 before saying what falls in the estate or can be claimed.
7Apply the trustee's and bankrupt's duties (sections 136, 144, 150, 174) to the facts.
8Write a clear conclusion in one or two lines that answers the exact question asked.

Quickest way: Stage, clock, creditor type

When to use it: Use when a case question gives dates and several creditors and you have limited time.

Write the stage and the section next to it: 125 for trustee, 126 for order, 128 for effects.
Mark the 7, 10 and 14 day limits on a small timeline from the dates in the facts.
Tick each creditor as secured or unsecured, and note the commencement date for the 30-day test.
Write the conclusion for each creditor in one line, then add any trustee or bankrupt duty point.

Common mistakes in Bankruptcy Order and Effects for Individuals

Saying the NCLT passes the bankruptcy order for an individual.
Students mix Part II (corporate persons) with Part III.
Fix: For individuals and firms in Part III, the Adjudicating Authority is the Debt Recovery Tribunal.
Counting the 14 days for the order from the date of the application.
The word application is in the facts, so it feels like the starting point.
Fix: Section 126(1) counts from receiving the confirmation or nomination of the trustee under section 125.
Saying a secured creditor is barred from enforcing security after the order.
Students over-apply the bar on creditor action in section 128(1).
Fix: Section 128(2) preserves the secured creditor's right to realise security, subject to section 123. The only penalty is loss of interest if no action is taken within thirty days.
Treating all of the bankrupt's property as part of the estate.
Students forget the excluded assets list in section 79(14).
Fix: Mention unencumbered tools, essential household items, certain ornaments, life insurance or pension plans and a single dwelling unit as excluded assets, with values as prescribed.
Writing that a bankrupt's duties end fully on discharge.
Discharge sounds like a clean end to everything.
Fix: Under section 150(3), duties other than the notice duty under clause (c) continue after discharge.
Ignoring the effect on partners when the order is against a firm.
Students focus on the firm as a separate entity.
Fix: Under section 128(3), the order operates as an order against each individual who is a partner on the date of the order.

Worked examples

Example 1

Ramesh Iyer applied for bankruptcy and proposed Meena Kapoor, an insolvency professional, as trustee. The Board confirmed her appointment on 10 March. On what basis and by when must the DRT pass the bankruptcy order, and what must it do within seven days after that?

Show the solution

Provision: section 125 provides for the Board to confirm a proposed professional, and section 126(1) requires the DRT to pass the order within fourteen days of receiving that confirmation.
Facts: confirmation was given on 10 March. Assuming the DRT received it that day, fourteen days run to 24 March.
Section 125(5) says the confirmed trustee is appointed by the DRT in the bankruptcy order itself, so Meena Kapoor is appointed through the order.
Under section 126(2), within seven days of passing the order, the DRT gives the bankrupt, creditors and trustee a copy of the application and a copy of the order.
If the order is passed on 24 March, the documents must reach them by 31 March.

Answer: The DRT must pass the order by 24 March (assuming it received confirmation on 10 March) and appoint Meena Kapoor in it. It must then supply copies of the application and order to Ramesh, the creditors and the trustee within seven days of the order.

Example 2

A bankruptcy order is passed against Sanjay Verma on 1 April. Canara Traders, an unsecured creditor, wants to file a suit to recover its dues. Mehta Finance, a secured creditor, holds a mortgage over Sanjay's shop and takes no action until 15 May. Advise both creditors.

Show the solution

Provision: section 128(1) vests the estate in the trustee and divides it among creditors. It bars a creditor from acting against the bankrupt's property or starting a suit without the DRT's leave.
Canara Traders is unsecured, so it cannot sue or act against the property without the leave of the DRT and on such terms as the DRT imposes. Its remedy is to prove its debt in the bankruptcy.
Mehta Finance is secured. Under section 128(2), subject to section 123, it may realise its security as if no order had been passed.
The proviso gives thirty days from the commencement date, 1 April, so the period ends on 1 May. Mehta took no action by then.
Conclusion: Mehta keeps its right to realise the security but is not entitled to interest after 1 April.

Answer: Canara Traders cannot sue without the DRT's leave and should prove its debt. Mehta Finance can still realise its security, but because it did not act within thirty days of 1 April, it loses interest on its debt after the commencement date.

Exam tips

Quote the section number for each time limit: 125 for trustee clearance, 126 for the order, 128 for effects, 150 for the bankrupt's duties.
Always name the DRT as Adjudicating Authority for individuals and firms, and the Board as IBBI.
In a case with several creditors, split them into secured and unsecured before concluding.
List the excluded assets and excluded debts from section 79 if the facts mention a home, vehicle, insurance policy or student loan.
Keep each answer in three parts: provision, analysis of the facts, conclusion.

Practice questions from Insolvency Resolution of Individuals and Partnership Firms

Bankruptcy Order and Effects for Individuals: frequently asked questions

Who passes the bankruptcy order for an individual under the IBC?

The Debt Recovery Tribunal passes it, as it is the Adjudicating Authority under Part III. It must do so within fourteen days of receiving the confirmation or nomination of the bankruptcy trustee.

What happens to the bankrupt's property after the bankruptcy order?

The estate vests in the bankruptcy trustee and is divided among the creditors. Excluded assets, such as certain unencumbered essential items, a life insurance policy or a single dwelling unit of the prescribed value, are not part of it.

Can a secured creditor enforce its security after a bankruptcy order?

Yes, subject to section 123, the secured creditor may realise its security as if no order had been passed. If it takes no action within thirty days of the commencement date, it is not entitled to interest after that date.

What must a bankrupt do for the trustee?

The bankrupt must give information about his affairs, attend on the trustee when required, and give notice of any new property, devolved property or income increase. This notice is due within seven days. After discharge, the duties other than this notice duty continue.