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Loan Settlement: Procedure, Impact on Credit Score Under the Insolvency & Bankruptcy Code

Shruti Goel
September 15, 2023
Loan Settlement Under the IBC

Loan settlements have become increasingly common in today's financial landscape, especially in the context of the Insolvency and Bankruptcy Code (IBC) in India. This legal framework provides a  structured mechanism for borrowers and lenders to resolve debt-related issues, offering a lifeline to individuals and businesses facing financial distress. However, loan settlements can have both positive and negative consequences, particularly on the borrower's credit score. In this blog, we will explore the procedure for loan settlement under the IBC and discuss its impact on the borrower's credit score. 

Understanding Loan Settlement Under the IBC 

The Insolvency and Bankruptcy Code, enacted in 2016, seeks to consolidate and amend laws relating  to insolvency resolution and bankruptcy. One of its primary objectives is to provide a time-bound and efficient mechanism for resolving financial distress, enabling businesses and individuals to settle their debts and make a fresh start. 

The IBC has Two Main Mechanisms for Loan Settlements

1. Corporate Insolvency Resolution Process (CIRP):

This process is applicable to corporate entities. It involves the initiation of insolvency proceedings against a debtor by its creditors. During the corporate insolvency resolution process, a  resolution professional takes charge of the debtor's Company, including all its assets and liabilities, post-admission order passed by the NCLT, and, a committee of creditors evaluates and approves a  resolution plan. Once approved, the plan may involve settling the debt with a haircut (reduced repayment amount) or other mutually agreed terms. 

2. Individual Insolvency Resolution Process (IIRP): 

This process applies to individuals, including personal guarantors of corporate debtors. The IIRP allows individuals to file for insolvency when they are unable to repay their debts. A resolution professional is appointed, and a repayment plan is devised based on the individual's financial situation and assets. 

The Procedure for Loan Settlement Under IBC 

Loan settlement under the IBC involves a structured process that allows debtors to negotiate with creditors and arrive at mutually agreeable terms. Here's a step-by-step overview of the procedure: 

1. Initiation: 

The debtor (individual or business) initiates the process by filing an application for insolvency resolution. The application is submitted to the National Company Law Tribunal (NCLT),  which evaluates its eligibility and admits or rejects it accordingly. 

2. Moratorium: 

Once admitted, the NCLT declares a moratorium, which temporarily halts all legal actions by creditors against the debtor. During this period, the debtor and creditors negotiate to arrive at a settlement. 

3. Committee of Creditors (CoC): 

The CoC, comprising the debtor's creditors, plays a pivotal role in the settlement process. It evaluates settlement proposals, approves or rejects them, and works in coordination with the resolution professional appointed by the NCLT, to oversee the process.

4. Negotiation:

The debtor presents a settlement proposal to the CoC, which may include a repayment plan, a debt reduction plan, or the sale of assets to settle debts. Negotiations continue until a  consensus is reached. 

5. Approval and Implementation: 

If the CoC accepts the settlement proposal, it is implemented, and the debtor's obligations are adjusted accordingly. If no agreement is reached, the case may proceed to liquidation, where assets are sold to repay creditors. 

Impact on Credit Score 

Now, let's delve into the impact of loan settlements under the IBC on the borrower's credit score: 

1. Credit Score Reduction: 

Loan settlements, whether through CIRP or IIRP, typically result in a reduction in the borrower's credit score. This is because creditors report the settlement to credit bureaus,  indicating that the borrower did not fully honor their debt obligations. As a result, the credit score is negatively affected. 

2. Credit Report: 

The record of a loan settlement remains on the borrower's credit report for several years. This can make it challenging to obtain credit or loans in the future, as lenders may view the borrower as a higher risk. 

3. Difficulty in Credit Approval: 

A lower credit score due to a loan settlement can affect the borrower's ability to secure credit cards, loans, or mortgages. Even if approval is granted, the terms may be less favorable, with higher interest rates and stricter conditions. 

4. Rebuilding Credit: 

To mitigate the negative impact of a loan settlement on their credit score,  borrowers should focus on rebuilding their creditworthiness. This can be achieved by making timely payments on any remaining debts, using secured credit cards, and demonstrating responsible financial behavior over time. 


Loan settlements under the Insolvency and Bankruptcy Code provide a lifeline to borrowers facing financial distress, offering them an opportunity to settle their debts and start anew. However, it is essential to understand that these settlements can have a significant impact on the borrower's credit score, potentially making it challenging to access credit in the future. Borrowers should weigh the pros and cons carefully, seek expert advice if necessary, and take proactive steps to rebuild their creditworthiness after a settlement. 

About Ancoraa 

Ancoraa Resolution is a financial services firm focused on debt resolution and financial restructuring.  Ancoraa Resolution helps suppliers file insolvency applications and get their dues faster by leveraging its technology platform and speeding up the recovery process. With over 35 licensed Insolvency Professionals located across 14 cities in India, Ancoraa Resolution ensures that you are equipped to take speedy action in matters of insolvency, debt resolution, and liquidation. 

Ancoraa’s flagship technology, the Rezolution Engine® – is India’s first and only ‘Resolution-as-a-Service’ platform providing a collaborative digital avenue to run the entire resolution process in compliance with the Insolvency and Bankruptcy Code of India. Whether you are a supplier, a homebuyer, a bank, or a personal guarantor, Rezolution Engine® enables anyone to initiate an insolvency application and allows all the participants to get a single point of view to the insolvency and bankruptcy proceedings while maintaining compliance and governance throughout the process.

About the author
Shruti Goel

Shruti is the operations specialist at Ancoraa. She is responsible for IP engagement, company research and operational excellence initiatives. She is passionate about and writes on topics of Insolvency Technology and administers Ancoraa’s flagship technology platform ‘Rezolution Engine’.

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