Insolvency filing

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Table of contents:
  1. When should I consider filing for insolvency?
  2. How does the insolvency process work?
  3. What are the consequences of filing for insolvency?
  4. Can I take on new debts during insolvency?

When should I consider filing for insolvency?

Filing for insolvency provides an opportunity to eliminate debts and make a fresh financial start. Before proceeding, it’s advisable to seek advice from a debt counseling agency or attorney to explore the best course of action and examine alternatives.

Situations where insolvency may be appropriate:

  • Over-indebtedness: When debts exceed available assets with no prospect of improvement.

  • Insolvency: When ongoing payments, such as rent, utilities, or loan installments, can no longer be met.

  • Imminent insolvency: When it’s foreseeable that sufficient funds will not be available to meet upcoming payments.

  • Failed negotiations with creditors: When attempts to arrange payment plans or settlements with creditors have been unsuccessful.

  • Protection from enforcement: When multiple enforcement actions threaten to deplete all assets.

  • Long-term financial stability: When structured debt resolution and a debt-free restart are the goals.

How does the insolvency process work?

The insolvency process consists of several steps designed to manage the debtor’s debts and facilitate structured debt relief.

Filing for insolvency

  • The debtor or a creditor files an application with the competent insolvency court to open proceedings.

  • The application must include all relevant documents and information about the debtor’s financial situation.

Opening the process

  • The insolvency court reviews the application and decides whether to initiate insolvency proceedings.

  • If approved, an insolvency administrator is appointed to coordinate the next steps.

Asset investigation

  • The insolvency administrator identifies all assets and liabilities of the debtor.

  • Creditors are invited to register their claims.

Insolvency plan (optional)

  • The debtor may propose an insolvency plan, suggesting a settlement arrangement with creditors.

  • The plan must be approved by creditors and the court.

Liquidation of assets

  • The insolvency administrator liquidates the debtor’s assets (e.g., selling valuables) to satisfy creditors.

  • Proceeds are distributed to creditors based on a pre-determined ranking.

Debt discharge

  • Upon completion of the process, the debtor can apply for debt discharge if specific conditions are met.

  • This discharge forgives remaining debts and allows for a financial restart.

Closing the process

  • The insolvency process is formally concluded once all steps are completed.

  • The debtor receives debt discharge, if granted.

This process ensures debts are addressed in an orderly manner and offers an opportunity for financial recovery. Professional guidance from a debt counseling agency or attorney is recommended throughout.

What are the consequences of filing for insolvency?

Filing for insolvency significantly impacts a debtor’s life and financial circumstances. Below are the key effects:

Asset management

  • All assets are placed under the control of an insolvency administrator, removing the debtor’s authority to manage them.

Garnishment protection

  • During the insolvency process, income is protected up to a garnishment exemption limit. Any excess is used to repay creditors.

Debt regulation

  • The debtor must comply with the insolvency administrator’s instructions and disclose all income and financial changes.

Debt discharge

  • After meeting certain conditions, the debtor can achieve debt discharge, forgiving remaining debts and enabling a financial restart.

Business restrictions

  • The debtor may not take on new loans or engage in business activities that could incur new debts without the administrator’s approval.

Public debt records

  • The initiation of insolvency proceedings is recorded in public debtor registers and credit agencies (e.g., SCHUFA). This can impact creditworthiness and complicate renting apartments or signing contracts.

Obligation to cooperate

  • The debtor must provide all relevant information and cooperate with the insolvency administrator. Non-compliance can result in the denial of debt discharge.

While insolvency entails significant changes, it also offers a path to debt relief and a fresh start. Early consultation with a debt counselor or attorney can help determine the best approach.

Can I take on new debts during insolvency?

While it is theoretically possible to incur new debts during insolvency, it is strongly discouraged.

Key points regarding new debts:

Prohibition on new liabilities

  • The debtor should not take on new debts as this may violate procedural rules. Doing so could be seen as disloyalty to creditors and result in the denial of debt discharge.

Oversight by the insolvency administrator

  • The debtor is under the supervision of the insolvency administrator during the process. Significant financial decisions and new obligations must be approved by the administrator.

Risk to debt discharge

  • Incurring new debts can jeopardize debt discharge. If the court suspects abuse of the process, it may deny debt discharge.

Business restrictions

  • The debtor cannot take on new loans or engage in activities leading to further debts without the administrator’s consent.

Duty to live economically

  • The debtor is expected to live frugally during the insolvency process. New debts contradict this obligation and may lead to legal consequences.

Strict adherence to these rules is critical for successfully completing the insolvency process and securing debt discharge. Professional advice and close cooperation with the insolvency administrator are essential to navigate the process properly and resolve financial difficulties effectively.