Working End > Insolvency

Insolvency of Companies

Definition, Explanation

One risk of entrepreneurship is the possibility of becoming insolvent: As an entrepreneur you are no longer able to pay your debts. The reasons for it need not be on your side:

• Clients might be no longer able to pay your performance because they have filed for insolvency themselves
• Products might not sell any longer when competitive standards rise (wholesale traders can offer a larger variety of products at lower prices)
• Framework conditions have changed such that turnover decreases dramatically (e.g. fuelling stations at country boarders, gastronomy-, hotel- and other services at long-term construction sites)

In an insolvency procedure, legal actions are taken mainly in order to satisfy involved creditors. Employees are protected from insolvency effects by insolvency money, dismissal protection and other legal regulations. The insolvent entrepreneur, however, will face a number of challenges to meet.

Tips, Checklist

• Plan how to proceed with the giving up of your own business, in an orderly way
• Inform the works council, your employees, suppliers and creditors about your situation and look for solutions (like partial abatement, deferment of payment, extension of payment periods or similar) and talk to them regularly, keep them informed
• Get advice from your tax consultant or from consulting companies
• Do read your mail and respond
• Think whether reduced working hours make sense
• Before you file for insolvency, try to achieve outside court agreements with your creditors. Filing for insolvency is only obligatory for owner-managers of corporations. They will be personally liable for damages, or prosecutable
• As a precaution, file for insolvency with applying for discharge of residual debt and maybe for deferral of distress costs. Discharge of residual debt will enable you to be free of debts after 6 six years, despite high debts
• Ensure correct bookkeeping and assess your liquidity
• Divest existing free company assets to satisfy your creditors
• File due tax declarations
• Cancel contracts (suppliers, infrastructure, professional literature etc.) and debiting authorisations
• Unregister your trade
• Report unemployed at the labour agency
• Get informed by the labour agency whether you can still receive unemployment benefit I payments. These will no longer be paid only if the starting of the business has been longer than 4 years ago, if, before, you have been an employee paying unemployment insurance contributions and have been unemployed for fewer than 12 months
• If you are not entitled to unemployment benefit I, you can get unemployment benefit II
• Get advice at a local debt counselling service which are normally for free at communities, counties and charity associations
• Make sure you comply with all legal regulations: Pay social insurance contributions in time, until having filed for insolvency, and file for insolvency early
• As an insolvent entrepreneur, you may use a minor part of the insolvency assets that you need for a moderate living
• Do not consider insolvency your personal failure. Be open with it and talk to other insolvent people
• Inform your family
• Insolvency takes a lot of effort and may cause stress, overload and burnout. Therefore, make sure in such a difficult situation to acre for yourself with good eating, sports, communication with friends and things that you like

Articles

• Over 60 perscent of all US bankruptcies attributabel to medical problems; EurekaAlert, June 4, 2009

Last update: 09/27/2010