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How does a personal insolvency procedure work?

The consumer or personal insolvency procedure is a simplified insolvency process available to private individuals who do not engage in or have not engaged in any self-employed economic activity (§ 304 Paragraph 1 of the Insolvency Code, InSO).

This applies to individuals such as the unemployed, social welfare recipients, students, interns, trainees, employees, retirees, as well as those serving in civil or military service. A managing director of a GmbH (limited liability company) or a board member of an AG (stock corporation) is also considered a consumer under § 304 InSO, provided they are not shareholders with a stake of at least 50%.

For debtors who have previously been self-employed, the consumer insolvency procedure is also available, provided they have fewer than 20 creditors at the time of filing the petition and have no claims arising from employment relationships.

If you do not fall into the above-mentioned categories, you can pursue the regular insolvency procedure.

The primary goal of the insolvency procedure is debt discharge (referred to as "Restschuldbefreiung"). This means that all debts are forgiven, allowing the debtor to make a fresh start without financial burdens.

The procedure consists of the following stages:

  1. Preparatory phase
  2. Out-of-court debt settlement attempt
  3. Court-supervised debt settlement plan
  4. Formal insolvency procedure
  5. Good behavior phase
  6. Debt discharge

According to the current legal framework, debt discharge occurs three years after the initiation of the procedure for all newly opened insolvency cases.

What Does the Release of Self-Employment Mean? What Are the Consequences of the Release for Me as a Self-Employed Person?

Can I continue my self-employment if I go into insolvency?

Yes, even if you are self-employed, the insolvency process is available to you. Depending on whether you are self-employed at the time of the insolvency filing or have been self-employed in the past, either the consumer insolvency procedure or the regular insolvency procedure may be applicable.

So, what happens to your self-employment if you go into insolvency? Can you continue running your business, or will you need to find a salaried job?

If the debtor is a natural person who is self-employed at the time of the insolvency filing and wishes to continue this activity after the insolvency has been opened, or if they intend to start self-employment after the opening of the procedure, the insolvency administrator has three possible options for dealing with the debtor’s self-employment:

  1. Continuation of the business together with the debtor:
    In this case, all new business transactions are conducted in the name of the insolvency administrator, with the debtor only acting as the administrator’s representative. The business revenues are added to the insolvency estate. The debtor receives a compensation payment from the insolvency administrator but does not bear any entrepreneurial risk and is not involved in the business’s financial success.

  2. Tolerating the debtor’s business activity:
    This option is very similar to the continuation of the business. The business revenues again go into the insolvency estate, and the debtor bears no entrepreneurial risk, but only as long as the insolvency administrator explicitly chooses the liability or is aware of the liabilities of the business.

  3. Release of self-employment:
    This is the standard option. The debtor is allowed to continue their business independently. By releasing the self-employment, newly acquired assets or property by the debtor are no longer part of the insolvency estate, meaning the debtor is free to dispose of them.

In this case, the amount the debtor must pay to the insolvency administrator is not based on their actual income from self-employment, but rather on a fictional salary. This salary is calculated based on the debtor’s education, work experience, and the regional salary structure, i.e., the salary the debtor would earn in a comparable salaried position (§ 295 Paragraph 2 InsO). The garnishable portion of this fictional salary is then calculated just like it would be for an employee.

If the debtor is very successful, they can keep significantly more for themselves. However, they also bear the risk of their business success. If, by the end of the "good conduct" phase, the debtor earns less than an employee in a comparable position and consequently achieves a lower repayment to creditors, this could result in the denial of debt discharge.

Since the insolvency administrator is personally liable for any new liabilities arising, they would need to supervise the debtor continuously if self-employment is not released. This significant time investment and the associated risks usually lead the insolvency administrator to release the debtor’s self-employment.

For these reasons, releasing the self-employment has become the standard and preferred solution in most cases.

Can I Continue My Self-Employment if I Go into Insolvency?

If a debtor is self-employed, they can still apply for insolvency. Depending on whether they are self-employed at the time of the insolvency filing or have previously been self-employed, they can either enter the consumer insolvency procedure or the regular insolvency procedure.

But what happens to your self-employment if you go into insolvency? Can you continue your business, or do you need to find a salaried job?

If the debtor is a natural person who is self-employed at the time of the insolvency filing and wishes to continue self-employment or plans to start a self-employed activity after the insolvency has been opened, the insolvency administrator generally has three options for handling the debtor’s self-employment:

  1. Continuation of the business with the debtor:
    In this case, all new business transactions are conducted in the name of the insolvency administrator, with the debtor only acting as the administrator's representative. The business income is added to the insolvency estate. The debtor receives a compensation payment from the insolvency administrator but bears no entrepreneurial risk and is not involved in the financial success of the business.

  2. Tolerating the debtor’s business activity:
    This option is very similar to the continuation of the business. Again, all business income goes into the insolvency estate, and the debtor bears no entrepreneurial risk, but this is only the case if the insolvency administrator explicitly chooses the liability or is aware of the business's liabilities.

  3. Release of self-employment:
    This is the standard option. The debtor is allowed to continue running their business independently. By releasing the self-employment, newly acquired assets or property by the debtor are no longer part of the insolvency estate, meaning the debtor is free to dispose of them.

What the debtor must pay to the insolvency administrator is not based on what they actually earn from their self-employment, but rather on a fictional salary. This salary is based on the salary the debtor would earn in a comparable salaried position, taking into account their education, work experience, and regional salary structure (§ 295 Paragraph 2 InsO). The debtor's actual earnings are not considered. The garnishable portion is then calculated just like it would be for an employee.

This means that if the debtor is very successful, they can retain a significantly higher amount for themselves. However, they also bear the risk of their business's financial success. If the debtor earns less than in a comparable salaried position, and as a result, ends up with lower satisfaction for creditors by the end of the good conduct period, this could lead to the denial of debt discharge.

Since the insolvency administrator, as outlined earlier, is personally liable for any new liabilities incurred, they would need to continuously monitor the debtor if self-employment is not released. This requires significant time and involves considerable risk, which is why the insolvency administrator generally chooses not to take this approach.

For these reasons, releasing self-employment has become the standard practice in insolvency procedures

What Happens to My Property if I Go into Bankruptcy? Can I Save It? Can the Bank Simply Terminate My Loan?

What happens to my property if I go into bankruptcy? Can I save it? Can the bank terminate my loan?

Properties you own are part of your assets and are therefore generally subject to forced liquidation (§ 165 InsO). However, the insolvency administrator has the option to "release" the property, meaning it will no longer be part of the insolvency estate and you can regain control over it. Such a release will be granted by the insolvency administrator if he believes that selling the property will not increase the insolvency estate. This is usually the case when the property is under debt.

The property is considered to be under debt if the expected sale price is less than the remaining debt on the property, or if it seems unlikely that the insolvency administrator will be able to find a potential buyer. In these cases, the insolvency administrator will generally release your property.

What Happens to My Loan?

Another important question is what happens to your bank loan and how you can negotiate with the bank to prevent it from starting a forced foreclosure. The bank is usually entitled to do this, as it has registered a lien on the property to secure the loan. Initially, you should seek to have an open conversation with your bank representative to maintain a good relationship. In this discussion, you can suggest to the bank that you continue paying the installments from your non-attachable income (see case law on payments from non-attachable assets: BGH IX ZR 145/15). If the bank refuses this proposal or if your non-attachable income is insufficient, the second option is for your spouse, a family member, or a solvent third party to continue making payments to the bank.

Loan Termination by the Bank

The bank may terminate the loan agreement due to arrears (§ 498 BGB) only if you are behind with two or more consecutive installments or if you are at least 2.5% in arrears of the net loan amount. (Note: For other (non-) mortgage loans with a term of up to three years, a delay of at least 10% of the net loan is required; for terms longer than three years, a delay of at least 5% is required.) If the bank terminates the loan due to missed payments, according to the Federal Court of Justice (BGH), the bank has no right to a prepayment penalty.

Independently, the bank has the right to terminate the loan without notice if, in addition to payment arrears, there is a deterioration in your financial situation or if it is imminent that the repayment of the loan will be jeopardized (§ 490 BGB).

Sale in Case of Co-ownership

Another option for saving your property during consumer bankruptcy is selling the property to your spouse, who must be a co-owner. The condition is that your spouse must have sufficient financial means to purchase the property or be able to continue paying the loan independently.

However, it is strongly advised against transferring the property free of charge to a family member before filing for bankruptcy. Such a gratuitous transfer can be contested within four years prior to the application for insolvency opening (§ 134 InsO).

I am Behind on My Rent Payments. Can the Landlord Just "Throw" Me Out?

To "throw" you out of your apartment, the landlord must first legally terminate the rental agreement and then file an eviction lawsuit against you. There are different conditions for regular (timely) termination and extraordinary (immediate) termination, which must be distinguished:

Conditions for Regular Termination due to Payment Arrears For regular (timely) termination, the tenant must have willfully violated their contractual obligations to a significant extent (§ 573 (2) BGB). In the case of regular termination, this generally applies when the payment arrears amount to at least one month’s rent, and the delay has lasted for at least one month. Unlike extraordinary termination, the arrears cannot be cured by simply paying the rent owed (§ 569 Abs. 3 No. 2 BGB). However, the tenant has the possibility to invoke unforeseen financial difficulties and show that there is no willful breach of contract. Additionally, the landlord must adhere to the notice periods (§ 573 c Abs. 1 BGB). According to § 574 BGB, tenants can object to the termination if it would result in hardship for them, their family, or other members of their household. Hardship examples include old age, disability, frailty, advanced pregnancy, or serious illness. Hardship can also be claimed if it is impossible to find suitable alternative housing under reasonable conditions (§ 574 Abs. 2 BGB).

Conditions for Immediate Termination due to Payment Arrears For a landlord to immediately terminate the rental agreement, there must be a good cause. A good cause exists if the tenant is behind on payments for two consecutive rent payments or if they have failed to pay a significant part of the rent (§ 543 Abs. 2 S. 1 No. 3a BGB). A significant arrear exists if the arrears exceed the rent for one month (§ 569 Abs. 3 No. 1 BGB), meaning if there is a rent arrear over two consecutive months amounting to more than one month's rent. Additionally, a good cause exists if the tenant is behind on payments over more than two payment periods and the total arrears reach the amount of two months' rent (§ 543 Abs. 2 S. 1 No. 3b BGB).

However, if the tenant has settled the arrears before the termination, extraordinary termination is excluded.

Even after an extraordinary termination is declared, it can be nullified by payment of the overdue rent. This is the case if the landlord is satisfied with the overdue rent within two months of the lawsuit being filed regarding the eviction claim (§ 569 Abs. 3 No. 2 BGB).

What Happens After Termination When the Tenant Doesn’t Vacate the Apartment by the Deadline? If the tenant does not voluntarily vacate the apartment after the deadline specified in the termination notice, the landlord must file an eviction lawsuit with the competent local court. The court will then notify the tenant and ask them to respond or appear in court. If the tenant does not respond, a default judgment will be issued, and the landlord can initiate forced eviction.

If the tenant defends themselves, which they should do to at least gain time, a court hearing will take place, and the outcome will usually be an eviction title. This will become legally binding one month after delivery unless the tenant files an appeal. The eviction title is a prerequisite for the bailiff to enforce the eviction.

If an eviction title exists and the tenant still refuses to leave, the landlord can only proceed with forced eviction. To do this, the landlord must apply for forced eviction at the appropriate local court or bailiff. The bailiff will check whether the conditions for forced eviction are met and request an advance payment from the landlord. Once the conditions are fulfilled, the bailiff will set an eviction date after receiving the payment. A three-week waiting period is required between notifying the eviction date and executing the eviction. During this period, the tenant may file a request for eviction protection at the enforcement court. Forced eviction can be postponed in cases where it would cause undue hardship for the tenant. Specific requirements for eviction protection applications in Berlin can be found here. Such eviction procedures can take anywhere from six to twelve months.

Can My Job Be Terminated if I Go into Bankruptcy?

In general, personal bankruptcy is not a legitimate reason for your employer to legally terminate your employment. You do not even have to inform your employer that you are going through such a process. The employer does not have the right to ask about it, as debts are not considered a legal wrongdoing under German law. However, you should expect that your employer will usually find out about your bankruptcy, as the appointed insolvency administrator will typically garnish your wages. Personal bankruptcy was introduced as a legitimate means for consumers to start a new life free from debt. If the employer were to have a right to terminate your employment because of the bankruptcy, it would contradict this purpose.

An exception can be made if other factors, such as embezzlement or fraud, are involved. There are also exceptions for certain professions. For individuals who work with money, need to meet high security requirements, or hold senior positions, personal bankruptcy can lead to the employer having the right to terminate the contract, as the necessary trust relationship may no longer exist.

For example, this can apply to bank employees, employees in air security, or authorized signatories with special powers in companies.

I have taken out a life insurance policy for retirement provision. Can it be seized in bankruptcy?

In general, a private life insurance policy is considered part of the debtor’s assets and can therefore be liquidated by the insolvency administrator, meaning it can be canceled. However, many debtors have paid into a private life insurance policy for their retirement provision, either as an additional pension or the only pension plan. Can this insurance now simply be seized in the event of bankruptcy?

(Excerpt: It is important to differentiate this life insurance for retirement provision from a life insurance policy taken out solely for the policyholder’s death. The latter can be seized if the amount exceeds €3,579, according to § 850b Paragraph 1 No. 4 of the ZPO.)

No, it can be protected from seizure under certain conditions. These conditions are outlined in § 851c Paragraph 1 of the ZPO. According to this, life insurance policies can only be seized like income if:

  1. The benefit is paid regularly for life and not before the age of 60 or only in the event of disability.
  2. The policyholder cannot dispose of the claims from the contract.
  3. No third parties, except for surviving relatives, can be designated as beneficiaries.
  4. The policy does not provide for a lump-sum payment, except for death benefits.

Thus, a life insurance policy that pays a regular retirement benefit (1), is non-transferable or cancellable (2), cannot designate third parties other than spouses and children as beneficiaries (3), and does not provide for early payout rights (4), is only subject to seizure if the debtor’s amount exceeds the non-seizable amount of at least €1,339.99 once they reach the age of 60, or if the contributions paid exceed the non-seizable amounts specified in § 851c Paragraph 2 ZPO (before the age of 60).

According to Paragraph 2, only a certain amount protected by the policyholder’s age is protected, and it rarely exceeds this limit.

The problem is that most life insurance policies allow the policyholder to cash in the policy early, albeit with high penalties. This clause, which is often very useful for self-employed individuals to access capital quickly in an emergency, allows creditors to seize the life insurance, as the policy no longer meets the criteria of § 851c No. 4 ZPO ("the payment of a lump-sum benefit... has not been agreed upon"), making it subject to seizure.

However, the policyholder of a life insurance policy has the option to request that the insurance be converted into a protected form before seizure at the end of the current insurance period (§ 167 VVG). By removing the contractually agreed-upon cashing-in option, the life insurance policy can be protected from seizure, provided the other conditions are met.

It is important that the request for conversion is made on time. The request for conversion must be submitted early enough so that the conversion is completed by the end of the current insurance period, typically by the end of the calendar year. Simply submitting the request on time is not sufficient for protection under § 851c ZPO. Additionally, a request made after the insolvency procedure has been opened has no effect, as the debtor’s dispositions over assets in the insolvency estate are invalid after the insolvency proceedings begin (§ 81 InsO).

Also, to comply with the disclosure obligations under § 290 Paragraph 1 No. 5 InsO, a conversion during the insolvency proceedings should be reported.

Do I have to submit my tax return during insolvency?

After the initiation of the insolvency procedure until its termination, meaning in the case of consumer insolvency until the start of the phase of good conduct, you as the debtor are not required to submit your tax return yourself. Instead, only the insolvency administrator responsible for your case is authorized and obliged to prepare and submit the tax returns on your behalf. This is derived from Section 80 of the Insolvency Code (InsO) in conjunction with Section 34 (3) sentence 1 of the General Tax Code (AO). The insolvency administrator must even prepare and submit tax returns for previous years that the debtor did not file. The costs for this will not be borne by you as the debtor, but will be paid from the insolvency estate (cf. Federal Fiscal Court ruling of November 19, 2007 – VII B 104/07). However, you are obliged to provide the insolvency administrator with all the necessary information and documents to prepare the tax return. Failure to do so is a violation of your duty to cooperate and can lead to the denial of discharge from debt, as per Section 290 (1) No. 5 in conjunction with Section 97 InsO. After the termination of the formal insolvency procedure, i.e., with the start of the phase of good conduct, you are again responsible for preparing and submitting your tax return.

I have a company car. What does this mean for my exemption from garnishment in insolvency?

First, it's important to note that a company car only affects the calculation of the garnishment exemption if it is explicitly made available for private use by the employee. Whether and how this actually occurs is not relevant. In this case, the so-called 1% rule applies. This means that 1% of the list price of the company car is added to the employee's gross income each month. This amount is then subtracted from the net income. For electric cars that cost up to 60,000 euros and are made available for private use as company cars, the 0.25% rule applies. For plug-in hybrid and fuel cell vehicles, as well as more expensive company electric cars, the 0.5% rule applies. In insolvency or in the case of wage garnishment before the opening of insolvency proceedings, this has two negative consequences for the debtor:

  1. The amount used to calculate the garnishable income is higher, so more will be garnished from the debtor.
  2. After the garnishable amount is deducted, the previously added amount is also subtracted, which can result in the debtor falling below the garnishment exemption threshold in extreme cases. To illustrate, an example: Assume an employee without maintenance obligations earns 2,500 euros gross and is provided with a company car worth 50,000 euros for private use by their employer. The gross salary is first increased by 1% of the car's list price, i.e., by 500 euros, bringing it to 3,000 euros. The net salary in this example would then be about 2,000 euros. According to the current garnishment table, an amount of 468.89 euros could be garnished from the employee, leaving a remaining amount of 1,531.11 euros. Then, the previously added 500 euros are subtracted, so the employee is left with 1,031.11 euros, which is significantly below the current garnishment exemption limit of 1,339.99 euros. For this reason, it is advisable to check whether the debtor can waive the company car or at least restrict private use through an agreement with the employer, so that the 1% rule does not apply. If the company car is used for commuting to the company for more than 47 days a year, this is added as an additional monetary benefit to the gross income of the debtor. In this case, 0.03% of the list price of the company car per kilometer of the one-way trip is added once a month (0.0075% for electric cars).

How long can my creditors enforce their claims? Do the claims eventually expire?

In principle, all claims are subject to a statute of limitations. However, the limitation periods vary significantly. There is a distinction between "ordinary" claims and those that have been titled.

The limitation period for claims that are not titled (i.e., those not based on an enforceable court judgment, settlement, entry in the insolvency table, or a garnishment order) is generally three years (§ 195 BGB).

The limitation period always begins at the end of the year in which the claim arose and the creditor knew or should have known about it.

The limitation period for the titled claims mentioned above is 30 years (§ 197 paragraph 1 Nos. 3-6 BGB).

For these, the limitation period begins with the legal validity or creation of the title (§ 201 BGB). However, the limitation period for titled claims can potentially be shortened to ten years due to "extinction" (Verwirkung). Extinction occurs when the creditor has failed to take any action to enforce the titled claim for a period of 10 years, i.e., has made no attempts at enforcement.

It is also important to note that the limitation periods can be significantly extended if the limitation is suspended before expiration due to legal action (§ 204 BGB) or if the debtor makes partial payments or there are official enforcement actions, which may even restart the limitation period (§ 212 BGB).

My employer pays me allowances. Can they be garnished?

What are allowances?

Allowances refer to higher expenses incurred by the employee due to business travel, for which they must spend extra money on food. To compensate for the resulting difference, the employer pays allowances in addition to the employee's salary.

Can my creditors garnish these allowances?

In principle, your income is subject to garnishment by creditors. However, there are a number of payments that are exempt from garnishment. The legislator has outlined these exemptions in Section 850a of the Code of Civil Procedure (ZPO). Allowances fall under the listed reimbursements and are therefore not garnishable, as long as they do not exceed the usual amount. The usual amount is defined as reimbursements that are considered tax-free under wage tax guidelines. To check if the amounts you receive are considered usual, you should compare them with the current list of standard rates for meal allowances and overnight expenses for business and professional international travel published by the Federal Ministry of Finance. Additionally, allowances must be calculated separately from income and must be independently listed in terms of their amount.

My employer pays me holiday pay. Can it be garnished?

Holiday pay is generally exempt from garnishment under Section 850a No. 2 of the Code of Civil Procedure (ZPO), as long as it does not exceed the usual amount. This means that holiday pay is excluded from the calculation of garnishable amounts and will not be deducted from the salary for garnishment purposes.

Can I commit a criminal offense in insolvency? What insolvency-related crimes exist?

The most common insolvency crimes are insolvency delay, withholding and misappropriating social security contributions, and so-called bankruptcy offenses (bankruptcy, violation of accounting obligations, and creditor favoritism).

Insolvency Delay, § 15a InsO

According to § 15a InsO, failing to file for insolvency on time, or filing incorrectly when insolvency or over-indebtedness occurs, is punishable by imprisonment for up to three years or a fine. The application must be submitted without undue delay, but no later than three weeks after insolvency or over-indebtedness occurs.
Insolvency delay is only punishable for managing directors of GmbH, UG (limited liability companies), board members of AG or cooperatives, and directors of Ltd. In cases of leadership failure, it can also apply to shareholders of a GmbH or members of the supervisory board of AGs or cooperatives.
Note: A conviction for intentional insolvency delay can lead to a five-year ban from holding the position of managing director of a GmbH, even if the penalty is a minor fine.

Withholding and Misappropriating Wages, § 266a StGB

According to § 266a (1) StGB, an employer who fails to pay employee social security contributions can be sentenced to up to five years in prison or a fine. The employer’s obligation to pay employee contributions takes priority over all other obligations, and failure to do so may lead to criminal penalties.

Bankruptcy, § 283 StGB

According to § 283 StGB, actions such as hiding, destroying, or undervaluing assets that belong to the bankruptcy estate are punishable by imprisonment for up to five years or a fine. This includes making unreasonably high expenditures, engaging in speculative transactions, or falsifying financial records. Actions leading to insolvency or over-indebtedness through these behaviors are also punishable.

Violation of Accounting Obligations, § 283b StGB

The violation of accounting obligations, such as failing to prepare necessary financial reports, can result in imprisonment for up to two years.

Creditor Favoritism, § 283c StGB

According to § 283c StGB, giving preferential treatment to one creditor by granting them a payment or security they are not entitled to is punishable by imprisonment for up to two years.

Fraudulent Procurement, § 263 StGB

Procurement fraud occurs when a company continues to order goods or services from suppliers despite being unable to pay, typically during an insolvency crisis. This is a form of fraud punishable by imprisonment for up to five years.

Tax Evasion, § 370 AO

Failure to pay wage tax or submit VAT returns on time during a financial crisis can lead to imprisonment for up to five years under § 370 AO. Convictions for tax evasion will prevent the discharge of these specific debts in insolvency proceedings.

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