What are ways to prevent bankruptcy

Bankruptcy: Causes and Solutions to Bankruptcy Proceedings

Bankruptcy: the involuntary cessation of business

In addition to great opportunities, starting a company also harbors risks. The greatest risk of self-employment is final failure, in other words: bankruptcy.

According to studies by KfW, a third of all start-ups will cease their activities within the first three financial years. An analysis by the Federal Statistical Office showed that in 2012:

  • 28,304 corporate insolvencies,
  • 20,280 insolvency proceedings of formerly self-employed natural persons,
  • 2,809 estate insolvencies and
  • 101,500 consumer bankruptcy proceedings have been filed.

Since the risk of bankruptcy is very high, especially in the first few years, start-ups should deal with the topic of corporate crisis or insolvency at an early stage. Accordingly, entrepreneurs will find tips on avoiding bankruptcy, an overview of the most common reasons for bankruptcy and the possible course of bankruptcy if other solutions to the crisis no longer work.

When is there a bankruptcy?

We speak of insolvency when a company, as a debtor, can no longer meet its current payment obligations to its creditors. Insolvency occurs in the event of over-indebtedness and insufficient financial liquidity.

According to the German insolvency law, there are two options for bankruptcy. On the one hand there is regular bankruptcy and on the other hand consumer bankruptcy. All natural persons are subsumed under consumer insolvency, so this form of insolvency is also referred to as personal bankruptcy. Regular insolvency is therefore relevant for companies under the following conditions:

  • Claims from employment relationships
  • At least twenty creditors
  • Commercial or self-employed activity

The opening and the course of insolvency proceedings are regulated in Germany in the insolvency code. You can find detailed information on bankruptcy law in a separate section.

If you notice the first signs of business difficulties that could potentially lead to bankruptcy, you should seek professional help. We recommend you the right support! Regardless of whether you decide to make a direct comparison with your creditors or to open insolvency proceedings, you will receive expert advice.

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Companies in bankruptcy: the bankruptcy procedure

As soon as the insolvency is established or even threatened, every entrepreneur should consider opening bankruptcy proceedings. Some legal forms such as the GmbH are even legally obliged to apply for bankruptcy in the event of insolvency.

Beware of the delay in bankruptcy!

Failure to open insolvency proceedings despite knowledge of insolvency inevitably leads to a criminal offense that can be punished with up to three years' imprisonment. You can find details on this in the chapter Delaying insolvency.

Bankruptcy can even avert the unpleasant consequences of a financial disaster. The purpose of bankruptcy or bankruptcy proceedings is namely the financial restructuring of the debtor. A completed insolvency always begins with the debt relief including the discharge of the remaining debts of a company and thus enables a new start for the failed entrepreneur. A proper bankruptcy thus prevents the courageous start-ups from being punished for life.

Questions about bankruptcy

The decision to file for bankruptcy brings with it many questions. The following matters should be clarified in advance of a bankruptcy:

  • Can a bankruptcy still be averted by a settlement with the debtors?
  • Is personal bankruptcy or regular bankruptcy an option for me?
  • What discharge of residual debt is possible for me in the event of bankruptcy - 3, 5 or 6 years?
  • Is it possible to resume self-employment despite bankruptcy?

Due to the complexity of bankruptcy or impending bankruptcy, detailed advice from a specialist lawyer and / or management consultant is essential. In addition, further detailed questions have to be clarified in the event of bankruptcy. Here are a few more examples:

  • What happens to the contractual obligations (rental, lease, lease and other contracts) in the event of insolvency?
  • According to what rank are the creditors and customers served in the event of bankruptcy?
  • Who determines the bankruptcy estate or the goodwill?
  • What happens to employees if my company goes bankrupt?
  • Which obligations towards the tax office, the social security funds etc. still apply?

The liquidator takes over

The bankruptcy court opens the bankruptcy proceedings and appoints the competent insolvency administrator. The criteria according to which the competent insolvency judge appoints the insolvency administrator in the event of bankruptcy and which qualifications the insolvency administrator must have are summarized here.

Causes and Reasons for Bankruptcy

The causes of bankruptcy are different. They range from inadequate corporate planning to inadequate corporate governance to adverse circumstances in the private sector, such as illness or divorce. External shocks such as economic crises or the bankruptcy of customers and suppliers can also lead to the bankruptcy of a company.

Avoidable reasons for the insolvency of a start-up are incorrect assumptions made in the planning and unsound financing. In order to make the success of a business start-up plannable and thus to counteract a possible bankruptcy from the outset, every business founder should develop a qualified business plan. First and foremost, special attention must be paid to the financial plan in the business plan.

In order to prevent possible negative consequences of bankruptcy, for example in the financial and family areas, every young entrepreneur should react immediately to the smallest signs of payment difficulties so that bankruptcy can be avoided.

Failure to pay as a sign of impending bankruptcy

As a rule, the difficulty in paying is the first indication of an impending bankruptcy. Payment difficulties can arise both with start-ups and with their own customers. In the event of their own financial bottlenecks, the entrepreneur has the best control option to prevent bankruptcy. In this way, he can try to agree on a suspension of payments directly with the creditors. In addition, assistance can be requested from private and public bodies in the form of a guarantee or debt rescheduling in order to avoid bankruptcy.

It looks more difficult with payment problems from external partners. For example, if your own customers go bankrupt, your company is also at risk of direct losses. Certainly there is also the possibility of factoring, but the equivalent of the outstanding amount is also estimated to be lower in the case of substantial problems. If the customer or supplier is already in bankruptcy, the funds that are still available will no longer be available.

Unexpected crisis situations cannot be anticipated, so every entrepreneur should take precautions in good times and, if possible, create a financial buffer.

Author: Für-Gründer.de editors

As editor-in-chief, René Klein has been responsible for the content of the portal and all publications by Für-Gründer.de for over 10 years. He is a regular interlocutor in other media and writes numerous external specialist articles on start-up topics. Before his time as editor-in-chief and co-founder of Für-Gründer.de, he advised listed companies in the field of financial market communication.