Meaning of Bankruptcy

By | May 30, 2021

Businesses can go bankrupt for a variety of reasons, a common reason being that customers fail to pay their bills. If a company gets into financial difficulties, it threatens bankruptcy. Insolvency cannot always be averted, in which case insolvency proceedings must be initiated. Statutory regulations apply to insolvency. Even individuals who are insolvent can be affected by bankruptcy, the last resort, but also a chance then is the personal bankruptcy .

Definition of bankruptcy

According to photionary, bankruptcy is the state of insolvency of a company, but also of a private individual. If the debtor can no longer meet his payment obligations, there is usually bankruptcy. In the event of bankruptcy, insolvency proceedings are initiated, provided that the insolvent company files for bankruptcy. If this does not happen, the criminal offense of bankruptcy can be delayed. As part of insolvency proceedings, the remaining assets of the debtor are divided among the creditors if there is still an insolvency estate. If the company has no bankruptcy estate, the creditors leave blank. The creditors can be suppliers, lenders, business partners and employees. In the context of bankruptcy proceedings or to avert bankruptcy, total or partial debt relief can be sought, depending on the creditors and the amount of the debts. Loan installments due can be reduced and liabilities deferred. The debtor’s solvency can be restored in this way.

Avoiding bankruptcy

There are several options for averting bankruptcy. Avoiding insolvency is often possible with a guarantee from a solvent company or a credit institute. Most often, creditors negotiate with debtors, agreeing to defer bills or to pay in installments. In order to avert insolvency, it is important to recognize the warning signs at an early stage and to carry out a well-founded analysis of company figures and data. The earlier the risk of bankruptcy is recognized, the better the chances of averting bankruptcy. An experienced management consultant can often help avert bankruptcy and discuss the necessary measures with the entrepreneur. Restructuring of production, but also redundancies for operational reasons, are often the last resort to avoid bankruptcy.

Reasons for bankruptcy

The law stipulates the following reasons for bankruptcy:

  • Insolvency
  • Impending insolvency
  • Insolvency

Insolvency occurs when a company is unable to meet its payment obligations. This term is to be distinguished from the temporary stagnation of payments, in which a company is only unable to make payments for a short period of time. Insolvency according to the guidelines of insolvency law is given if a company cannot settle at least 90 percent of its payment obligations within three weeks. If a company is unlikely to be able to settle its existing obligations by the time they become due, there is a threat of insolvency. Over-indebtedness exists when the company’s liabilities can no longer be covered by the existing assets. To determine over-indebtedness under insolvency law, all assets of a company must be compared to liabilities. If there is at least one of these reasons for bankruptcy, companies must file for bankruptcy within three weeks of the announcement of these reasons, otherwise there is a risk of a penalty for delaying bankruptcy. In the event of insolvency and over-indebtedness, there is an obligation to file for insolvency; in the event of impending insolvency, a company can decide for itself whether it wants to file for bankruptcy.

Examples of bankruptcy

An example of bankruptcy is a small family-owned electrical company near Berlin that made transformers. The company became insolvent, was in debt, and the entrepreneur filed for bankruptcy. The insolvency administrator examined the facts of the bankruptcy and found a buyer. The company was bought by a larger company from North Rhine-Westphalia, the production profile and some jobs were retained. A traditional bookstore moved to a better location to get more sales. This was associated with higher costs and led to insolvency. An application was made for bankruptcy, a bookseller friend of mine bought this bookstore as part of the bankruptcy proceedings, the range was redesigned and all jobs were retained.