Definition of "Bankruptcy"

The term "Konkurs" is an older designation for the term insolvency and is now used more colloquially. Insolvency has its origin in Latin and derives from the word insolvens or solvere (to pay). It describes the situation in which a debtor is no longer able to meet the payment obligations to a creditor.

Main characteristics of insolvency are an impending inability to pay, a very probable and imminent inability to pay, as well as an over-indebtedness of the debtor.

When is someone considered insolvent?

A debtor is considered insolvent at the moment when there is no longer sufficient income or capital available to pay the debts arising from contracts and thus be able to meet the payment obligations.

For a company, insolvency occurs when the business operation can no longer be maintained on a lasting financial basis. This is the case when operating revenues are not high enough to cover ongoing costs and meet obligations.

However, a private individual can also be affected by insolvency. In this case, the burdens over time are significantly higher than the available monthly income. This situation is called personal insolvency.

Ways to avert insolvency

An impending bankruptcy can be averted in various ways. The most sensible and simplest of these options is to negotiate with the respective creditor about deferrals or reductions of installments. There is also the possibility of discussing the waiver of certain claims with the creditor.

Providing additional security, such as a guarantor, can also serve to avert insolvency at least temporarily. For a private person there is also the option to consult a debt counselor and, with their help, identify potential savings in personal living expenses as well as hidden costs, for example in insurance policies, so that the monthly burden in these areas decreases.

For companies, a debt settlement plan can be helpful. By using such a plan one can, for example, pursue a specialization of the company and thus possibly increase revenues. For personal insolvency, it can be advisable to consider selling valuables and non-essential consumer goods or luxury items.

If all these measures have been considered and have not led to improvement, an insolvency proceeding may possibly be initiated. This procedure can have either a judicial or an extrajudicial outcome. However, the remaining assets/capital, the so-called insolvency estate, must still be present in sufficient amount so that at least a part of the debts to the creditors can be paid and the fees and expenses of the insolvency administrator can be covered.

For companies and the self-employed, the Commercial Code (Handelsgesetzbuch) must also be observed, which contains more detailed provisions on insolvency for the described group.

The term "Konkurs" in the legal system

While in Germany the term insolvency has been used since the late 1990s, Switzerland and Austria still speak of "Konkurs" today. "Konkurs", like insolvency, also stems from Latin. The root is concursus, which translates as "coming together". This term denotes the creditors' meeting before the court when it carries out the distribution of the debtor's assets.

In Germany, bankruptcy was handled until 1999 in a bankruptcy procedure under the Konkursordnung, a legal provision from the 19th century. Another procedure was the so-called Vergleichsverfahren. This was subject to the provisions of the Vergleichsordnung of 1935.

Other terms for insolvency besides "Konkurs" are also "Pleite" or "Bankrott", both of which carry very negative connotations, and "Bankrott" furthermore fulfills the elements of a criminal offense in Germany. How insolvency is carried out differs in each country and is subject to different statutory regulations.

Legal situation regarding bankruptcy

Bankruptcy and insolvency law has a long and eventful history in Germany. Since 1999 there have been two types of proceedings in Germany. These are the Regelinsolvenz and the Privatinsolvenz. To enter regular insolvency (Regelinsolvenz), a total of three requirements must be met.

These requirements include an existing self-employment, a creditor base of more than 19 creditors, as well as existing claims from employment relationships, i.e. wages and salaries and social security contributions of employees. If these requirements are not met, consumer insolvency (Verbraucherinsolvenz) is initiated after failed negotiations about a settlement with the creditors.

A period of six months is allowed for the settlement. In this procedure there is the possibility, after six years, to obtain a discharge of residual debt (Restschuldbefreiung). In contrast to regular insolvency, personal insolvency can be sought whenever over-indebtedness threatens or inability to pay has occurred.

The insolvency proceeding (formerly: bankruptcy proceeding) is governed by the Insolvenzordnung. Among other things, its first part sets out general provisions such as the objectives of insolvency proceedings and its second part the opening of the insolvency proceedings. The Insolvenzordnung consists of 13 parts in total.

Reasons for bankruptcy or insolvency

There are different reasons for insolvency. However, a distinction is made between external and internal factors or causes. Internal factors include everything that can be directly traced back to the actions of the person or the company and consequently lead to insolvency. These actions can be miscalculations, faulty investments or incorrect planning.

External factors, on the other hand, consider all influences that act on those actions from the outside. These include above all cyclical and structural changes in the market and also labor market and sales market situations. Often, however, unforeseeable events that have a major impact are involved. This distinction is usually only clearly identifiable or applicable for companies.

For a private individual, such differentiation is hardly possible. The most common causes for private individuals are deterioration of health, loss of employment and family problems such as divorce.

Statistics on bankruptcy

The figures and data cited here are taken from the insolvency courts. It can be stated that in 2011 there were almost 160,000 insolvencies in Germany, as reported by the Federal Statistical Office. About 80% of these, corresponding to 129,049 insolvencies, related to personal insolvencies. Of these, 101,063 were so-called consumer insolvencies. 30,099 insolvencies could be attributed to corporate insolvencies.

These insolvencies are distributed across different sectors as follows: 12.8% preparatory construction site work, building installations and other finishing; 9.8% gastronomy; 9.6% retail (excluding motor vehicle trade); 6.0% wholesale; 5.7% administration and management of companies, business consulting; 4.6% other finishing (finishing trades, ancillary construction trades). These involved claims amounting to 10 billion euros.