Insolvency – is a loan still possible?

Every year many thousands of companies suffer insolvency. But numerous private individuals are also over-indebted and can no longer meet their ongoing financial obligations. A loan despite insolvency may seem like the solution. You can read here what exactly to consider when taking out a loan after an insolvency.

At this point MAXDA informs you about the topic of insolvency — and whether a loan despite insolvency can be a solution.

Insolvency proceedings

The legislature has created the possibility of orderly termination of insolvency through the regular insolvency proceedings and the consumer insolvency proceedings. Many affected persons use the consumer insolvency procedure, which is also referred to as personal insolvency, to be able to lead a financially regulated life again afterwards.

However, before the discharge of residual debt, which is pronounced by the competent local court, a currently six-year good-conduct period must be completed. During this time the debtor is forced to live at the subsistence level, because only the non-seizable allowance is available to cover living expenses.

Whether one can take out a loan despite insolvency, and what consequences an insolvency entails, you will find out in the following sections.

Definition of insolvency and legal regulations

Insolvency refers to a debtor's inability to fully meet their due payment obligations to their creditors (banks, companies, etc.). Both individuals and companies can find themselves in such a situation.

For the winding-up of an insolvency, German law provides specific procedures; for natural persons the so-called personal insolvency must be gone through. The insolvency proceedings are governed by the Insolvency Code (hereinafter: InsO). The overarching aim of every insolvency proceeding is to enable the debtor to make a fresh economic start. This applies both to natural persons who, after a completed insolvency procedure, are discharged from their residual debts, and to companies that wish to participate successfully in economic activity again after a restructuring.

In many cases, however, continuing the business operation is not economically sensible. In that case the InsO ensures the proper winding-up of the company. Furthermore, these provisions aim to ensure the equal treatment of all creditors.

After the opening of insolvency or personal insolvency proceedings, the insolvency administrator or trustee ensures that no creditor can obtain advantages over others. The InsO prescribes two different types of insolvency proceedings.

The regular insolvency proceeding applies to all debtors who are either legal entities or natural persons who are self-employed or were self-employed in the past and, in addition, have a large number of creditors (at least 20) or claims arising in connection with an employment relationship are asserted against them. All other natural persons fall under the consumer insolvency procedure.

Regular insolvency

For legal entities, such as GmbHs and public limited companies, in addition to inability to pay, balance sheet over-indebtedness can also be a reason for insolvency. In this case, a special balance sheet, the over-indebtedness statement, shows that the sum of liabilities reported on the liabilities side exceeds the sum of assets reported on the assets side.

A regular insolvency is applied for at the competent local court either by the debtor themselves or by a creditor. It should be noted that the management bodies of corporations are legally obliged to apply for opening insolvency proceedings without delay if there is inability to pay or over-indebtedness. Otherwise they may be guilty of the criminal offense of delaying insolvency proceedings (Insolvenzverschleppung).

If the local court, after examining the grounds for insolvency, decides that the insolvency petition was justified, it opens the insolvency proceedings and appoints an insolvency administrator. From that point on only the insolvency administrator may dispose of the insolvency estate. He prepares an inventory of estate assets, creditors and assets.

All creditors are written to and asked to assert their claims in writing to the insolvency administrator. The administrator checks the validity of the claims. At the subsequent creditors' meeting the creditors are informed about the situation of the insolvent company and the chance of continuing business operations.

The creditors' meeting decides on the liquidation of the company. After that the insolvency administrator realizes the estate assets. After settlement of the estate liabilities and preferential claims, any remaining residual is distributed among the creditors according to the estate quota. When everything has been distributed, the local court closes the insolvency proceedings.

If the insolvency concerned a legal entity, the corporation (AG or GmbH) is then automatically deregistered. The course and duration of regular insolvency proceedings depend crucially on how many creditors are involved and whether continuation of business operations is sought or not. The type and realizability of the estate assets also influence the complexity of the insolvency proceedings. In major corporate insolvencies it can take many years until the proceedings are concluded.

Personal insolvency

The personal insolvency procedure was created in 1999 for permanently insolvent private individuals. In principle, any natural person can apply for this procedure at the local court. However, formerly self-employed persons who have 20 or more creditors or creditors in connection with employment relationships must go through the regular insolvency proceedings.

Private individuals who wish to initiate personal insolvency proceedings can find help and support at debt counseling agencies. The debtor must first draw up an overview of all liabilities and creditors. Afterwards they must attempt to reach an out-of-court settlement.

This is particularly likely to succeed when the number of creditors is small and the debtor can offer them a payment above the anticipated estate quota. This is generally only possible if the debtor is provided with the necessary funds by third parties, usually close relatives.

If the out-of-court settlement attempt is unsuccessful, the debtor has this certified by a lawyer, notary, tax advisor or a debt counseling agency. This certification is a prerequisite for applying for consumer insolvency proceedings at the competent local court.

As a rule, the application for discharge of residual debt is filed at the same time as the petition to open the personal insolvency proceedings. The proceedings are only opened if there are no exclusion reasons. Exclusion reasons include, for example, a discharge of residual debt already granted within the last ten years or a criminal conviction for insolvency fraud.

The procedure for private individuals is significantly simplified compared to the regular insolvency proceedings. The local court appoints a trustee who takes over the administration of all the debtor's financial affairs for the duration of the proceedings. He first distributes any remaining realizable assets among the creditors.

If an application for discharge of residual debt has been filed, a total six-year good-conduct period follows. During this period all income above the garnishment exemption must be handed over to the trustee. The trustee then distributes it among the creditors.

Also the part of earned income that is not considered unseizable for covering living expenses thus goes to the creditors. How high the garnishment exemptions are also depends on any maintenance obligations of the debtor.

Furthermore, the debtor must observe extensive notification obligations. For example, they must inform the trustee about a change of residence or workplace. If all requirements are complied with during the good-conduct period, the court will, upon application, grant the discharge of residual debt afterwards. The debtor is then released from all remaining liabilities and can thus make a financial fresh start.

Aside: Why can discharge of residual debt be denied in insolvency?

A discharge of residual debt is only granted if there are no grounds for denial. For this the debtor must have complied with all their obligations during the good-conduct period. If the trustee or one of the creditors has the impression that there are justified grounds for denying discharge, an application can be made that the debtor is not granted discharge. There can be many reasons for this, e.g. if the debtor has avoided tax payments or if a discharge of residual debt was already granted to the debtor within the last ten years.

Is a loan possible despite or after insolvency?

You must first endure the aforementioned six-year good-conduct period as a consequence of personal insolvency: disclosure of financial circumstances and settling debts with creditors are then on the agenda.

You can in principle take out a loan despite insolvency; it would then have to be repaid from the portion of income that is not seizable, which is not advisable. Often the non-seizable portion of income is not high enough to meet obligations to the lender.

The discharge of residual debt should not be put at risk. Therefore, before taking out a loan despite insolvency, you should inform yourself extremely carefully about the conditions to be observed. A borrower must fundamentally be able to repay the loan to the lender (loan broker, bank, private person). If this is not possible, debts increase due to the loan after insolvency.

Anyone who colloquially speaks of being "insolvent" because they might be "short on cash" at the end of the month can of course request a loan with or without Schufa from MAXDA at any time. This is sensible if your creditworthiness is affected by a Schufa entry and you are considered not creditworthy. A loan despite insolvency or after insolvency in the conventional sense would not be meant by this.

Regardless of this, MAXDA as a reputable loan broker examines every personal situation very carefully. You should consult our experienced MAXDA advisors about whether you can apply for a loan despite insolvency.

Aside: Not insolvent and still not creditworthy? The loan without Schufa

Even if you are not insolvent, you may be considered "not creditworthy" by banks if you have a Schufa entry. This can happen quickly — often a few unpaid bills are enough. If you are looking for a loan without Schufa to have funds available for important investments despite a Schufa entry, you can get information from us. For many banks it is not possible to apply for a loan with a Schufa entry. In such cases your creditworthiness is classified as risky and you are considered not creditworthy (see also: Creditworthiness).
MAXDA as a reputable loan broker helps you to explore your options and reviews the loan application with you. A loan without Schufa can quickly provide you with the money needed for necessary investments.
Other relevant topics: Creditworthiness basics and criteria.