What is chapter 7 bankruptcy basics?
What does bankruptcy mean? The term stands for the insolvency of a debtor.
Mr. M. can not repay his loan because he has lost his job. Guitarmaker G. piles up the bills and reminders because he does not have enough customers to buy his instruments. The tax office calls on freelancer F. to fairly high tax arrears, which this cannot raise.
Mr. M., guitar maker G. and freelancer F. have one thing in common: their revenues are far less than their expenses. They can no longer meet their payment obligations. In other words, you are insolvent or – colloquially – bankrupt, bankrupt.
If a private individual or a company is insolvent, threatens such insolvency or if someone is over-indebted, then bankruptcy is spoken. Another, rather obsolete word for bankruptcy, especially of companies, is bankruptcy. Why Does Filing Chapter 7 Make Sense?
So there are three reasons for bankruptcy :
This is the case when a debtor can not pay due debts. If someone stops their payments, it is generally assumed that the person is insolvent.
- impending insolvency
If a debtor is unlikely to be able to pay bills the moment they become due, he threatens to become insolvent.
This bankruptcy reason is usually only applied to companies. These are then considered over-indebted if their assets no longer cover existing monetary claims. Whether and when this type of bankruptcy is present cannot always be ascertained so easily, because here B. accounting issues play a major role.
All three reasons for bankruptcy are regulated and defined in bankruptcy law. They play an important role as reasons for opening insolvency proceedings. We will come back to this later.
Sometimes the term bankruptcy has another meaning, but it is very similar to the first one. The media often report that a well-known company or a prominent person had to file for bankruptcy. In this case, it is meant that the person concerned has requested the opening of insolvency proceedings.
What regulates insolvency law?
Insolvency reasons Bankruptcy plan
The insolvency code is the most important law in insolvency law.
To come back to our examples, Mr. M. wants to live a debt-free life again, and his bank is interested in having their loan fully repaid. Guitar maker G. wants to save and continue his business – his goal is to refurbish his business while his business partners want their bills paid. And the freelancer F. wants to agree with the tax office and dare a career new start.
All three have to somehow bridge the time of their bankruptcy and need some income to continue to cover their living expenses.
Companies, self-employed persons and private individuals who are in bankruptcy should, according to the will of the legislator, have the possibility to settle their debts in a regulated way and subsequently to start a new debt-free business. The claims of the creditors, in turn, are to be redeemed as far as possible within the framework of an orderly procedure. These two goals and the reconciliation of interests between the insolvent debtor and his creditors are dealt with in insolvency law.
The insolvency is regulated as part of the civil law essentially in the insolvency order (InsO). Insolvency Law and Insolvency Regulation are amateur names for the Insolvenzordnung.
This law describes how the creditors are satisfied evenly – that is, on an equal footing. It describes which insolvency proceedings exist and how they expire. In addition, the bankruptcy law ensures that the debtor a certain subsistence level to life, so that not all his assets in favor of the creditors is utilized.
In addition to the InsO, other laws also play a role:
- the Introductory Act to the Insolvency Code (EGInsO),
- Regulation (EC) No 1346/2000 (EuInsVO) and
- the §§ 1975ff. Civil Code (BGB) for the estate insolvency proceedings.
- The provisions of the Code of Civil Procedure (ZPO) and other regulations are also sometimes applied in insolvency law.
This matter is therefore very complex and difficult to survey, also because other areas of law and economic aspects have to be considered.
For this reason, people and companies affected by bankruptcy should seek professional help, such as bankruptcy counsel or a bankruptcy lawyer. The former is often offered by recognized public debt advice centers. These usually advise you for free. However, this offer is usually only for individuals, not for self-employed and companies.
Bankruptcy proceedings – Legally regulated insolvency proceedings
In insolvency proceedings, the interests of the creditors and the debtor are equally taken into account.
As mentioned earlier, in the case of bankruptcy, various interests must be taken into account. This is ensured by the insolvency proceedings. Which procedure the insolvent debtor has to go through depends on whether it is a private individual, a (former) self-employed person or, for B. is a company.
For private individuals such as Mr. M. and, under certain conditions, also for (former) self-employed, consumer insolvency (also known as personal bankruptcy ) is the right procedure.
All others will be the rule insolvency login. Because of the latter concerns mostly companies, this procedure is called colloquially also company insolvency or company insolvency.
In addition, there are the Nachlassinsolvenzverfahren in the event that a deceased person has left many debts. Because their heirs are liable for these debts with their private assets, the legislature has introduced this procedure in order to limit their liability to the inheritance or estate.
The participants in the insolvency proceedings
In the event of insolvency, not only the insolvent debtor ( insolvency debtor ) and his creditor (insolvency creditor) are involved. Other people and institutions also play an important role. But let us first stick to the concept of the creditor, because there are small but subtle differences here.
We have already discussed at the beginning that in insolvency all creditors are treated equally. However, there is a certain ranking here. And the equal treatment is only within the same rank, otherwise, creditors of a higher rank are treated and paid for preferentially.
At the center of the proceedings are the insolvency creditors whose claims against the debtor already existed at the time the proceedings were opened against the debtor. For them or for the repayment of their claims, the bankruptcy is carried out. Nevertheless, they do not take first place.
For Mr. M. that would be z. For example, the bank. The guitar maker G. whose contractor, soz. B. its suppliers, and freelancer F. the tax office.
Even employees of an insolvent company are insolvent creditors. Under certain circumstances, you can obtain insolvency money from the Employment Agency. This covers the last three months salaries before the bankruptcy.
The so-called creditors are entitled to insolvency because their property is owned by the debtor. You can demand the surrender of this property because it is not part of the debtor’s assets.
Insolvency Court – Responsible for the execution of the bankruptcy
Will Mr. M. and Freelancer F. be released from their remaining debts at the end of their personal insolvency? Can the company of guitar maker G. be rehabilitated or dissolved (liquidated) because it is unprofitable? The insolvency court is the place where the entire proceedings take place and where the future of the insolvent debtor is decided. As a state institution, it carries out the entire insolvency proceedings.
An essential task is to examine the insolvency petition of the debtor or a creditor and to decide whether the procedure can be opened. But that’s not all. The insolvency court …
- Appoints the insolvency administrator and controls or supervises him during the procedure
- carries out the debt settlement plan procedure
- convenes the bondholders’ meeting and chairs their meetings
- denies the debtor on request the exemption from residual debt, if this does not fulfill his obligations during the insolvency, or grants remainder of debt relief
- makes initiated insolvency proceedings publicly known ( insolvency announcements, colloquially insolvency register)
Insolvency administrator: manages and utilizes the insolvency estate
As insolvency administrators mostly specialized lawyers work.
For every insolvency opened, the insolvency court appoints a bankruptcy administrator in its opening resolution or a trustee in the private insolvency proceedings. He is a key figure in the entire process because he owns, manages and utilizes the assets of the debtor.
The proceeds are paid out to the insolvency creditors – after deduction of the mass liabilities. He only considers those creditors who have registered their claims against the debtor. These claims are called insolvency claim.
In the legal jargon, it is often said: The insolvency administrator takes possession of the bankruptcy estate and manages it. The term ” insolvency estate” comes from the insolvency code and is defined therein § 35 InsO as follows:
“The insolvency proceedings cover all the assets belonging to the debtor at the time the proceedings are opened and which he obtains during the proceedings (bankruptcy estate).”
As an administrator in bankruptcy cannot work any person, because he must be a business person and bring the appropriate legal and economic expertise and experience. Lawyers who specialize in this field of law often work as insolvency administrators. If an insolvency administrator violates his duties, he can make himself liable for damages to all parties involved.
The insolvency administrator is independent and thus does not take sides with the creditor or the debtor.
A typical course of insolvency in private insolvency proceedings
Two important things about private insolvency in advance:
First, there is no legal regulation that determines from which level of debt an application may be made. The deciding factor is rather the bankruptcy reasons presented at the beginning. The insolvency application is possible in case of (imminent) insolvency.
Second, before a consumer declares personal bankruptcy, he must seek to reach an out-of-court settlement with his creditors. Only if this attempt fails and a recognized debt counseling, a lawyer, notary or tax consultant certifies this failure, he may file for bankruptcy.
That is, the debtor must first provide his creditors with a so-called debt settlement plan on how to settle his debts. This plan can z. B. provide an installment. If the creditors agree, private insolvency can be avoided.
Before filing for personal bankruptcy, the debtor must try to agree with his creditors.
This is cheaper for all involved than insolvency proceedings. The creditors usually receive more money in an out-of-court settlement than in private insolvency. The debtor saves the procedure and the associated costs. And the courts are relieved.
Consumer insolvency essentially consists of the following sections :
- the just- out-of-court settlement attempt just mentioned
- Judicial debt settlement procedure
- actual (simplified) insolvency proceedings
- Conduct phase
- Residual debt relief by court order
Application for the opening of private insolvency following a failed attempt to unite
If the out-of-court settlement attempt fails, the debtor can file for insolvency with the help of the certificate issued thereon.
We recall once again: The consumer or private bankruptcy is only possible for the following debtors:
- Private individuals, eg Unemployed persons, workers, marginal workers, and pensioners
- (former) self-employed persons, if their financial circumstances are manageable, that is, if they have a maximum of 19 creditors and if there are no open claims from employment relationships.
Freelancer F. could apply for personal bankruptcy if his financial circumstances are manageable and the z. B. does not owe any social security contributions or payroll taxes.
Insolvency can also be claimed by the creditors of a private individual who is over-indebted. In case of imminent insolvency, however, this may only be the debtor himself.
Debt settlement and simplified insolvency proceedings
Before the actual procedure begins for bankruptcy, the court is making a new attempt to reach an agreement between the debtor and its creditors (debt settlement proceedings). At this point, once again the debt settlement plan is used, which serves as a basis for a possible court settlement.
Private bankruptcy is a simplified insolvency procedure.
Under certain conditions, the court may substitute the consent of individual creditors. However, if the insolvency court finds that no settlement is possible, the actual insolvency proceedings will be opened. This is usually the case when the majority of creditors reject the plan.
Private insolvency is a simplified procedure. At this stage, the trustee manages and liquidates the estate and distributes the proceeds evenly among the creditors, always taking into account the order of precedence set out above.
As a rule, the simplified procedure ends with the judicial announcement of the discharge of residual debt, the actual goal of each person in bankruptcy.
Good behavior phase and residual debt exemption
Now comes the good conduct phase, which usually lasts six years. The calculation of this period is based on the date of the opening of insolvency. Under certain conditions, this phase can be shortened.
During this period, the debtor must not be guilty of any wrongdoing and must fulfill certain obligations set out in the law. These duties are also called obligations.
- In order to be able to pay off as many debts as possible, the debtor must exercise or seek appropriate employment.
- He must continue to pay the attachable portion of his income to the trustee. On the other hand, he is not allowed to make payments to his insolvent creditors.
- Each change of residence and each job change must be communicated immediately to the bankruptcy court and the trustee.
If the debtor conscientiously fulfills all these duties, nothing stands in the way of discharge of residual debt. If this is granted by the court, the insolvency creditors can no longer enforce their debt against the debtor. This debt waiver applies regardless of how many debts have been paid in the bankruptcy – for all claims that existed before the bankruptcy. Even those creditors who have not filed their claims and have not taken part in the proceedings may no longer execute.
On the other hand, the debtor is not released from new debts incurred after the opening of insolvency.