Bankruptcy of sole proprietorships
If you are a sole proprietor and no longer able to meet your financial obligations, you have to consider if you are bankrupt. You apply for bankruptcy with the district court where the sole proprietorship is registered. The purpose of the proceedings is to get an overview of assets and to turn these into money for distribution between the creditors.
In order for a sole proprietorship to be considered bankrupt, it must be insolvent. Insolvent means that the proprietorship is unable to fulfil its financial obligations by their due date and that there are no assets within the enterprise to cover the debt. To claim insolvency, you must be unable to fulfil your obligations for the foreseeable future. As no distinction is made between the finances of the sole proprietorship and the personal finances of the owner, the owner will be declared personally bankrupt in these cases.
The district court will open bankruptcy proceedings at the request of either the person concerned themselves or a creditor.
The reconstruction Act
The reconstruction Act is a temporary act to replace the provisions of the Bankruptcy Act concerning dept settlement proceedings. The Act was passed in connection with the coronavirus epidemic, but it has been decided to extend the Act. The purpose of the change is to enable a debtor to enter into restructuring proceedings at an earlier stage, and thereby ensure that viable businesses can avoid bankruptcy. How your enterprise petition for restructuring and how the proceedings are conducted can be found in the Act. See the link below.
Applications for bankruptcy from the owner
- In a sole proprietorship, it is you as owner who is personally responsible for the finances of your enterprise. If you decide that your sole proprietorship is insolvent, it is your responsibility to apply for bankruptcy to the local district court.
- When an enterprise submits the application to a district court in this way, this is known as 'applying for its own liquidation'. In addition to the application for bankruptcy, certain attachments must also be submitted (certificate of business registration, list of creditors, posted collateral and a list of assets).
The bankruptcy proceedings
- The district court will consider the application for bankruptcy and assess whether or not the enterprise is insolvent. If the enterprise is considered insolvent, the district court will open bankruptcy proceedings and an estate administrator will be appointed. The administrator is normally a lawyer and is the person who will carry out the bankruptcy proceedings.
- Bankruptcy means that all assets belonging to you as owner of the sole proprietorship (known as 'the debtor') will be seized in favour of the creditors. When the district court has opened bankruptcy proceedings, you will immediately lose possession of your assets. The right of disposal is transferred to the bankruptcy estate.
- Assets which you and your family need can be retained, e.g. clothing and household goods. You can continue to work or get a new job and you will normally be able to retain your normal salary income to cover living expenses for your family.
- You are obliged to provide the district court and administrator with all necessary information concerning your financial circumstances and your business before and during the bankruptcy proceedings. You are also obliged to help obtain accounting vouchers and other documents of importance for the administration of the estate and to provide other assistance as necessary. You are obliged to assist the estate free of charge.
- Once the administrator has completed a review of your financial position, the administration of the estate will be concluded. The estate administration will be terminated by the district court if there are no funds to continue the process. If the estate does have funds, the estate administration proceedings will be concluded through the distribution of the estate's funds between the creditors, so that they receive proportional reimbursement.
After the bankruptcy proceedings
The debt will not be deleted after the bankruptcy proceedings have been concluded. As owner, you are personally liable and responsible in full for all debt that has accrued. This means that you will be liable for the component of the debt that is not repaid during the administration of the estate.
If you still have serious debt problems after the administration of the estate has been concluded, you can apply for a debt management plan.
