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The Bankruptcy Can Be a Dangerous Mistake – Even After Pandemic

It is often said that the obligation to file for bankruptcy is suspended until the end of 2020. But that’s only half the story. For most companies in crisis, the grace period due to Corona has expired since October – penalties are threatened.

Whether on the Internet or on the radio, it is reported almost everywhere that the federal government has extended corona-related aid measures until the end of the year, also in bankruptcy law. It is often even said that the obligation to file for insolvency for insolvent companies was suspended until the end of 2020. But that’s not only inaccurate, it’s wrong.

Many are not aware that a crucial grace period has expired on October 1, 2020. Insolvent companies have had to file for bankruptcy again since that day – regardless of whether they ran out of money because of the corona pandemic or not. If managing directors do not appear immediately to the bankruptcy judge in this case, they are liable to prosecution for delaying bankruptcy, in which case will help you to have the best bankruptcy attorney.

What is the grace period until the end of 2020?

Only the obligation to file for insolvency in the event of over-indebtedness was suspended until the end of 2020. And only if the over-indebtedness of the company is corona-related. You have to know that the vast majority of bankruptcy applications are filed because of insolvency. “Insolvency only because of over-indebtedness is the clear exception,” says Regina Rath, insolvency law expert at the Norton Rose Fulbright law firm in Morgan, MN.

For instance, a total of 1,756 companies went bankrupt in 2019 due to insolvency (partly in combination with over-indebtedness) in Duluth, MN.  This corresponds to a share of 96.5 percent. Over-indebtedness was the sole reason for insolvency in less than 2 percent of cases. But, the grace period until the end of the year currently only applies to these cases. Experts speak of a dangerously shortened communication by the federal government. “For an inexperienced reader, it sounded like nothing would change on October 1st,” says lawyer Rath.

When is a company insolvent?

Quite simply: when a company can no longer pay its debts. The fact that most entrepreneurs file for bankruptcy because of insolvency is because this situation is more tangible for them than over-indebtedness. “The money is simply missing. Many have long been over-indebted, “says Maria Bea, restructuring expert at Attorney Debt Fighters.

Insolvent companies were exempt from the obligation to file for insolvency until September 30 if their difficulties were due to the corona pandemic. But this deadline is over.

When is a company over-indebted?

Over-indebtedness exists “if the debtor’s assets no longer cover the existing liabilities” – this is how it is defined in Section 19 of the Insolvency Code (InsO). But there is a second condition: the continuation of the company must not be predominantly likely.

Conversely, if the indebted company can show a positive forecast, things can continue. “This is the case, when the company is financed in a stable manner despite the debts in the current and the coming year,” says lawyer Bea. For example, because follow-up financing is on the way.

If the forecast is rather negative, but the company has assets, for example in the form of unsecured property, this can also eliminate over-indebtedness.

When is over-indebtedness caused by corona?

Whether over-indebtedness is due to the corona pandemic can be determined in accordance with the “COVID-19 Insolvency Suspension Act” with a look back at the past: If the company’s finances were unclouded as of December 31, 2019, it is assumed that the current over-indebtedness is due to corona. In this case, the obligation to file for insolvency remains suspended until the end of 2020.

What’s happening now?

When the corona pandemic began, the federal government built a protective dam around the companies – but now it is opening the floodgates. Experts expect a market shakeout; some even see a wave of bankruptcies rolling in. Many entrepreneurs will and will have to go to the bankruptcy judge in the next few weeks.

More about this here: Retention of title: How to contractually protect yourself against customer bankruptcies

Regina Rath considers this necessary, ​​”The emergency measures are not suitable as a long-term solution.” She believes that the insolvency proceedings have lost their horror due to the pandemic. “In the past, bankruptcy was often associated with personal failure, but nobody can do anything about bankruptcy as a result of Corona,” she says.

When is there a threat of a penalty for delaying bankruptcy?

The deadline is short: after the occurrence of insolvency or over-indebtedness, managing directors must submit an application for insolvency “without undue delay” – but no later than three weeks (Section 15a InsO). Anyone who slips away makes himself personally liable. A penalty for delaying bankruptcy threatens, the investigations are then directed against the managing director and / or the shareholders.

A delay in bankruptcy can result in up to three years in prison. In less serious cases, the proceedings against payment of a fee are discontinued or a fine is imposed. But be careful: the side effects can be worse than the fine. Anyone who receives a judgment for deliberately delaying bankruptcy cannot be a managing director of a company for five years.

Pandemic 2020 Affects Public Financially

The corona crisis hits entrepreneurs so hard that they ask themselves: should I file for bankruptcy? The income collapses, the costs continue, the nerves are on edge. With every additional day in a state of emergency, the debt pressure on new businesses increases. The losses caused by the Corona crisis can be mitigated with various programs that the state quickly launched. For example, access to short-time work benefits and loans have been made easier and emergency aid has been granted.

What if the short-time work allowance is not enough, if loans are paid out too late or if business does not start up again immediately after the crisis? Even if it’s the last thing entrepreneurs want: Those who are particularly hard hit by the Corona crisis should also consider bankruptcy. “The earlier this is recognized, the greater the chance of a rescue,” explains Lawyer Robin Johnson. Insolvency does not have to mean the end of the company.

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