What is insolvency? Meaning simply explained

What insolvency is, you should know, because it can affect businesses and individuals. Find out more about the basics and the effects.

What is insolvency? Understand and act on insolvency

Understand the basics and implications of insolvency to better manage financial challenges.

• Insolvency means inability to pay and the inability to pay debts.

• Financial difficulties can have various causes, such as unemployment or unexpected expenses.

• Insolvency proceedings allow for an orderly settlement of debts.

• Advice from insolvency experts and lawyers can help find alternative solutions and avoid insolvency.

Private insolvency and regular insolvency

The main difference between private insolvency and regular insolvency lies in the people affected by the proceedings:

• Private insolvency: Private insolvency is an insolvency procedure for over-indebted private individuals and self-employed persons. It offers these individuals the opportunity to free themselves from their debts and make a fresh financial start. During the proceedings, an insolvency administrator is appointed to monitor the debtor’s financial situation and satisfy creditors. Private insolvency proceedings usually last six years, but can be shortened under certain conditions.

• Regulatory insolvency: Regulatory insolvency is an insolvency procedure for companies and self-employed persons. It is used when the financial situation is no longer manageable and reorganisation does not seem possible. An insolvency administrator is appointed to safeguard and manage the debtor’s assets. The aim is to satisfy the creditors as best as possible. Under certain conditions, regular insolvency can lead to a discharge of residual debt.

• While private insolvency is intended to relieve over-indebted private individuals and self-employed persons, regular insolvency is aimed at insolvent companies and self-employed persons. The duration, requirements and consequences of the two procedures can be different. In both cases, it is advisable to seek advice from an insolvency expert or a legal advisor to find the best solution for the individual financial situation.

The effects of insolvency and how to deal with them

• Insolvency can lead to difficulties in obtaining credit and opening a bank account

• Creditor confidence may be shaken, making it difficult to enter into new financial commitments.

• Companies may be affected by closures, layoffs and loss of business opportunities.

• An early response, professional advice and alternative solutions can help avoid insolvency and improve the financial situation.