Probate insolvency proceedings
What are probate insolvency proceedings?
The aim of insolvency proceedings is to enable a regulated settlement of existing debts for companies and consumers and also offers an opportunity for a fresh start. In particular, insolvency proceedings are intended to prevent a single creditor from claiming the debtor's assets regardless of the costs incurred by the other creditors. In principle, the remaining assets are distributed equally among all creditors in insolvency proceedings.
This also applies to probate insolvency. It should be emphasised that an estate does not only consist of positive assets, but also includes all the debts and liabilities of the deceased. This means that, in addition to a company or a private individual, an estate can also get into financial difficulties.
Pursuant to Section 320 sentence 1 InsO (Insolvency Ordinance), a reason for opening insolvency proceedings against an estate exists if the estate is insolvent within the meaning of Section 19 InsO or overindebted within the meaning of Section 17 InsO.
How can probate insolvency proceedings come about?
As already mentioned, the heirs inherit not only the positive assets, but also the debts and liabilities of the deceased.
If the estate is over-indebted, the heirs initially have the option of rejecting the inheritance. However, if the six-week period has expired, the inheritance is deemed to have been accepted in accordance with Section 1943 BGB.
In such a case, the opening of estate insolvency proceedings can serve to limit the heir's liability to the inherited estate. This primarily serves to protect the heir's private assets through the insolvency proceedings.
Who can or must file for insolvency?
Pursuant to Section 320 sentence 2 InsO, any heir, any creditor of the estate and also an estate administrator or executor can file an insolvency petition.
If the heir becomes aware of the insolvency or over-indebtedness of the estate, he or she is obliged to apply for the opening of insolvency proceedings without delay in accordance with Section 1980 (1) sentence 1 BGB. If they fail to fulfil this obligation, they are liable to pay damages to the creditors of the estate in accordance with Section 1980 (1) sentence 2 BGB. It should be noted here that knowledge of insolvency or over-indebtedness is equivalent to ignorance due to negligence (Section 1980 (2) sentence 2 BGB). In particular, according to sentence 3, negligence is deemed to have occurred if the heir does not apply for a summons from the creditors of the estate although he has reason to assume the existence of unknown debts of the estate; the summons is not required if the costs of the proceedings are disproportionate to the existence of the estate.
There is only a fixed time limit for filing an application for creditors of the estate. Pursuant to Section 319 InsO, an application by a creditor of the estate to open insolvency proceedings is inadmissible if two years have passed since acceptance of the inheritance. The reason for this time limit is that two years after acceptance of the inheritance, the estate assets have become mixed with the heir's own assets, meaning that a separate liquidation of the over-indebted estate assets is no longer possible.
What happens after filing for insolvency?
If an admissible application for probate insolvency proceedings has been filed, the court will first check whether there are still sufficient funds in the estate to at least cover the costs of the proceedings.
As a protective measure, the insolvency court can order appropriate measures in accordance with Section 21 InsO to prevent assets belonging to the estate from being moved.
Once it has been established that there are sufficient assets in the estate to at least cover the costs of the proceedings, insolvency proceedings are opened and an insolvency administrator is appointed for the estate. An alternative for the insolvency administrator would be the so-called self-administration by the heirs.
If the assets do not cover the costs of the proceedings, the application will be rejected in accordance with § 26 InsO.