Probate insolvency proceedings
What are estate insolvency proceedings?

If a company's current expenses exceed its income and there are no reserves, the company is obliged to file for insolvency in the foreseeable future. Since 1999, this has also applied to over-indebted private individuals (consumer insolvency proceedings).

The aim of insolvency proceedings is to enable companies and consumers to settle existing debts in an orderly manner and also offers an opportunity for a fresh start. In particular, insolvency proceedings are intended to prevent a single creditor from claiming assets of the debtor without regard to the costs of the other creditors. In principle, in insolvency proceedings the remaining assets are distributed equally among all creditors.

This also applies to estate insolvency. In principle, it should be emphasized that an estate consists not only of positive assets, but also includes all debts and liabilities of the decedent. Thus, 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 estate insolvency proceedings occur?

As already mentioned, the heirs inherit not only the positive assets, but also the debts and liabilities of the decedent.

In the event that the estate is overindebted, the heirs initially have the option of disclaiming the inheritance. However, if the six-week period has expired, the inheritance is deemed accepted in accordance with Section 1943 of the Civil Code.

In such a case, the opening of probate insolvency proceedings may serve to limit the liability of the heir to the inherited estate. This serves primarily to ensure that the heir protects his 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, but also an administrator of the estate or an executor may file for insolvency.

If the heir has become aware of the insolvency or overindebtedness of the estate, he has a duty under section 1980 (1) sentence 1 of the German Civil Code to apply for the opening of the estate insolvency proceedings without delay. If he fails to comply with this duty, he shall be liable to pay damages to the creditors of the estate pursuant to § 1980 (1) sentence 2 BGB. It should be noted here that ignorance based on negligence is equivalent to knowledge of the insolvency or overindebtedness (section 1980 (2) sentence 2 BGB). In particular, according to sentence 3, negligence shall be deemed to exist if the heir does not apply for the offer of the creditors of the estate, although he has reason to assume the existence of unknown liabilities of the estate; the offer shall not be required if the costs of the proceedings are disproportionate to the existence of the estate.

There is a fixed time limit for filing the petition only for creditors of the estate. Pursuant to Section 319 InsO, the application of an estate creditor for commencement of insolvency proceedings is inadmissible if two years have elapsed 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, so that a separate liquidation of the overindebted estate assets is no longer possible.

What happens after the application for insolvency?

Once an admissible application has been filed for probate insolvency proceedings, the court first checks whether there are still sufficient funds in the estate to cover at least the costs of the proceedings.

As a protective measure, the insolvency court may order appropriate measures under 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 cover at least the costs of the proceedings, the insolvency proceedings are opened and an insolvency administrator is appointed for the estate. An alternative for the insolvency administrator would still be the so-called self-administration by the heirs.

If the assets do not cover the costs of the proceedings, the application is rejected in accordance with section 26 InsO.