Bankruptcy is when a company or individual no longer is able to pay their debt. In that event, the insolvency court opens bankruptcy proceedings in order to determine, how the debt is to be settled in the best possible way.
What is bankruptcy?
Bankruptcy is a legal procedure that comes into play, when a company or individual no longer is able to pay their debt to their creditors. For an individual, this usually results in a debt relief.
Both the debtor or one of their creditors can apply for the opening of bankruptcy proceedings with the insolvency court. This costs 750 DKK in legal fees. The application for bankruptcy proceedings has to contain name and address of the debtor and the company registration number of the company.
If you or your company go bankrupt, you lose the right to control the assets connected to the bankrupt legal entity. That is to say, that if you undergo personal bankruptcy, you no longer have control over your car, house, bank account etc. If instead it is your company or organization that undergoes bankruptcy, it would be the assets connected to said entity. This can be commercial property, computers, office supplies, company cars and more.
What does insolvent mean?
A person or company goes bankrupt, when they are insolvent. “Insolvent” means, that the debtor cannot repay the debt on time. This means, that they are unable to cover the amount previously agreed on in the promissory note or loan agreement in order to repay the debt. If the financial difficulties are only expected to be temporary, one is not considered insolvent.
In the event of a bankruptcy, the insolvency court will review the debtor’s assets and debt, to ensure the creditors will be paid - in a certain order.
Bankruptcy law and debt relief
Since the bankruptcy law was changed in 2006, it has become possible to receive debt relief while the insolvency court processes the debt. This means, that the owner or owners of a company can repay their debt more quickly and are able to avoid dragged out bankruptcy proceedings.
Thus, if you want to quickly move on after your company went bankrupt - either by founding a new company or by becoming a wage earner - it can be beneficial to apply for debt relief during the bankruptcy proceedings.
What is personal bankruptcy?
Personal bankruptcy is when you, as an individual, no longer are able to repay your debt on time. Going bankrupt can have wide-reaching consequences. You risk having to sell your car, your house and other property. Usually, the insolvency court will review your debt and decide, whether you are eligible to receive debt relief. The requirement for debt relief is to have debt that you cannot repay without debt relief.
Your application for debt relief has to be submitted to the insolvency court in connection to the bankruptcy proceedings. If you receive debt relief, you will have to live under a strict budget until the debt is paid off. The insolvency court will determine a disposable income for you in addition to cost of living. Any earnings above that threshold will go your creditors in order to repay your debt.
Of course, circumstances like having children, a sickness that requires medication etc. are also taken into account.
Bankruptcy - the process in insolvency court
When the insolvency court receives an application for bankruptcy proceedings, it will take a stance in the case. If the insolvency court is of the opinion that the case is valid, it will then declare the company or individual bankrupt with a bankruptcy decree. After such a decree is issued, the bankrupt entity is no longer allowed to receive a salary or other payments. They are not allowed to transfer or give away any belongings either.
When the debtor or one of their creditors files for bankruptcy, all of their assets are transferred into a bankruptcy estate. A curator or a liquidator is put in charge of the estate. They will look after the assets until the insolvency court has decided, what each creditor can lay claim to. The purpose of a bankruptcy estate is to prevent the creditors from competing in who is the first to claim individual assets.
Not all assets are transferred into the bankruptcy estate. This is because the Civil Procedure Law requires that the bankrupt entity be able to sustain modest housing. It is the bankruptcy estate’s task to either sell or otherwise liquidate the assets to repay the debt. This can happen through foreclosure for instance. After the assets are liquidated, the money from the sale has to be distributed among the creditors. It is done according to a prioritized order.
The order is as follows:
- Legal fees
- The company’s employees (e.g. if they are owed wages)
- The company’s vendors
- Other creditors
After this process is finished, the company is officially declared bankrupt. This means, that it will be removed from the company register.
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Disclaimer: This overview is for informational purposes only and cannot be counted as legal advice.