Bankruptcy Delay: What Sole Proprietors and Individuals Need to Know

Can Sole Proprietors or Private Individuals Be Prosecuted for Bankruptcy Delay?

The short answer: No.

Unlike mana­ging direc­tors of corpo­ra­tions such as a GmbH or AG, sole proprie­tors and private indi­vi­duals are not legally required to file for bank­ruptcy under § 15a (1) of the German Insol­vency Code (InsO). This results in a funda­men­tally diffe­rent legal frame­work.

While sole proprie­tors or private indi­vi­duals are not subject to criminal liabi­lity for delayed bank­ruptcy filings in the tradi­tional sense, this does not mean economic miscon­duct during a finan­cial crisis is without legal conse­quences. Conti­nuing busi­ness opera­tions despite clear insol­vency may, in certain cases, lead to criminal charges under other statutes—such as fraud or bank­ruptcy offenses.

Important: Even in the absence of a formal filing obli­ga­tion, sole proprie­tors still carry signi­fi­cant respon­si­bi­lity to act prudently during a finan­cial crisis. Core prin­ci­ples of insol­vency law—such as creditor protec­tion—also apply to sole proprie­tor­ships, meaning there can be serious civil and criminal liabi­lity risks if misma­nage­ment occurs during insol­vency.

When Can Sole Proprietors Still Face Criminal Charges During Insolvency?

While sole proprie­tors and private indi­vi­duals cannot be prose­cuted for “delayed insol­vency filing” under Section 15a of the German Insol­vency Code (InsO), there are still signi­fi­cant criminal risks. Several other criminal offenses may apply in the context of finan­cial distress—espe­ci­ally if busi­ness opera­tions continue despite clear insol­vency.

Section 283 of the German Criminal Code: Bank­ruptcy Offense

The criminal offense of inten­tional bank­ruptcy (§ 283 StGB) can also apply to sole proprie­tors. A person may face criminal liabi­lity if, during impen­ding insol­vency, in a state of over-indeb­ted­ness, or after beco­ming insol­vent, they:

• Hide or dispose of assets
• Destroy or alter finan­cial records
• Fail to main­tain proper accoun­ting books or neglect timely prepa­ra­tion of finan­cial state­ments
• Engage in exces­sive or reck­less loss-gene­ra­ting tran­sac­tions

Penal­ties: Impri­son­ment for up to 5 years or a mone­tary fine.
Note: Attempted bank­ruptcy under § 283 (2) of the German Criminal Code (StGB) is also punis­hable.

Negli­gent bank­ruptcy under § 283 (4) and (5) StGB can result in a prison sentence of up to 2 years or a mone­tary fine.

In espe­ci­ally serious cases under § 283a StGB, offen­ders face impri­son­ment ranging from 6 months to 10 years.

Other insol­vency-related offenses include:

• Viola­tion of book­kee­ping obli­ga­tions (§ 283b of the German Criminal Code),
• Prefe­ren­tial treat­ment of credi­tors (§ 283c StGB),
• Prefe­ren­tial treat­ment of the debtor (§ 283d StGB).

Section 263 of the German Criminal Code: Fraud

A charge of fraud under § 263 (1) StGB may apply if a sole proprietor, despite being clearly insol­vent:

• Orders new goods,
• Accepts customer payments for services or products that can no longer be deli­vered,
• Takes out or extends loans,
• While conce­aling their own insol­vency.

Penal­ties: Impri­son­ment of up to 5 years or a fine

In espe­ci­ally serious cases, the penalty increases to 6 months up to 10 years in prison.

An espe­ci­ally serious case is typi­cally assumed when:

• The fraud was committed on a commer­cial basis or as part of a criminal enter­prise (Section 263 (3) sentence 2 no. 1 StGB), or
• The act resulted in a substan­tial finan­cial loss (Section 263 (3) sentence 2 no. 1, alter­na­tive 2 StGB).

Section 266a of the German Criminal Code: Withholding Employee Contributions

If a sole proprie­tor­ship employs staff and fails to properly pay social secu­rity contri­bu­tions, this may also result in criminal liabi­lity.

Penalty: Impri­son­ment of up to 5 years or a fine

In espe­ci­ally serious cases (§ 266a (4) StGB): impri­son­ment from 6 months up to 10 years.

Example: A self-employed contractor accepts a large project despite being clearly insol­vent and takes a €10,000 down payment. Although he knows he can no longer fulfill the contract, he uses the money to pay off personal debts. This conduct may qualify as fraud.

Prac­tice Tip: When sole proprie­tors file for insol­vency, prose­cu­tors regu­larly inves­ti­gate whether criminal offenses—especially bank­ruptcy-related fraud or frau­du­lent misre­pre­sen­ta­tion—have occurred. Autho­ri­ties pay parti­cular atten­tion to busi­ness conduct in the final months leading up to insol­vency.

Key Conside­ra­tions for Sole Proprie­tors: The Right—but Not the Obligation—to File for Insol­vency

While sole proprie­tors are not legally required to file for insol­vency under § 15a (1) InsO, they do have the right to volun­t­a­rily initiate insol­vency procee­dings if they face:

• Insol­vency (§ 17 InsO)
• Over-indeb­ted­ness (§ 19 InsO)
• Immi­nent insol­vency (§ 18 InsO)

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Reasons to File for Insolvency Voluntarily

1. Discharge of Remai­ning Debts
After comple­ting insol­vency procee­dings and a “good conduct” period of three years, debtors may be eligible for discharge of remai­ning debts (“Rest­schuld­be­freiung”), offe­ring a path to finan­cial reco­very.

2. Criminal Risk Miti­ga­tion
Timely filing can help avoid criminal liabi­lity, parti­cu­larly in cases invol­ving poten­tial bank­ruptcy offenses or fraud due to continued opera­tions despite insol­vency.

3. Limi­ting Personal Liabi­lity
Because sole proprie­tors are perso­nally liable for busi­ness debts with their private assets, filing for insol­vency may serve as a stra­tegic step to protect personal finan­cial stabi­lity.

Special Considerations for Partnerships

In general, part­ner­ships such as a GbR (civil law part­ner­ship), OHG (general part­ner­ship), or KG (limited part­ner­ship) are not subject to a manda­tory insol­vency filing requi­re­ment under § 15a InsO. However, there are important distinc­tions depen­ding on the specific legal struc­ture:

• GmbH & Co. KG: The general partner (Komple­mentär) is typi­cally a GmbH, and as such, this GmbH is legally obli­gated to file for insol­vency if insol­vency grounds exist.
• OHG or KG: These part­ner­ships may file for insol­vency over the partnership’s assets. The insol­vency proce­dure affects the busi­ness as a whole.
• Perso­nally liable part­ners: Indi­vi­dual part­ners who are perso­nally liable (e.g., in an OHG or as Komple­men­täre in a KG) may sepa­ra­tely file for personal bank­ruptcy to deal with their private liabi­li­ties stem­ming from busi­ness debt.

Increased Liabi­lity Risks Since 2021

With the intro­duc­tion of the StaRUG (Corpo­rate Stabi­liza­tion and Restruc­tu­ring Act) in 2021, new liabi­lity risks for company direc­tors and mana­gers have been estab­lished. While prima­rily aimed at corpo­rate enti­ties, these risks may also impact sole proprie­tors, espe­ci­ally in scena­rios where busi­ness advi­sors such as tax consul­tants or finan­cial advi­sors are involved in guiding the entre­pre­neur during a crisis.

Key point: If a sole proprietor seeks restruc­tu­ring advice and fails to act properly on that guidance—or if advi­sors them­selves provide negli­gent or mislea­ding counsel—civil or even criminal liabi­lity may arise. This unders­cores the importance of profes­sional, well-docu­mented crisis manage­ment.

Important: Until 2020, indi­vi­duals seeking debt discharge had to complete a six-year good conduct period. Since early 2021, this period has been shor­tened to three years, making personal bank­ruptcy a signi­fi­cantly more prac­tical and attrac­tive option for sole proprie­tors facing finan­cial distress.

Warning Signs and Common Mistakes in the Face of Impen­ding Insol­vency

For sole proprie­tors, it is espe­ci­ally important to iden­tify signs of finan­cial distress early in order to avoid legal conse­quences and mini­mize liabi­lity risks.

Common Red Flags Indicating Imminent Insolvency:

• Consis­t­ently over­drawn busi­ness accounts
• Frequent remin­ders and debt coll­ec­tion notices from credi­tors
• Regular defer­rals of payments to suppliers and service provi­ders
• Failure to pay taxes and social secu­rity contri­bu­tions
• Inabi­lity to reduce private with­dra­wals from the busi­ness
• Missed or suspended salary payments to oneself
• Annual finan­cial state­ments repea­tedly showing a deficit not covered by equity
• Balance sheets showing over-indeb­ted­ness without any hidden reserves

Reco­gni­zing these indi­ca­tors early allows busi­ness owners to take protec­tive legal steps, such as initia­ting volun­tary insol­vency procee­dings, and to avoid more serious conse­quences like fraud or bank­ruptcy charges.

Common Mistakes Sole Proprietors Make During Financial Distress

Even without a formal obli­ga­tion to file for insol­vency, sole proprie­tors can expose them­selves to serious risks if they misma­nage a crisis. Here are the most frequent missteps:

“Business as usual”

Many busi­ness owners continue opera­tions unch­anged, hoping things will improve on their own—without adap­ting their busi­ness model or stra­tegy.

Mixing personal and business assets

In times of crisis, busi­ness assets are often used for personal purposes or sold priva­tely. This can later be inter­preted as a bank­ruptcy offense under criminal law.

Short-term “band-aid” solutions

Paying off only the most pres­sing credi­tors without deve­lo­ping a sustainable finan­cial plan often worsens the overall situa­tion.

Ignoring tax and social security obligations

These liabi­li­ties carry criminal conse­quences and should be treated with the highest prio­rity—even before paying suppliers or other credi­tors.

Failing to seek professional advice

Due to shame or fear of added costs, many avoid consul­ting lawyers or tax advi­sors. This can be a critical mistake, as early legal guidance often helps avoid liabi­lity or criminal prose­cu­tion.

Example: A self-employed IT consul­tant falls into finan­cial trouble. Instead of asses­sing his finan­cial situa­tion, he conti­nues to accept new contracts—despite knowing he can no longer meet dead­lines or deliver the promised services. He uses inco­ming advance payments to pay off older debts.
Even­tually, a creditor files for insol­vency. As a result, the consul­tant is charged with frau­du­lent intent at contract initia­tion (known as “Einge­hungs­be­trug” under § 263 of the German Criminal Code).

Key Issue: Over the final months before the insol­vency peti­tion, he accepted orders worth €50,000—despite being effec­tively insol­vent. This pattern of conduct may be inter­preted as criminal fraud, since he concealed his inabi­lity to fulfill the contracts at the time they were entered.

Prac­tical Tip: Early consul­ta­tion with an attorney specia­lized in insol­vency law can signi­fi­cantly reduce the risk of criminal liabi­lity. A timely legal assess­ment helps clarify available options, ensure compli­ance, and prevent poten­ti­ally punis­hable missteps during a finan­cial crisis.

Legal Distinctions: Bankruptcy for Sole Proprietors vs. Corporations

To fully under­stand the legal risks and obli­ga­tions involved in insol­vency, it helps to compare how bank­ruptcy affects sole proprie­tors versus corpo­rate enti­ties such as a GmbH or AG:

Aspect	Sole Proprie­tors / Sole Proprie­tor­ships	Corpo­ra­tions (GmbH / AG)
Obli­ga­tion to file for bank­ruptcy	No legal obli­ga­tion	Manda­tory filing within 3 weeks under § 15a InsO
Criminal liabi­lity for late filing	No direct criminal liabi­lity for delayed filing	Up to 3 years impri­son­ment or a fine for delayed filing
Liabi­lity	Unli­mited personal liabi­lity with private assets	Gene­rally limited to company assets; personal liabi­lity only in case of brea­ches of duty
Asset sepa­ra­tion	No legal sepa­ra­tion between personal and busi­ness assets	Clear sepa­ra­tion between company and personal assets
Debt discharge (Rest­schuld­be­freiung)	Possible after 3 years (personal insol­vency)	Only applies to perso­nally liable part­ners (e.g., in a KG or GbR)

Important: Part­ners in part­ner­ships such as general part­ner­ships (OHG) or limited part­ner­ships (KG) are also not legally obli­gated to file for bank­ruptcy. However, insol­vency procee­dings can still be initiated over the partnership’s assets. Due to their unli­mited personal liabi­lity, indi­vi­dual part­ners often find them­selves forced into personal bank­ruptcy as a conse­quence.

Options for Action and Bankruptcy Proceedings for Sole Proprietors Facing Financial Distress

If you’re a sole proprietor facing finan­cial diffi­cul­ties, you have several options available to manage the situa­tion and avoid legal pitfalls:

1. Restructuring and Recovery Efforts

Before conside­ring bank­ruptcy, explore whether the busi­ness can be rescued through restruc­tu­ring efforts, such as:

1. Adjus­ting the busi­ness model
2. Nego­tia­ting with major credi­tors for defer­rals or partial debt forgi­ve­ness
3. Selling non-essen­tial busi­ness assets
4. Redu­cing private with­dra­wals from the busi­ness
5. Brin­ging in part­ners or inves­tors to stabi­lize the busi­ness

2. Out-of-Court Settlements

An out-of-court agree­ment can some­times help avoid formal insol­vency procee­dings. This involves direct nego­tia­tions between the debtor and credi­tors, aiming for:

1. A private debt sett­le­ment plan
2. Lump-sum payments in exch­ange for debt forgi­ve­ness
3. Long-term install­ment payment agree­ments

3. Filing for Bankruptcy Voluntarily

If the finan­cial outlook is hope­less, volun­t­a­rily filing for bank­ruptcy may be the most respon­sible choice:

1. It’s the most secure path to debt discharge (discharge of resi­dual debt) after three years (as per the German Insol­vency Code).
2. It limits personal liabi­lity for new debts from the moment of filing.
3. It prevents further dete­rio­ra­tion of your finan­cial situa­tion.
4. It protects you from criminal liabi­lity through proac­tive legal action.

4. Voluntary Business Closure Before Filing

In some cases, closing the busi­ness in an orderly manner before filing for bank­ruptcy can be the best course of action:

1. Selling the busi­ness or selected assets
2. Properly termi­na­ting all contrac­tual obli­ga­tions
3. Prepa­ring a final balance sheet
4. Regis­tering as a jobseeker with the local employ­ment agency

Example: A self-employed retailer realizes he can no longer meet his finan­cial obli­ga­tions. Instead of waiting for a creditor to initiate bank­ruptcy procee­dings, he seeks legal advice early on. With the help of an attorney specia­lized in insol­vency law, he’s able to sell part of his inven­tory to a compe­titor and use the proceeds to pay off his most pres­sing credi­tors.

For the remai­ning debts, he volun­t­a­rily files for personal bank­ruptcy. After three years, he is granted a discharge of resi­dual debt. By acting proac­tively and trans­par­ently, he avoids criminal liabi­lity and regains finan­cial stabi­lity.

Prac­tical Tip: The earlier you respond to a finan­cial crisis as a sole proprietor, the more options remain available to you. Profes­sional legal advice can help uncover viable solutions—even in situa­tions that initi­ally seem hope­less.

Current Legal Developments and Deadlines for Sole Proprietors Since 2023

The legal frame­work for insol­vency is conti­nuously evol­ving. The follo­wing recent deve­lo­p­ments are parti­cu­larly rele­vant for sole proprie­tors:

• Reform of insol­vency law in 2023/2024
• Expan­sion of self-admi­nis­tra­tion options even for small busi­ness owners
• Simpli­fied discharge of resi­dual debt with a more stream­lined process
• Digi­ta­liza­tion of insol­vency procee­dings, inclu­ding an elec­tronic creditor infor­ma­tion system

Tax Law Changes Affecting Insolvency

• New regu­la­tions on value-added tax (VAT) in insol­vency procee­dings
• Revised treat­ment of income tax in the event of busi­ness closure
• Adjus­t­ments to the taxa­tion of restruc­tu­ring gains

StaRUG as an Alternative to Formal Insolvency Proceedings

The Corpo­rate Stabi­liza­tion and Restruc­tu­ring Act (StaRUG), intro­duced in 2021, offers an alter­na­tive to formal insol­vency proceedings—particularly for larger sole proprie­tor­ships and self-employed profes­sio­nals:

• Enables restruc­tu­ring outside of court insol­vency proce­dures
• Allows over­co­ming indi­vi­dual creditor oppo­si­tion through majo­rity appr­oval mecha­nisms
• Faci­li­tates continued busi­ness opera­tions without filing for insol­vency

Important: Recent legal deve­lo­p­ments create new oppor­tu­ni­ties for sole proprie­tors facing finan­cial distress. At the same time, they raise the bar for careful docu­men­ta­tion of the business’s finan­cial situa­tion.

Conclusion and Practical Recommendations for Sole Proprietors

In summary, while sole proprie­tors and private indi­vi­duals are not subject to the original criminal offense of delayed insol­vency filing under § 15a of the German Insol­vency Code (InsO), they still face a wide range of legal risks in finan­cial crises:

Key Takea­ways

1. No direct criminal liabi­lity for delayed insol­vency filing under § 15a InsO for sole proprie­tors or private indi­vi­duals
2. However: Criminal liabi­lity for bank­ruptcy (bank­rott) or fraud is possible if actions worsen the finan­cial crisis
3. Unli­mited personal liabi­lity — busi­ness debts are covered with private assets
4. Timely filing for insol­vency can help avoid both criminal prose­cu­tion and civil liabi­lity
5. The reduced discharge period (3 years) makes personal insol­vency a more viable and attrac­tive option for sole proprie­tors

Practical Recommendations – How to Avoid Delayed Insolvency Filing

1. Estab­lish an Early Warning System Set up a simple finan­cial moni­to­ring system that alerts you to poten­tial liqui­dity shortages in advance.
2. Sepa­rate Busi­ness and Personal Finances Even though there’s no legal requi­re­ment for sepa­ra­tion, main­tai­ning clean book­kee­ping can be crucial for proving your case in the event of an inves­ti­ga­tion.
3. Docu­ment All Busi­ness Decis­ions Espe­ci­ally in times of finan­cial distress, keeping detailed records can be key to defen­ding against alle­ga­tions of frau­du­lent bank­ruptcy or misma­nage­ment.
4. Prio­ri­tize Critical Liabi­li­ties Pay close atten­tion to tax obli­ga­tions and social secu­rity contri­bu­tions, as failure to meet these may carry criminal liabi­lity.
5. Seek Legal Advice Early Consult with an attorney who specia­lizes in insol­vency and busi­ness law as soon as payment diffi­cul­ties begin to emerge.

Although sole proprie­tors are not subject to tradi­tional criminal liabi­lity for delayed insol­vency filing, a proac­tive approach to finan­cial diffi­cul­ties is essen­tial to mini­mize legal risks and enable a struc­tured fresh start.