Delay in Filing for Insolvency for Sole Proprietors & Private Individuals

Can sole proprietors and private individuals be prosecuted for delay in filing for insolvency?

The short answer is: No. Unlike managing directors of corporations such as a GmbH or AG, there is no statutory obligation to file for insolvency under Section 15a (1) InsO for sole proprietors and private individuals. no statutory obligation to file for insolvency under Section 15a (1) InsO . This leads to a fundamentally different legal starting point. As a sole proprietor or private individual, you do not face the classic criminal liability for delay in filing for insolvency, but this does not mean that economic misconduct during a crisis remains without legal consequences. Anyone who continues to operate despite recognizable insolvency may, under certain circumstances, be liable to prosecution for other criminal offenses – such as bankruptcy or fraud.

Important: Even without an obligation to file, sole proprietors have a high level of responsibility to act diligently during a crisis. Creditor protection and basic principles of insolvency law also apply to sole proprietorships, with corresponding liability and criminal risks.

When do sole proprietors still face penalties in the event of insolvency?

Although sole proprietors and private individuals cannot be prosecuted directly for delay in filing for insolvency within the meaning of Section 15a InsO, relevant criminal law risks still exist. Several other criminal offenses can apply in connection with an economic crisis – especially if business operations continue despite insolvency.

Section 283 StGB: Bankruptcy

The (intentional) offense of bankruptcy can also affect sole proprietors. Anyone who, in the event of imminent insolvency, in a state of over-indebtedness, or after the onset of insolvency, pursuant to Section 283 (1) StGB:

• • Sets aside or conceals assets
  • Destroys or alters economic records
  • Fails to keep proper commercial books or fails to prepare balance sheets on time
  • or engages in inappropriate loss-making transactions.

Sentencing: Imprisonment for up to 5 years or a fine Attempted bankruptcy (Section 283 (2) StGB) is also a punishable offense. Negligent bankruptcy (Section 283 (4), (5) StGB) can be punished with imprisonment for up to 2 years or a fine. In particularly serious cases (Section 283a StGB), 6 months to 10 years of imprisonment may be imposed. Other insolvency-related offenses include:

• • Violation of the duty to keep records (Section 283b StGB),
  • Favoring a creditor (Section 283c StGB),
  • Favoring a debtor (Section 283d StGB).

Section 263 StGB: Fraud

Fraud pursuant to Section 263 (1) StGB may occur if a sole proprietor, despite recognizable insolvency:

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

Sentencing: Imprisonment for up to 5 years or a fine; in particularly serious cases, from six months to 10 years A particularly serious case exists, for example, in the event of:

• • commercial fraud or fraud committed as a member of a gang (Section 263 (3) sentence 2 no. 1 StGB),
  • or if a loss of assets on a large scale was caused (Section 263 (3) sentence 2 no. 1 alt. 2 StGB).

Section 266a StGB: Withholding of employee contributions

If the sole proprietorship has employees and social security contributions are not properly paid, this can also be relevant under criminal law. Sentencing: Imprisonment for up to 5 years or a fine In particularly serious cases (Section 266a (4) StGB): 6 months to 10 years of imprisonment. Case Example: A self-employed craftsman accepts a large order despite recognizable insolvency and has a down payment of €10,000 paid out. Although he knows that he can no longer fulfill the order, he uses the money to settle private debts. This can be considered fraud.

Practical Note: In insolvency proceedings of sole proprietors, the public prosecutor’s office regularly examines whether actions relevant to criminal law, in particular bankruptcy or fraud, have occurred. Behavior in the last few months before filing for insolvency is viewed particularly critically.

Special features for sole proprietors: Right and duty to file for insolvency

Although there is no statutory obligation for sole proprietors to file for insolvency, they still have the right to file voluntarily in the event of insolvency (Section 17 InsO), over-indebtedness (Section 19 InsO), or imminent insolvency (Section 18 InsO).

Reasons for a voluntary filing

• • Discharge of residual debt: After successful insolvency proceedings and a three-year good-conduct phase, there is the possibility of being released from the remaining debts.
  • Protection against criminal liability: Filing at an early stage can significantly reduce criminal law risks – such as for bankruptcy or fraud.
  • Avoiding liability: Since sole proprietors are liable with their entire private assets for business debts, filing for insolvency can be an important step toward personal relief.

Special constellations for partnerships:

As a rule, there is also no obligation to file for forms of partnership such as the GbR, OHG, or KG. Nevertheless, specific special features apply here:

• • In the case of a GmbH & Co. KG, the general partner GmbH is obliged to file.
  • In an OHG or KG, an application can be made regarding the company’s assets.
  • The personally liable partners can file for private insolvency separately.

Special liability risks since 2021: With the StaRUG (Act on the Stabilization and Restructuring Framework for Companies), which has been in force since 2021, new liability risks for business managers were introduced. These can also affect sole proprietors, especially when the business owner is advised by tax consultants or other advisors.

Important: Until 2020, a six-year good-conduct phase applied until the discharge of residual debt. Since the beginning of 2021, the period has been shortened to three years – which makes private insolvency significantly more attractive and practical for sole proprietorships.

Warning signs and typical mistakes in the event of imminent insolvency

For sole proprietors, it is particularly important to recognize signs of economic distress early on in order to minimize legal risks:

Typical warning signs of imminent insolvency:

• • Permanent account overdraft
  • Accumulation of reminders and collection letters
  • Regular payment deferrals to suppliers
  • Non-payment of taxes and social security contributions
  • Private withdrawals can no longer be reduced
  • Failure to pay salary to oneself
  • The annual financial statements repeatedly show a deficit not covered by equity
  • Despite over-indebtedness, the annual financial statements contain no hidden reserves

Frequent mistakes made by sole proprietors in a crisis

Case Example: A self-employed IT consultant gets into financial difficulties. Instead of analyzing his economic situation, he continues to accept orders even though he knows he can no longer fulfill them on time. He uses incoming down payments to settle older liabilities. When a creditor finally files for insolvency, he is accused of contract fraud (Section 263 StGB). Background: In the last few months, he had accepted orders worth €50,000, even though he was de facto insolvent.

Practical Note: Early consultation with a lawyer specializing in insolvency law can help minimize criminal law risks and explore options for action.

Legal differences: Insolvency for sole proprietors vs. corporations

To understand the special features of insolvency for sole proprietors, a comparison with the situation for corporations is helpful:

Aspect	Sole Proprietor / Sole Proprietorship	Corporations (GmbH/AG)
Duty to file for insolvency	No statutory duty	Duty to file under Section 15a InsO within 3 weeks
Criminal liability for late filing	No direct criminal liability for delay in filing	Imprisonment for up to 3 years or a fine
Liability	Unlimited personal liability with private assets	Generally only company assets, personal liability only in case of breach of duty
Asset spheres	No separation between business and private assets	Separation between company and private assets
Discharge of residual debt	Possible after 3 years	Only relevant for personally liable partners

Important: There is also no statutory obligation to file for partners of partnerships, such as an OHG or KG. Nevertheless, insolvency can be triggered via the company’s assets. Due to unlimited personal liability, partners often end up in a subsequent private insolvency.

Options for action and insolvency proceedings for sole proprietors in a crisis

If you as a sole proprietor find yourself in financial distress, various options for action are available to you:

1. Restructuring efforts

Before filing for insolvency, restructuring options should be examined:

• • Restructuring of the business model
  • Negotiations with main creditors regarding deferrals or partial waivers
  • Sale of non-essential business assets
  • Reduction of private withdrawals
  • Admission of partners or investors

2. Out-of-court settlement

An out-of-court settlement, in which the debtor negotiates directly with all creditors, can avoid insolvency:

• • Conclusion of a private debt settlement plan
  • Quota payments in exchange for waiver of remaining claims
  • Installment payment agreements with extended terms

3. Filing for voluntary insolvency

In a hopeless situation, a voluntary insolvency filing may be the best option:

• • Secure path to discharge of residual debt after 3 years in accordance with the Insolvency Statute.
  • Termination of unlimited liability for new obligations
  • Prevention of further worsening of the situation
  • Protection against criminal allegations through proactive action

4. Business closure before insolvency

In certain situations, an orderly business closure before insolvency can be sensible:

• • Sale of the business or individual assets
  • Proper termination of all contractual relationships
  • Preparation of a final balance sheet
  • Registration as a job seeker with the Federal Employment Agency

Case Example: A self-employed retailer notices that he can no longer meet his obligations. Instead of waiting for a creditor to file for insolvency, he seeks legal advice early on. With the support of a lawyer specializing in insolvency law, he succeeds in selling part of his inventory to a competitor and using the proceeds to satisfy the most pressing creditors. He files for insolvency for the remaining debts and can obtain a discharge of residual debt after 3 years. Through his proactive action, he avoids criminal charges.

Practical Note: The earlier you as a sole proprietor react to a crisis, the more options for action remain available to you. Expert advice can show ways to a solution even in seemingly hopeless situations.

Current legal developments and deadlines for sole proprietors since 2023

The legal situation in insolvency law is constantly evolving. For sole proprietors, the following current developments are particularly relevant:

Insolvency Law Reform 2023/2024

• • Strengthening of self-administration even for small business owners
  • Simplified discharge of residual debt with a clearer procedure
  • Digitization of insolvency proceedings with an electronic creditor information system

Changes in tax law with impact on insolvency

• • New regulations on VAT in insolvency
  • Changed treatment of income tax upon business closure
  • Adjustments in the taxation of restructuring gains

StaRUG as an alternative to insolvency

The Act on the Stabilization and Restructuring Framework for Companies (StaRUG), introduced in 2021, also represents an alternative to insolvency proceedings for larger sole proprietorships:

• • Possibility for restructuring outside of insolvency proceedings
  • Overcoming blocking positions of individual creditors
  • Continuation of the company without filing for insolvency

Important: Current legal developments create new opportunities for sole proprietors in a crisis. At the same time, however, the requirements for careful documentation of the economic situation are also increasing.

Conclusion and recommendations for sole proprietors

In summary, it can be stated that although sole proprietors and private individuals cannot be subject to original criminal liability for delay in filing for insolvency pursuant to Section 15a InsO, a variety of other criminal law risks exist:

Core Findings

Practical recommendations – Avoiding delay in filing for insolvency

Although sole proprietors are not subject to the classic criminal liability for delay in filing for insolvency, a proactive approach to economic difficulties is crucial to minimize criminal law risks and enable an orderly new start.