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Change from October – Obligation to file for insolvency: Is the big wave of bankruptcies coming?

The corona crisis poses financial problems for thousands of companies. That is why the federal government suspended an important regulation: companies no longer had to register if they were insolvent. That’s over now.

Galeria Karstadt Kaufhof, Maredo, Escada: the list of companies that have filed for bankruptcy or are facing complete bankruptcy during the Corona crisis is long. But that’s not all: some experts are already warning of an even bigger wave of bankruptcies.

Companies in sectors such as retail, tourism or the auto industry in particular could soon go bankrupt. Companies that lost billions in revenue because of the virus. Tens of thousands of jobs would be threatened in this case.

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The fear is related to a change in the legal situation, which will apply from October 1st. Because: Companies facing insolvency did not have to file for bankruptcy in the past few months.

Due to the crisis, the obligation to file for bankruptcy was suspended until September 30 – and has now been reintroduced. What that means, whether we are really threatened by a large wave of bankruptcies in autumn: t-online answers the most important questions about this regulation.

What exactly will change from October?

From October 1st, companies have to file for insolvency at the responsible local court again if they are insolvent. Companies are considered insolvent if they can no longer pay at least ten percent of their bills. You then have to draw up a conclusive financial plan within three weeks. Because of the corona pandemic, the federal government suspended this obligation in March. The exception is now running out.

Only in cases of over-indebtedness does the obligation to submit an application remain suspended until the end of the year. A company is considered over-indebted if it is liquid enough to pay bills, but its debts are so high that they would foreseeably overwhelm them.

However: More than 90 percent of bankruptcies result from insolvency, only the rest from over-indebtedness. Therefore, experts fear a wave of bankruptcies in the fall.

Are we facing a wave of bankruptcies?

That is the crucial question – and the most controversial one. While business laymen in particular strongly assume this, many experts are less convinced.

The chairman of the Association of Insolvency Administrators in Germany (VID), Christoph Niering, focused on government measures such as extended short-time work benefits and bridging allowances. These are likely to keep many companies alive that are actually about to go bankrupt, he told the German press agency. Therefore a real wave is unlikely.

Even the head of the employer-related institute of the German economy, Michael Hüther, does not believe in mass bankruptcies. He recently said in an interview with t-online: “The number of bankruptcies will certainly increase somewhat. But there will not be a real wave of bankruptcies.”

Unlike Niering, he justified this with the good equity base of many companies. In other words, companies are not so dependent on loans that can be withdrawn.

Small businesses in particular could be affected

The German Savings Banks and Giro Association recently found this out in a survey of German medium-sized companies: The companies have an average equity ratio of 39 percent – enough to put away possible losses themselves for the time being.

The crux of all of this: this value is an average. This means that in individual cases the equity base can be much lower. Where this is the case, bankruptcy still threatens.

In addition, the Savings Banks Association only included companies with a turnover of at least 20 million euros in its survey. Small businesses such as pubs, restaurants or hairdressers are not considered. These are sometimes more often dependent on bank loans.

That would also fit the current figures. “At present, over 300,000 companies in Germany have financial problems,” said Frank Schlein, managing director of the Crifbürgel credit agency.

When does a wave of bankruptcies occur?

It is also questionable when there will be a wave of bankruptcies. Some experts anticipate that the number of bankruptcies will increase by the end of 2020. “A wave of insolvency will come because the economic environment has become much harsher,” said Nikolaus von dercken, managing director of the credit reporting agency Creditreform, recently to the “Hamburger Abendblatt”.

However, he does not expect a “real wave” until 2021. Compared to 2019 there will be an increase “in the lower double-digit percentage range”.

Economist Steffen Müller from the Institute for Economic Research (IWH) in Halle sees it similarly. He assumes that there will be more bankruptcies only next year. “The extreme extension of short-time work benefits until the end of 2021 is particularly problematic,” he said. He expects that this measure will keep the number of company insolvencies low until they expire, said Müller.

Insolvency expert Niering points out, however, that many business tasks happen in silence. Especially owners of small pubs, travel agencies or retail stores should simply close without waiting for insolvency.

Are private bankruptcies also threatening?

Experts agree that when there is a wave of bankruptcies in businesses, private bankruptcies also go hand in hand. However, it will take a while before corporate insolvencies lead to consumer bankruptcy in individual cases, said Patrik-Ludwig Hantzsch from Creditreform. At the end of 2021 or beginning of 2022 one will see a greater effect in personal bankruptcies.

The strongest trigger for a hopeless financial situation is unemployment, said Hantzsch. In the Corona crisis, this is likely to affect many self-employed people or employees in the severely battered gastronomy, tourism or aviation industries.

In addition, the automotive industry – in addition to the slump caused by the virus pandemic – is undergoing structural change, what the job cuts at the suppliers showed. “These people will be on the street in the medium term,” said Hantzsch. A lot of state aid ran until the 2021 federal election, said the Creditreform expert. “In the election year, a lot will be done to get fewer unemployed people.” That could possibly change afterwards.

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