Filing for bankruptcy as leverage
A bankruptcy petition is the most severe leverage in the debt collection process. No entrepreneur wants to be declared bankrupt — the consequences are far-reaching and irreversible. The debtor loses the power of disposal over their assets, a trustee takes over management, and all ongoing agreements come under pressure.
It is precisely that threat that makes a bankruptcy petition effective as a collection tool. In practice, most debtors pay up after all — or arrange a payment plan — before the hearing takes place.
However, a bankruptcy petition is not a tool to be used lightly. We always first assess whether it is legally justifiable and proportionate.
When is a bankruptcy application worthwhile?
A bankruptcy petition works as leverage only if the debtor is able to pay but unwilling to. If there is an unwillingness to pay—the debtor has assets but refuses to pay—then this measure is effective.
If the debtor is genuinely insolvent and unable to pay, filing for bankruptcy serves little purpose as leverage. Bankruptcy is declared, you stand in line with the trustee as an unsecured creditor, and the chance of full recovery is slim. In practice, most bankruptcies end with insufficient assets to satisfy creditors.
An asset tracing investigation helps with the assessment: does the debtor have sufficient assets to pay, or is he actually insolvent?
Requirements for a bankruptcy application
The court declares bankruptcy if two requirements are met.
First, the debtor must have ceased making payments. That is to say: he is in a state of inability to pay or unwillingness to pay that is not temporary.
Secondly, a plurality of creditors is required. You can file for bankruptcy yourself as a single creditor, but for the bankruptcy ruling to be issued, there must be at least one other creditor with an enforceable claim — a so-called supporting claim. We can locate a supporting claim for you through our network if you are unaware of one yourself.
How does the procedure work?
Only a lawyer may file a bankruptcy petition with the court on behalf of a creditor. We immediately engage a specialized lawyer.
The procedure typically unfolds as follows. We first send a draft bankruptcy application to the debtor as leverage — the debtor often pays at this point. If he does not respond, the lawyer files the petition with the court.
The hearing takes place within three to four weeks of filing. In the period between filing and the hearing, the pressure is at its maximum — the debtor knows that he has only a short time left to avoid bankruptcy.
Would you like to maintain the pressure a little longer? The substantive hearing can be suspended for a maximum of eight weeks if you are still negotiating a payment arrangement. This gives you a powerful leverage tool until the very last moment.
The lawyer may also withdraw the request orally at the hearing if the debtor pays or reaches an agreement.
Risk: liability for unjustified application
A bankruptcy application is not without risk. If the application is doomed to fail from the outset — because the claim is disputed on the merits or the debtor is demonstrably not in a state of having ceased payments — you may be held liable for the legal costs the debtor has incurred to defend himself.
We always first assess whether a bankruptcy application is legally justified before taking any steps. In the case of a disputed claim, ordinary court proceedings are the better route.
What if bankruptcy is actually declared?
If the debtor is declared bankrupt, a trustee takes over the management of the assets. You submit your claim to the trustee. Whether and how much you receive depends on the available estate and the ranking of creditors. If the estate is insufficient, you will receive nothing.
Is the debtor a natural person and is the bankruptcy subsequently lifted due to a lack of assets? Then your claim is revived, and you can seek recourse again after the lifting of the bankruptcy.
