Insolvency

Insolvency refers to a situation in which a natural person or legal entity is no longer able to meet their payment obligations as they fall due. In real estate law, insolvency is particularly relevant when owners can no longer service their mortgage or land charge obligations, when tenants in a leasehold arrangement file for bankruptcy, or when developers become insolvent during a construction project. According to § 17 InsO, insolvency is the primary ground for initiating insolvency proceedings.

Distinction: Insolvency, Temporary Payment Difficulties, and Over-Indebtedness

Insolvency must be distinguished from temporary payment difficulties: If a debtor can settle a claim within three weeks, insolvency generally does not yet exist. A payment delay is a temporary liquidity shortage that can be resolved through short-term measures-such as a short-term loan, the sale of other assets, or a deferral agreement with the creditor.

Over-indebtedness, as another ground for insolvency, refers to a situation where a debtor’s assets no longer cover existing liabilities-this is particularly relevant for corporations such as limited liability companies (GmbHs) (Section 19 InsO). For natural persons-i.e., private real estate owners-insolvency is the more relevant criterion. Over-indebtedness alone does not trigger insolvency proceedings for private individuals, but it can contribute to them when combined with insolvency.

Consequences for Property Owners and Creditors

If an owner becomes insolvent and insolvency proceedings are opened against their assets, the property becomes part of the insolvency estate. The insolvency administrator may sell the property-either through a private sale or a forced auction. Mortgage creditors (banks with registered mortgage liens) have a separate right to satisfaction and are paid first from the proceeds.

For landlords, a tenant’s insolvency means that rent arrears must be filed as insolvency claims and will only be satisfied on a pro rata basis-which in practice often means that only a fraction of the outstanding debt is paid out. Rents accruing after the date of the insolvency filing, however, are claims against the estate and are satisfied on a priority basis. The landlord may terminate the lease agreement as of a specific date pursuant to the Insolvency Code (Section 109 InsO).

Special rules apply to buyers of real estate in insolvency proceedings: Purchase agreements concluded shortly before the insolvency may be challenged by the insolvency administrator under certain circumstances (insolvency challenge pursuant to §§ 129 ff. InsO)-particularly if the purchase price was significantly below market value.

Protection Against Insolvency: Early Action

Owners who find themselves in financial distress should act as early as possible: Discussions with banks regarding debt restructuring, extending the repayment schedule, or temporarily suspending repayments (repayment-free years) can avert insolvency. Out-of-court settlement attempts take precedence over formal insolvency proceedings and are more cost-effective for all parties involved.

Professional debt counseling-including through licensed insolvency counseling agencies-helps explore all options before filing for insolvency becomes unavoidable. An orderly sale of the property before filing for insolvency can often be a significantly better solution than a subsequent foreclosure auction: The proceeds from a private market sale are typically 10 to 30 percent higher than those from a foreclosure auction, which improves debt coverage.

Practical Tip for Property Owners in Nuremberg and Franconia

In increasingly difficult economic times-rising interest rates, rising operating costs, and lost rent-even financially sound property owners occasionally find themselves in financial difficulties. In the Nuremberg metropolitan region, there are established debt and insolvency counseling centers (including those at Caritas, the AWO, and the City of Nuremberg) that offer free initial consultations.

We recommend that property owners, at the first signs of financial difficulties, also obtain a property valuation early on to determine whether an orderly sale offers more flexibility than a later foreclosure auction. A professionally managed sale under pressure is not a defeat, but often the wisest financial decision. We will guide you through this process discreetly and with a focus on results.

Frequently Asked Questions

What happens to my property if I file for personal bankruptcy?

In personal bankruptcy proceedings, the property becomes part of the bankruptcy estate if its value exceeds the amount of debt. The insolvency trustee sells the property; the proceeds are used to satisfy the creditors. After the good-conduct period expires (currently usually three years), the debtor is granted a discharge of residual debt-they can then start over debt-free. However, negative Schufa entries remain visible for up to ten years.

As a landlord, can I still enforce rent claims during the tenant’s insolvency proceedings?

Rent arrears that accrued before the insolvency filing must be filed as insolvency claims with the insolvency administrator. The percentage ultimately paid out depends on the insolvency estate-it often ranges between zero and 30 percent. Rent accruing after the filing of for bankruptcy is considered a claim against the estate and is paid on a priority basis. The landlord may terminate the lease agreement pursuant to § 109 InsO as of the next termination date to limit further loss of rent.

How does a foreclosure auction differ from a private sale in the event of bankruptcy?

A foreclosure auction is a judicial proceeding that often results in lower proceeds than an orderly market sale-especially if bidders take advantage of the pressure situation or the property cannot be presented optimally. The insolvency administrator therefore generally prefers a private sale if it can be realized quickly and at market value. Owners facing financial difficulties should actively seek to sell the property before the bank files for foreclosure.

Is there government assistance available to prevent insolvency due to the loss of real estate?

In certain situations-such as temporary job loss or illness-a deferral agreement with the bank can prevent insolvency. There are no general government programs to support homeowners in financial difficulties, but debt counseling agencies can point out available social assistance benefits, housing subsidies, or other support options that can help improve liquidity.

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