What happens in bankruptcy, and what are its consequences?

An entrepreneur receives a demand for payment with a bankruptcy threat, but can bankruptcy still be avoided? Varma's collections manager explains how bankruptcy proceeds and what consequences bankruptcy can have for the entrepreneur.

According to Statistics Finland, there were nearly 2,500 bankruptcy filings in 2021. In bankruptcy, the assets and liabilities of an insolvent company are liquidated, and the company's assets are realised and used to pay off the company's debts. Creditors are paid in proportion to the amount of their claims, and the business ceases to exist.

For this article, we collected common questions on bankruptcy, which were answered by Hanna Huhanantti, Varma's collections manager and Master of Laws with court training.

When is a company filed for bankruptcy?

Bankruptcy is generally declared when a company is not profitable and has not paid its debts. The condition for bankruptcy is insolvency, i.e. the company's inability to pay its debts, other than temporarily. Around a third of bankruptcy petitions are filed by the company itself, the rest by creditors, such as the tax authority and pension insurance companies.

The creditor usually demands that the company be declared bankrupt after sending the company a demand for payment with a bankruptcy threat. The company has one week to pay the debt, after which the creditor can file for bankruptcy in the district court. If a company receives a demand for payment, Huhanantti recommends contacting the creditor. Most situations are resolved once the creditor and debtor have agreed on payments.

What happens in bankruptcy?

Once the creditor has submitted the bankruptcy petition to the district court, a bailiff serves it on the company. The company usually has one week to submit a statement, after which the district court either sets a hearing date or issues a decision, depending on the content of the statement.

If the district court declares the company bankrupt, an administrator is appointed to take charge of the assets and liabilities of the bankruptcy estate. The administrator draws up an estate inventory showing the debtor's assets at the beginning of the bankruptcy as well as the main creditors and their claims, and a debtor's statement outlining the reasons for the bankruptcy as well as the activities and the financial transactions prior to the bankruptcy.

Bankruptcy is an expensive and often lengthy procedure. If the assets of the bankruptcy estate are not sufficient to complete the process, the administrator will apply for bankruptcy to lapse. If there are enough funds, the administrator will call a meeting of creditors and set a date for supervision. By this date, creditors will have submitted their claims, which will be entered in the distribution list.

The bankruptcy ends when the bankruptcy estate has been liquidated, the assets of the estate have been converted into cash, the final account drawn up by the administrator has been approved and the assets have been distributed to the creditors. Finally, the administrator files a notification of termination with the Trade Register. Bankruptcy can last from months to years if the estate is large, difficult to liquidate, or involves litigation or, for example, criminal proceedings for misconduct.

Can an entrepreneur be financially liable in bankruptcy?

In the bankruptcy of a sole proprietorship or partnership, i.e. a general partnership or a limited partnership, the entrepreneur is personally liable for the obligations of the business. If the assets of the bankruptcy estate are not sufficient to pay the debts in full, creditors can collect their unpaid debts from the entrepreneur personally. In such cases, Huhanantti recommends contacting a debt counselling service to discuss the possibility of a debt arrangement.

In a limited company, the entrepreneur has no personal liability for debts, but the liability is limited to the capital invested in the company. However, the entrepreneur may have guaranteed the company's loans with his or her own money or pledged assets such as shares in a residential property, a house, or a summer cottage. The bank may recover a claim from the guarantor of the loan or liquidate the assets securing the loan and use the funds to pay the claim.

How can bankruptcy be avoided?

Bankruptcy can be avoided if a company's payment problems are identified early. Huhanantti encourages entrepreneurs to react to problems as early as possible to prevent them from building up. If payment problems do arise, it is worth contacting your creditors – often a creditor will be willing to compromise and give you more time to pay if you are proactive. The Yrittäjän talousapu counselling service can help you to organise your company's finances and prevent payment difficulties.

Filing for bankruptcy is usually a last resort, by which time several agreements have already been concluded with the debtor. Before that, a payment notice, a draft, or an enforcement order may have been sent. Even at this stage, bankruptcy can still be avoided by paying the creditor's claim.

Is business restructuring an alternative to bankruptcy?

Business restructuring is a statutory debt arrangement for which a company that is insolvent or at risk of becoming insolvent can apply if all or part of its business is capable of being restored to viability. In business restructuring, the business and its debts are reorganised so that the company can continue to operate solvently. There are legal conditions for eligibility, and a creditor can object to restructuring on certain grounds of ineligibility.

According to Huhanantti, the problem is often that people apply for business restructuring too late: they file for restructuring only after the creditor has already filed for bankruptcy. In this case, the company's coffers are already empty and the payment difficulties are often too profound. If they had been addressed earlier, business restructuring could still have been a fruitful option," says Huhanantti.

Are there any consequences for the entrepreneur in bankruptcy?

Bankruptcy can have repercussions, such as preventing the bankrupt entrepreneur from being entered in the prepayment register. Huhanantti emphasises that for entrepreneurs who have managed their affairs properly, bankruptcy has no direct consequences. However, information about the bankruptcy will remain in the business information services for a certain period of time, which may, for example, have an impact on eligibility for a loan or credit when setting up a new business. According to Huhanantti, it is up to the operator whether the bankruptcy record has an impact on the granting of financing.

Among the legal consequences of bankruptcy is that once bankruptcy begins, the entrepreneur loses the right to control the assets belonging to the bankruptcy estate. In addition, a bankrupt sole proprietor is ineligible to hold certain posts or positions of trust between the beginning of bankruptcy and the confirmation of the list of assets.

The purpose of Varma's marketing communications is to promote earnings-related pension insurance and to market Varma's services. We also publish other content that may be relevant or of interest to an insurance policyholder or a person starting a business. This content is general information, and Varma is not responsible for its exhaustiveness. We cannot guarantee the applicability of the content to all situations and are therefore not liable for any damages caused by the use of the information in the published content. Any use of the information in the published content shall be at the user's own risk.

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