Debt from self-employment

If you have debts from self-employment, it is usually twice as difficult: your private and professional life often falter at the same time, the pressure is high, and it is difficult or impossible to relinquish responsibility. Structured action and clear decisions are required, but a favourable perspective is not always in sight. 

The central steps you can take when you realise that you cannot pay your (commercial) bills are similar to those for private debt. First of all, you should stabilise your financial situation so that no further or new debts arise. It is important to secure your ongoing livelihood before you worry about when and how you will repay your debts. 

However, you often have to take more comprehensive steps when you earn your income from economically self-employed work. Often there is a retail space or rented office space. You don't want to disappoint your customers or have been fighting a competitor for years. But maybe you've been thinking about switching industries and starting an employment relationship for a while now? Especially if you are currently unable to exercise your independence due to the coronavirus restrictions, you unfortunately have a lot of work ahead of you to avoid over-indebtedness and financial shortfalls. 

Also, the financial aid from the federal government creates more confusion than relief. In some cases, it is not applicable, in other cases it is offset against other services that have already been paid for. The obligation to file for insolvency is not only extended in correlation with the sluggish disbursements of coronavirus subsidies, the content also changes almost daily. If you are self-employed in your name, you are not obliged under the GmbHG to file for insolvency, as if you were the managing director of a corporation. Nevertheless, you should not place orders on target in the economic crisis and ultimately not pay for them. Also, consider not accepting down payments if it is already foreseeable that you will not be able to execute the underlying order. Many self-employed people ask whether they also fall under the application requirement. There is some confusion here.

Always take advantage of the possibility of cost savings in the company and private sector, the possibilities of coronavirus subsidies and the application for basic benefit before you possibly fall back on your pension. Check the changes, redesigns and other eligible government aid on a daily basis. At the moment, you really have to expect daily changes in all areas.

…And: Try to keep your nerve, even if there are moments when you might prefer to give up.

Individual entrepreneurs and service providers in particular, such as self-employed yoga teachers, communication trainers or event technicians, often have only low operating expenses because private and professional life cannot be clearly separated. You have a (private) mobile phone contract, which is also used to make business phone calls. There is a car that is used for your business trips as well as for the day trip at the weekend. The debt for the new work clothes will be paid by Grandma's Christmas present. For many small/micro self-employed operations, the first major difficulty is separating operational expenses from private expenses. 

But that's exactly what you should try! Create order and clearly separate your invoices, account entries and correspondence into professional and private. Provide clarity. The same applies to income. Pay yourself a wage from your business account rather than settling all transactions through your personal account. Set yourself regular deadlines for accounting and "paperwork". Keep track, find your system. Only in this way can you realistically assess how your business is doing and how you can cope with the tense financial situation again in the future. 

In recent months, the Federal Government has developed various aids and subsidies to provide economic support to the self-employed during the lockdown phases. In any case, if the conditions are right, it is advisable to apply for the corresponding subsidies.

Caution: The regulations are currently changing at breakneck speed. It is therefore strongly recommended that the self-employed get an overview of the legal conditions and current subsidies on a daily basis. Below are the links to important pages:

• Federal Ministry of Finance 
• Federal Government
• Ministry of Economy

Even without the coronavirus crisis, there are government grants and loans with particularly favourable conditions. These are awarded by the Kreditanstalt für Wiederaufbau (KfW). 

• Funding opportunities provided by the KfW

If you currently do not (or no longer) earn enough to secure your livelihood, you can apply for unemployment benefit II (basic benefit for jobseekers) at the Jobcenter. ALG II is a social benefit intended to cover basic living expenses. It is open to both (former) employees and the self-employed. 

With the application for benefits according to SGB II (at the Jobcenter), not only are the livelihood and rent of you and your family secured, but also the health and long-term care insurance can be continued. This is especially important with family insurance.

It is not clear whether the conditions change in the case of a second or subsequent application. It is also not clear how a break between two applications in the period can be assessed.

Despite being able to apply for the services online, you will need to submit very extensive documentation for approval. This includes bank statements for the last 12 months, partial annual financial statements and business financial statements as well as insurance contracts and other documents relating to your assets. It is possible to have a 1-hour interview with the administration of the JobCenter in order to clarify questions when filling out the applications. Even if you are currently in an exceptional economic situation, try to keep the conversation as calm and objective as possible.

• Prerequisites and interesting facts on the employment agency's website

In the event of payment difficulties, it is also worth applying immediately to the tax office to have the advance payments of income and sales tax set at €0.00 for the time being, as well as to defer any outstanding tax payment for 2018.

On 25 January 2021, the Federal Ministry of Finance published identical decrees from the highest tax authorities of the federal states on trade tax measures to take into account the effects of the coronavirus. All entrepreneurs affected by the coronavirus crisis can then submit an application for a reduction in the business tax for the purpose of prepayment. There are no strict requirements for the examination of the prerequisites.

If you are self-employed with the help of a commercial lease, there is now a legal facilitation to negotiate with your commercial landlord. Your commercial lease is usually concluded over several years. However, you may have just extended your old lease just before the outbreak of the coronavirus pandemic. Negotiating the rent down to a tolerable level due to the pandemic or even "getting out" of the commercial lease is usually extremely difficult.

With Article 240 § 7 of the Introductory Act to the German Civil Code (EGBGB), the Federal Government has therefore given you the opportunity to negotiate with the landlord "on an equal footing". Art. 240 § 7 EGBGB opens up the possibility of applying the provisions on frustration of contract pursuant to Section 313 of the German Civil Code (BGB) due to the government restrictions to prevent the spread of the Covid-19 pandemic. It is thus (refutably) presumed that circumstances that have become the basis of the rental agreement have changed significantly after the conclusion of the agreement and that the contracting parties would not have concluded the agreement or would have concluded it with different content if they had been aware of the changes.

Therefore, refer to this section when negotiating with the commercial landlord. Both a rent reduction and suspension as well as an early extraordinary termination are thus possible.

If your commercial income has decreased significantly and you are paying maintenance, the maintenance payments may be adjusted or reduced. Seek dialogue with the people entitled to maintenance. Alternatively with the youth welfare office and/or the maintenance advance fund. Inform them immediately about the income reduction so that the amount of the payment can be adjusted.

Tip: If you have previously paid the maintenance payments directly to your child, but this is currently not possible due to your loss of income, your child can receive maintenance in advance from the state. The advance on maintenance payment compensates for at least part of the missing maintenance.

People with voluntary statutory health insurance should inform their health insurance company immediately if their income is reduced in order to reduce their health insurance contribution.

You should also have your health insurance tariff checked in general. Changing tariffs often brings significant savings. 

• Contribution on Focus.de

Review – privately and professionally – your ongoing contracts and payment obligations.

If you are unable to go to the gym privately due to the pandemic, you should also take action against the direct debit of your membership fee. You should consider cancelling or pausing your gym membership for good cause. Many providers offer an uncomplicated pause, but you must actively request the pause. 

The same applies to your current professional expenses: cancel your monthly public transport pass if you only work from home. Apply for a reduction in the advance electricity payment if your business premises are not used for months at a time. Check whether insurance companies allow a (temporary) reduction in the payment amount or even offer payment breaks. Set up advertising measures (e.g. adverts) for a limited period if you are currently not allowed to accept orders. 

Tip: Take a critical and honest look at your spending over the past few months. Where are payment breaks possible? With whom can you negotiate payment facilities? Where is cancellation the best option? 

The possibility of short-time working helps with personnel costs. Short-time working means the temporary reduction of regular working hours in a company due to a significant loss of work. All or only some of the employees of a company may be affected by short-time working. This is a rather unusual measure for a caterer or the owner of a massage practice, but it is just as available to you as it is to a car company. 

• Information on short-time working on the employment agency's website

For parents who are unable to look after their children during lockdown, the state has also issued a special holiday regulation. 

Especially in small companies, it is important to talk to your employees and try to find solutions together. As a team, you can develop more ideas, divide up work and rethink processes. Alternatively, exchange ideas with other self-employed people or your environment, share experiences and solutions. 

Whether subsidised loans make sense certainly depends on the individual case. Loans have to be repaid and the question is whether and when the economy will pick up again and in what way. It is clear, for example, that a restaurant has to buy fresh food when it reopens. Most of the old goods are probably no longer suitable for consumption. The money for this has to come from somewhere.

Filing for insolvency proceedings should always be your last resort. You should only use the proceedings when all other options for saving costs, receiving subsidies or basic benefits have been exhausted. However, this also means finding out about the advantages and disadvantages of insolvency law in advance.

Regardless of whether you apply for one of the two personal insolvency proceedings or wish to have proceedings opened over the assets of a corporation as a managing director, the reorganisation options under insolvency law are available to you in all proceedings. However, you should bear in mind that the earlier and more structured you tackle this, the sooner you will be able to utilise these tools. The opening of insolvency proceedings does not mean the end of business operations.

The two insolvency proceedings for natural persons with discharge of residual debt also offer you the opportunity to have all "honest" debts discharged by the court. In any case, it is important to create a budget situation in which new debts are no longer incurred.

Chart: Differentiation between standard insolvency proceedings and consumer insolvency proceedings

In order to be able to utilise the restructuring possibilities of insolvency, a forecast of future economic opportunities is required. The question must therefore be asked as to when there will again be enough customers, orders or contracts to make a profit from the self-employed activity. As long as the pandemic-related factors are so unclear and changeable, this question is unlikely to be answered. So in many cases, insolvency will unfortunately not be an option. 

The chambers of industry and commerce, DEHOGA and guilds are currently offering online seminars on insolvency law almost every week. In most cases, these are free of charge. The recognised debt counselling centres are also available to answer your personal debt-related questions. Use these options to obtain information. You wouldn't just hike through the Brazilian rainforest armed with a machete, would you? You'd usually trust an experienced guide to take you safely to your destination, wouldn't you?