Last Updated on March 19, 2021 by Filip Poutintsev
Sometimes economic problems or poor management cause many businesses to file for insolvency and fail to meet their financial obligations. In this case, although this may be a bitter end for many businessmen and companies, taking advantage of the protection laws that have been established in this area will help to minimize the problems. In summary, it can be concluded that if companies file for bankruptcy promptly and adopt appropriate strategies, they can avoid further losses and return to normalcy in a shorter period.
What is a bankruptcy?
Bankruptcy in business law is a state of the business that stops paying its debts; in simpler language, it cannot fulfill its business obligations.
What are the types of bankruptcy?
Ordinary bankruptcy
Ordinary bankruptcy refers to the situation that the merchant or business goes bankrupt without fault or fraud due to external factors such as sanctions or unforeseen events.
Bankruptcy to blame
In this case, bankruptcy is caused by the fault and error of the trader and is considered an unintentional crime. Also, this is usually caused due to the lack of a business office, the uncertainty of the assets and liabilities, and the fulfillment of the obligations.
Bankruptcy to fraud
In this case, the trader declares himself run out of money with fraud, in which he is found guilty of fraud. The most important reasons are fraud, concealment of assets, and destruction of property by fictitious transactions, and creation of unrealistic debts to show the amount of debt above the original amount.
Pros and cons of filing a bankruptcy
Benefits of filing bankruptcy
Bankruptcy can have many disadvantages, but it can also bring benefits to businesses. In other words, it has effects that can even benefit the trader and untie the knot of the trader’s problems. Here are some benefits:
Avoid direct accountability to creditors
Generally, companies should be liable to every creditor and all creditors are obliged to go to court to pursue their claims.
Exemption from late payment compensation
One of the main benefits of filing for insolvency is the company’s exemption from payment of damages.
Postponing the payment of government debts
Companies may receive large loans from banks in the course of their business to raise capital. In this case, if the company is declared by the court until the final verdict of the court is announced, which usually takes a long time, the interest on the loans will no longer be calculated and their debt will not be added day by day.
Peace with bankrupt businessmen
The creditors usually enter into peace with the out of money companies and sometimes give up their claim with much lower amounts.
Tax exemption
Companies can keep their debts fixed and be exempt from paying taxes and damages. Also, their debts to the government will not increase until the final verdict of the case is announced. Therefore, if the company adopts a proper strategy after running out of money, it can return to normal and even appear stronger by learning from the failures.
Disadvantages of filing a bankruptcy
Bankruptcy for a trader or company will have consequences, some of which are:
Non-interference and occupation of the property by the merchant
A trader who has declared to be broke will not be able to legally encroach on his property and will be legally disqualified.
Discrediting in economic affairs
An broke businessman not only loses his legal credibility, but also loses his credibility among traders, merchants, and the market.
Prohibition of involvement in lawsuits
Due to the damage that the trader has caused to legal and natural persons, he is prohibited from filing legal claims, and a new representative is introduced to settle.
Prohibition of prosecuting creditors individually
Once the trader has filed insolvency, he can no longer pursue the creditors individually and receive his claims but it must be done by a legal representative under certain conditions.
The invalidity of previous transactions
All his transactions have no legal status and are declared invalid, meaning that he can no longer claim these transactions and the parties to the transaction can refer to legal authorities in case of financial loss or loss.
Deprivation of some political and social rights
By law, depending on the extent of his or her obligations, a bankrupt businessman is deprived of some of his or her political and social rights. And the extent of the businessman’s deprivation depends on the extent of his obligations and, more importantly, his position in society.
What happens to stock when a company goes bankrupt?
In this case, its liquidator will be obliged to identify the assets, property, and liabilities. So that it can pay the debts of the company from its property and assets.
When the liquidation manager has identified all types of debts and liabilities and if the company, has debts and the remaining assets are not sufficient to settle the debts, the liquidation manager will ask shareholders to participate in the nominal amount of their shares in providing liquidation of the remaining debt.
Which of the following can not be discharged by filing a bankruptcy?
Most people who run out of money have the goal of clearing or forgiving their debts. Although most debts can be written off, there are certain categories of debts that do not discharge including the following:
- Student loan
- Taxes
- Internal support
- Fines and compensation
- Personal injury
- Not mentioning debts
- Determining the ability to forgive
Filing a bankruptcy during Covid
The outbreak of the coronavirus has plunged the global economy into an unprecedented recession. Covid 19 disease has not only placed unprecedented restrictions on the range of public activities, but has also reduced broad economic activity, especially in important service sectors including small and large businesses, restaurants, hotels, and the tourism and energy and global manufacturing industries. Covid 19 has bankrupted hundreds of thousands of companies in the United States, Europe, and Asia over the past year.
The effects of the Covid 19 on the world economy have been so severe that even with the discovery of the vaccine, some experts have said that the world economy will never return to pre-corona times. The recovery of the world economy from the Covid 19 crisis will be very slow and the growth rate of the economy will never return to the level before the Corona crisis.
