What does inability to pay mean?

Inability to pay means that someone is no longer able to settle their bills on an ongoing basis. In other words, there’s not enough money available to cover outstanding amounts on time. This can apply to both private individuals and businesses.

It’s not about being a few days late with a payment. The key point is that there’s no realistic prospect of paying outstanding debts in the foreseeable future. That’s exactly how the law defines it.

When is a person or a business considered unable to pay?

A person is considered unable to pay when ongoing payments can no longer be made – not just temporarily, but over an extended period. If someone is unable to pay their due invoices for several weeks, this is often seen as an indication of inability to pay.

Courts provide a clear guideline: if at least 10% of due liabilities cannot be settled within three weeks, this can be a strong indication of inability to pay as defined in Section 17 (2) sentence 1 of the German Insolvency Code (InsO). This assessment is based on established case law of the German Federal Court of Justice.

Inability to pay in private individuals

In private individuals, this often becomes apparent through blocked bank accounts, dunning letters, or failed direct debits. For example, someone who can no longer consistently pay rent, electricity bills, or ongoing contracts is usually considered unable to pay. This doesn’t require a mountain of debt – the key point is whether due payments can still be made.

Inability to pay in businesses

For companies, the situation is similar but slightly more complex. If suppliers remain unpaid, wages are not disbursed, or taxes and social security contributions are not submitted, these are strong indicators of inability to pay. The decisive factor is whether the business is permanently unable to meet its ongoing payment obligations.

How is inability to pay determined?

Whether someone is no longer able to pay can’t simply be determined on a gut feeling. There are specific criteria and indicators that point to an inability to pay.

Objective criteria

These include, for example:

Unpaid invoices despite multiple reminders
Insufficient income or lack of financial reserves
Arrears in rent, wages, or social security contributions
Payment issues persisting for longer than three weeks

The important point: it’s not about a single late payment, but a fundamental and ongoing disruption to payment ability.

Evidence in practice

In practice, documents such as bank statements, dunning letters, garnishment notices, or entries in the debtor register play a role. A sworn affidavit or ongoing insolvency proceedings can also serve as clear indicators. Debt collection agencies or courts rely on this kind of information to assess the debtor’s financial situation.

Who determines the inability to pay?

First of all: there’s no requirement for an official body to formally declare that someone is unable to pay. Creditors, debt collection agencies, or the affected individuals themselves can usually assess the situation based on the facts.

A legally binding determination only occurs when insolvency proceedings are initiated. At that point, the competent court assesses whether an insolvency ground – such as inability to pay – exists. Debtors themselves may also file for insolvency when they recognize that they can no longer continue financially.

What role does inability to pay play in debt collection?

Inability to pay is a crucial factor in the debt collection process. It influences which measures are appropriate and whether a claim can realistically be enforced in the short term.

Identifying inability to pay by debt collection agencies

Debt collection agencies look out for typical warning signs. These include a lack of response to dunning letters, failed direct debits, or negative credit reports. Such indicators help evaluate the case.

Impact on receivables management

If a debtor is unable to pay, there are still ways to attempt collection – but through different means. These might include installment agreements, the judicial dunning process, or long-term monitoring. The goal is to recover the money at a later point, once the debtor’s financial situation improves.

How does inability to pay differ from unwillingness to pay?

Inability to pay and unwillingness to pay are two different things, even if the outcome appears the same at first glance: no payment is made.

In inability to pay, the money is simply not there. The debtor would like to pay but cannot.
In unwillingness to pay, the money is available, but the debtor chooses not to pay. This might be due to a dispute over the invoice or a belief that the claim is unjustified.

This distinction is important for creditors. In cases of unwillingness to pay, the chances of quick collection are generally much better – you just need to persuade the debtor to comply. In cases of inability to pay, it’s often far more difficult.