What is a consumer insolvency?

Consumer insolvency is a legally regulated procedure for private individuals who are no longer able to pay their debts. It is also known as “personal insolvency.” The goal is to create a structured way out of over-indebtedness through the court.

The procedure is governed by the German Insolvency Code, primarily from Section 304 onward. It offers the possibility of becoming debt-free after a fixed period and under certain conditions. During the course of consumer insolvency, debtors must hand over their attachable income to a trustee. The trustee distributes the money proportionally to the creditors.

This procedure typically applies to everyday debts. These include unpaid mobile phone contracts, installment purchases, and credit card debts. Claims already handled by a debt collection agency also fall under this. Once the procedure is opened, creditors are no longer allowed to take individual actions such as reminders or enforcement proceedings.

What distinguishes consumer insolvency from regular insolvency?

The most important difference lies in the target group: consumer insolvency is aimed at people without any self-employed economic activity. Regular insolvency, on the other hand, applies to entrepreneurial individuals such as sole traders, self-employed people with many creditors, or managing directors of companies.

The process also differs. In consumer insolvency, an out-of-court attempt to reach an agreement is mandatory. This means that the person involved must first try to find a solution with the creditors. In regular insolvency, this step is not required.

Another difference lies in the procedure itself. In regular insolvency, a preliminary insolvency administrator is often appointed. This is not necessary in consumer insolvency.

Instead, once the procedure is opened, a trustee takes over management. The number of creditors and the type of debts involved influence which procedure applies.

Who can file for consumer insolvency?

Any natural person who is no longer self-employed can apply for consumer insolvency. This includes:

Employees
Retirees
Students and trainees
People without regular income, such as the unemployed or recipients of social benefits

Former self-employed individuals may also qualify. However, this only applies if they have no debts resulting from employment relationships—such as unpaid wages or social security contributions. In addition, they must have fewer than 20 creditors.

In these cases, it must be examined whether the requirements for consumer insolvency are still met or whether regular insolvency is already necessary.

What requirements must be met?

Before an application can be submitted, an out-of-court attempt to reach an agreement with the creditors must be made. This step is legally required. The aim is to resolve the debt without court involvement, for example through installment payments or a settlement.

This attempt must be supported by a “suitable agency.” This could be a recognized debt counseling service, a lawyer, or a notary. It is important that the attempt is carried out seriously and properly documented. If the agreement fails, the advising agency issues a certificate confirming this.

This certificate is mandatory in order to file the insolvency application with the court. Without it, the procedure will not be opened. Lawmakers want to ensure that consumer insolvency is used only when all other options have been tried.

How does a consumer insolvency work?

The procedure consists of several clearly defined steps. The goal is to deal with the debt in an orderly way so that the person affected can become debt-free.

Out-of-court attempt to reach an agreement: Before the application can be submitted, an attempt must be made to reach an agreement with the creditors. The attempt must be professionally supported and documented.
Insolvency application at the local court: After the failed attempt, the application is submitted to the competent insolvency court. This includes various forms and supporting documents, for example concerning debts and income.
Opening of the insolvency procedure: The court examines the application and decides whether the requirements for opening the procedure are met. If so, the procedure is officially opened.
Appointment of a trustee: The court appoints a person to oversee the procedure, known as the trustee. The trustee manages the attachable income and reviews the claims filed by the creditors.
Good conduct phase: This phase begins after the procedure is opened. Over a period of usually three years, the person must fulfill certain obligations. This includes taking up work and handing over attachable income.
Discharge of residual debt: At the end, the court can cancel all remaining debts—if all obligations have been fulfilled and there are no grounds for denial.

What documents are required?

Several documents are needed to apply for insolvency with the court. These include:

The certificate confirming the failed out-of-court settlement
A complete list of all creditors with amounts and reasons for the claims
Proof of current income, such as payslips, pension statements, or social benefit notifications
A list of existing assets, such as bank balances, a car, or other valuables
Information on personal and financial circumstances
The application for discharge of residual debt

All information must be complete and correct. Incorrect or incomplete details can result in the application being rejected or the procedure being terminated later.

What role does the trustee play?

The trustee is a person appointed by the court to oversee the procedure. They receive the debtor’s attachable income and distribute it to the creditors according to a fixed formula.

Their duties also include:

Reviewing the claims filed by creditors
Monitoring whether the debtor fulfills their obligations
Reporting to the court

The trustee does not act in an advisory role. They do not represent either the debtor or the creditors but act neutrally within the scope of the procedure.

Where is the consumer insolvency procedure carried out?

The procedure is carried out by the local court at the debtor’s place of residence. This is where the insolvency division is located and where all documents must be submitted.

The court decides whether to open the procedure, appoints the trustee, and sets important deadlines. For example, creditors are given a deadline to register their claims. All updates regarding the procedure are also handled through this court.

There is no central location. The relevant factor is the debtor’s place of residence at the time of the application.

Who is affected by consumer insolvency in debt collection?

Consumer insolvency directly impacts ongoing debt collection cases. Once the procedure is opened, all further measures to collect the debt become inadmissible. This includes reminder letters, judicial dunning notices, enforcement proceedings, and wage garnishments.

Claims handed over to a debt collection agency are not automatically canceled by the insolvency. They must be properly registered within the procedure.

Creditors or debt collection service providers can file their claims with the insolvency court to continue asserting their rights through the procedure.

What do creditors need to consider in debt collection cases?

For creditors, it is important to act quickly once an insolvency procedure is opened. From that point on, they may no longer take independent action. Debt collection service providers must also cease their activities.

Instead, creditors must register their claims with the insolvency court within the deadline set by the court. If no registration takes place, the claim will not be considered in the procedure. Even legitimate claims can be lost.

In many cases, the debt collection agency handles the registration. Nevertheless, creditors should ensure that this step is actually carried out. The insolvency administrator or trustee will then review the claim and decide whether it is accepted.

How can claims be registered in the insolvency procedure?

Claims must be submitted in writing to the competent insolvency court. There is usually a standard form, which must include the following information:

Name and address of the creditor
Amount of the principal claim
Additional charges such as interest or collection fees
Legal basis of the claim (e.g., purchase contract, service, invoice)
Supporting documents (copies of invoices, contracts, or reminders)

The court sets a deadline for filing claims. Those who miss this deadline may still submit their claims later, but they risk being treated less favorably or not receiving any payment at all. Early registration is therefore essential.