Business owners facing serious financial difficulties often come up against a delicate question: does it make sense to file for self-bankruptcy? Our Corporate Law team frequently hears this question from business clients going through a crisis. In many cases, this decision, however difficult, can be the most viable strategy for winding down business activities in an organised way while protecting both the assets and the reputation of those involved.
A self-bankruptcy filing, set out in the Bankruptcy Law (Law No. 11,101/2005), is a legal tool that can be used by insolvent companies — those unable to honour their commitments to creditors. Below, we explain the scenarios in which this solution may be recommended and the precautions required to adopt it.
What is self-bankruptcy?
Self-bankruptcy is the process by which business owners, on recognising that their company is financially unviable, go to court to request bankruptcy themselves. The goal of this filing is to organise debt repayment transparently and fairly, avoiding individual lawsuits that could further harm the company's financial situation.
When is self-bankruptcy recommended?
Opting for self-bankruptcy makes sense when the company sees no possibility of financial recovery and insolvency has already become a reality. The process may be advisable to avoid a series of negative consequences, such as the accumulation of court enforcement proceedings, account freezes and asset seizures.
In addition, by taking the initiative before creditors do, the business owner demonstrates good faith before the courts and creditors, which can facilitate the bankruptcy proceedings and reduce the risk of the partners being held personally liable.
What are the benefits of self-bankruptcy?
Some of the main advantages of choosing self-bankruptcy include:
- Transparency and control of the process: the business owner avoids having creditors or third parties file separate, scattered lawsuits, opting instead for a centralised process that facilitates the fair division of assets.
- Protection of personal assets: as long as there are no irregularities or fraud, the partners may be able to protect their personal assets, preventing them from being used to settle business debts.
- Faster settlement of obligations: by opting for self-bankruptcy, the business owner speeds up the winding-down of the company and seeks a more efficient way to settle its debts.
How does the process work?
The self-bankruptcy petition is filed with the courts and must include a detailed account of the company's financial situation, including a list of assets, liabilities and creditors. Our legal team is prepared to handle this stage strategically, ensuring that all legal requirements are met and that the process runs as effectively as possible.
Liability of the partners
It is important to note that, during bankruptcy proceedings, the causes of the insolvency and the company's management may be investigated. It is therefore crucial that the partners act transparently and cooperate with the process. If it is shown that the company was run properly, without fraud or misconduct, the chances of the partners being held personally liable are reduced.
Conclusion
Filing for self-bankruptcy is not a simple decision, but it can be the wisest path in situations of insolvency. This choice gives the business owner greater control over the winding-down process and, in many cases, protects personal assets and minimises losses. Our team is available to provide a detailed review of each case and guide companies facing this difficult scenario toward the best strategy.
If you are going through this situation or have questions on the topic, contact us for a specialised consultation.
