Bankruptcy rider

The term "bankruptcy rider" refers to someone who deliberately speculates on letting a company go bankrupt - typically repeatedly.

In other words, if a company goes bankrupt once with one owner and the bankruptcy is not the result of speculation, it is usually not a bankruptcy rider.

A bankrupt's modus operandi is typically to acquire a number of assets on credit, resell them to another company and then close the company. This leaves behind a number of private and public creditors who have extended credit, while the assets are passed on to a new company or sold to customers - without the creditors getting their money.

Bankruptcy riders abuse the limited liability of limited liability companies, where the owner is not personally liable for the assets purchased or debts incurred.

There are no official figures for how much bankrupts cost Danish creditors each year, but it is estimated to be in the three-digit millions. When a bankruptcy filer closes a company, they typically leave the tax authorities and other public authorities with unpaid claims.

Bankruptcy quarantine

To counteract bankruptcy riders, a person can be placed in so-called bankruptcy quarantine.

Bankruptcy quarantine is given to people who have behaved in a grossly irresponsible and "grossly reckless manner".

The disqualification prevents the person from participating in the management of a business for typically three years.

If the person violates their bankruptcy quarantine, they may be sentenced to be personally liable for the company's obligations if the company goes bankrupt.

It will typically be a trustee in bankruptcy who initiates a bankruptcy quarantine case against one or more persons.

Avoid bankruptcy riders

There are several ways to protect yourself from bankruptcy riders or at least limit the risk.

For example, many banks and lenders choose to require a business owner to be personally liable for all debt and credit issued by the bank - even if the business is run with limited liability as an ApS or A/S.

In this way, the bank protects itself against the company's management taking out large loans and credits and then closing the company, leaving the bank with a loss.

In addition, it's a good idea to perform credit checks (KYC) on your customers. By knowing your customers' history and financial circumstances, you can get an indication of who they are - for example, have they founded many companies that have all gone bankrupt?

Limit your loss with a good credit policy

Another way to protect yourself from bankruptcy riders is to have a strong credit policy.

Questions like: "Who should we extend credit to?", "How much credit do we extend?", and "How long can a customer have credit?" should be part of your credit policy and guide your credit granting.

With a good credit policy, you can avoid bad payers and bankruptcy riders.