HR-Glossar

Insolvenzgeld (insolvency pay)

What German insolvency pay covers, which event triggers it, why the application deadline is absolute and what pre-financing achieves.

1. What is Insolvenzgeld (insolvency pay)?

Insolvency pay is a benefit of the Federal Employment Agency replacing the remuneration lost in the last three months of the employment relationship before the insolvency event. The legal basis is Sections 165 ff. SGB III.

Two features make it distinctive. First, the period is counted backwards from the insolvency event – not from the application, not from when payment stopped. Someone who has received no pay for six months receives insolvency pay for three of them; the rest remains an insolvency claim.

Second, what is replaced is net pay, limited to the part of gross pay not exceeding the contribution ceiling of the unemployment insurance. Insolvency pay is free of tax under the Income Tax Act but is subject to the progression proviso – a tax back payment in the following year is the normal case.

For a group whose German entity is in difficulty, the third feature below matters most: pre-financing can bridge three months of payroll costs, and it depends on data the company may not control.

2. Origin and development

Before it was introduced, employees faced their employer's insolvency with an ordinary insolvency claim – that is, with a dividend that is typically small and arrives years later. That hit people who still had rent to pay and who had neither taken on the company's risk nor been able to influence it.

The answer was an insurance solution: the Federal Employment Agency pays first and takes over the claim in return. It is funded through the insolvency pay levy under Section 358 SGB III, borne by all employers – regardless of how likely their own insolvency is.

In practice this has developed into an instrument of restructuring going beyond the original protective purpose. Pre-financing allows insolvency pay to be paid to employees before proceedings are opened – frequently by a bank buying the future claim. For three months payroll costs effectively fall away, and precisely that breathing space often makes continuation and a sale of the business possible at all.

3. Core principles and how it works

Three months, counted back from the insolvency event

The insolvency pay period covers the last three months of the employment relationship before the insolvency event. Older arrears of pay are insolvency claims and are not replaced.

Three possible insolvency events

Under Section 165 SGB III the triggers are: the opening of insolvency proceedings, the rejection of the application for want of assets, and the complete cessation of business activity in Germany where proceedings are obviously not in prospect for want of assets. The third is the hardest case in practice, because no court establishes it.

A two-month absolute deadline

The application must be made within two months of the insolvency event. That is an absolute deadline, not a procedural one – it runs even where nobody has informed the employees. Relief is available only on narrow conditions.

The claim passes to the Federal Employment Agency

With the application the pay claim passes to the Federal Employment Agency under Section 169 SGB III. It files the claim in the insolvency schedule; employees no longer pursue it themselves.

The Agency pays the contributions

The social security contributions attributable to the insolvency pay are borne by the Agency. Employees' entitlements are therefore preserved – which is why insolvency pay leaves no gap in the insurance record.

Pre-financing only with consent

Pre-financing before proceedings are opened requires the consent of the employment agency under Section 170 SGB III. Without it the claim does not pass to the party financing it – and the money advanced is lost.

4. Who is Insolvenzgeld (insolvency pay) relevant for?

- Employees of insolvent employers – for them it is the only way to receive lost pay promptly and in full. - Insolvency administrators and custodians – they organise applications and certificates for the whole workforce. - Payroll teams – they produce the insolvency pay certificates; without reliable payroll data the whole process stalls. - Works councils – they are frequently the only body informing the workforce about the two-month deadline in time. - All employers – through the insolvency pay levy they help fund the process.

5. How it differs from related terms

- Insolvency pay and the insolvency pay levy – one is the benefit, the other its funding. The levy is borne by all employers and collected on a pay-as-you-go basis. - Insolvency pay and short-time work benefit – short-time work benefit compensates a temporary loss of work, insolvency pay a loss of pay through inability to pay. Both can occur one after the other in a crisis. - Insolvency pay and unemployment benefit – insolvency pay presupposes an existing employment relationship in the period; unemployment benefit follows only after it ends. - Insolvency claim and estate claim – pay for the time after opening is an estate claim and is paid by the administrator, not through insolvency pay. - Insolvency pay and severance – severance is not remuneration for work performed and is therefore not covered.

6. Variants and adaptations

The cases differ above all in how they run:

- The standard case after opening – the administrator organises certificates and applications in bulk; payment follows examination by the employment agency. - Pre-financed insolvency pay – a bank buys the future claims and pays immediately; the employment agency must consent. The most frequent route where the business continues. - Rejection for want of assets – there are no proceedings and no administrator; employees have to act themselves. This is where the two-month deadline is most often missed. - Complete cessation without an application – the third insolvency event. Whether it exists is established by the employment agency, with no court decision as a reference point. - Self-administration and protective shield – insolvency pay and pre-financing work as in ordinary proceedings; the custodian takes the administrator's role.

7. Advantages and challenges

Advantages

  • Employees receive net pay for three months in full, not as a dividend
  • The Federal Employment Agency bears the social security contributions — no gap in the insurance record
  • Pre-financing creates a breathing space that often makes continuation and restructuring possible
  • The transfer of the claim relieves employees of pursuing it
  • Funding through the levy spreads the risk across all employers

Challenges

  • The two-month deadline is absolute and runs even without any information
  • Only three months — older arrears remain an insolvency claim paid as a dividend
  • The limit at the contribution ceiling bites noticeably on higher pay
  • The progression proviso regularly leads to a tax back payment in the following year
  • Where the application is rejected for want of assets there is no administrator to organise the process
  • Without reliable payroll data the certificates cannot be produced

8. Best practices for implementation

Communicate the two-month deadline immediately and in writing

It is an absolute deadline. A single communication to the workforce – the date of the event, when the deadline ends, where the application is made – prevents the most consequential error in this process.

Secure access to payroll data before the crisis

Insolvency pay certificates are produced from payroll data. Where a provider blocks access over unpaid invoices, the process stalls for the entire workforce. Rights of access and hand-over belong in the contract while the company is still doing well.

Agree pre-financing with the employment agency early

Without consent under Section 170 SGB III the claim does not pass. That discussion belongs at the beginning of restructuring considerations, not at the end.

Explain the progression proviso

Insolvency pay is tax-free and still raises the tax rate on the rest of the income. People who have just survived three months without pay should not be surprised by the back payment.

9. Tips for employers and employees

For employers

  • **Certificates take priority** – without them the process stalls for every employee
  • **Secure access to payroll data contractually** – before the crisis, not during it
  • **Pre-financing needs the agency's consent** – Section 170 SGB III, not only the bank's
  • **You pay the levy anyway** – Section 358 SGB III, regardless of your own risk

For employees

  • **Two months from the insolvency event** – the deadline is absolute and runs without any notice
  • **Only the last three months** – older arrears are filed in the insolvency schedule
  • **Expect a tax back payment** – insolvency pay is tax-free but raises your tax rate
  • **Your pension entitlement is preserved** – the Federal Employment Agency pays the contributions

10. Conclusion

Insolvency pay replaces net pay for the last three months before the insolvency event – counted backwards, not from the point at which the money stopped arriving. Anyone unpaid for longer receives replacement for three months and otherwise remains an insolvency creditor.

The most consequential point is the two-month deadline: an absolute deadline that runs even where nobody has informed the employees. Particularly where an application is rejected for want of assets – with no administrator to organise the process – it is regularly missed.

For companies in crisis the genuinely interesting part is pre-financing: it makes three months of payroll costs bridgeable and is therefore frequently the precondition of continuing. But it requires the consent of the employment agency under Section 170 SGB III – and, very practically, working payroll data. Anyone who has not secured access to those contractually discovers that the process can hang on an unpaid invoice with a service provider.

For an international group that last sentence is the one to act on in advance. Where German payroll runs on a group platform or with an external provider, the right of access and hand-over decides whether the certificates can be produced at all – and it is negotiated while the company is solvent or not at all.

A note on sources: there is no official English version of SGB III (checked on 2026-09-28); the German texts are cited below and their wording governs.

Sources

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