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What are the options available when dealing with sole trader debts?

If you are a sole trader, you are personally responsible for all your debts – whether they are personal or business-related. That includes such as consumer debt and your mortgage as well as business debts due to suppliers, HMRC or the asset finance for a van or equipment. This means that when you fall into debt as a sole trader, you will be personally liable for the debt which in turn means that assets, such as your home, may be at risk.

In contrast, if you operate your business through a limited company, the company is legally viewed as a separate entity from the people who own it. As there is no separation between your business and personal debt when you are a sole trader, any adverse credit history will be filed against your name personally.

Therefore any business debt arrears can have a significant negative impact on your personal finances in the future. For this reason it is important to deal with any business debts before they get out of hand.

There are a number of ways you can deal with sole trader debts and which option is the most suitable for you will depend entirely on your situation. Here are some options available and how they could affect you and your business:

Individual Voluntary Arrangement (IVA)

An IVA is a formal arrangement between you and your creditors where you can consolidate all your debts into one single monthly payment to all your creditors. As an IVA is a legally binding agreement, it means you have more protection from your creditors who generally will not be able to apply interest charges to your debt or take legal action against you for the duration of the IVA.

At the end of the term, providing you have kept to the conditions, any debts which were included in the IVA will be written off.

When you are struggling with debts, contact us – we can help you put together an IVA proposal to put to your creditors. If 75% of creditors by value agree to the proposal then you will enter into the IVA, usually for the five-year term paying back your creditors, the amount agreed to in the proposal.

Benefits of an IVA

  • It will protect you and against any action from unsecured creditors included in the arrangement
  • It allows you to pay back an amount you can afford each month
  • It provides you with the safety to carry on trading
  • It is an alternative to bankruptcy
  • It covers unsecured personal and business debts (but not student loans, fines or child support arrears)

Drawbacks of an IVA

  • You need 75% of your creditors who vote on the proposal by value to agree to your proposal to enter the IVA
  • An IVA lasts for five years so it is not a short-term solution to your debt problems
  • An IVA stays on your credit rating for six years which can affect your ability to obtain credit
  • Not all debts are included in an IVA including secured debts such as mortgages and hire purchase
  • There is also no guarantee that your IVA will be accepted.

To find out more about IVAs, visit our webpage here.

sole trader debts

Personal bankruptcy

Bankruptcy is sometimes seen as a more severe option as any significant assets are likely to be put at risk. When you enter into bankruptcy, assets such as your home may look to be sold if there is any equity. If the equity can be raised another way then the Trustee would explore this. Although you can carry on trading as a sole trader, you will not be able to act as a director of a limited company for the duration of your bankruptcy.

Bankruptcy gives you the chance of a fresh start for your finances but it will significantly affect your credit score and it will stay on your credit file for six years. The Official Receiver (OR), or an insolvency practitioner the OR appoints to act on their behalf, will act as trustee in bankruptcy, dealing with creditors and the sale of significant assets.

You can either declare yourself bankrupt or a creditor who is owed money can petition to have you made bankrupt through the courts. In both situations, you would need to owe £5000 before bankruptcy can be an option but with the new online process it is much simpler to apply for bankruptcy for yourself if you think that is the right solution for you.

Benefits of personal bankruptcy

  • It can provide you with the opportunity for a fresh start
  • You will only be in the bankruptcy state for a year, in most situations
  • The new online process makes it simpler to apply for bankruptcy and in most cases, you won’t have to go to court.

Drawbacks of personal bankruptcy

  • Your assets are at risk, particularly any high value assets you have like your house
  • It can sour relationships and any goodwill with creditors who may not be happy as they are likely to receive little or none of the money they are owed.
  • It stays on your credit file for six years, affecting your ability to borrow money in future

For further information on personal bankruptcy, check out this information webpage from Personal Debt Solutions.

An informal deal

An informal deal, such as a debt management plan, can be an alternative to bankruptcy or an IVA for businesses who have short-term cash flow issues or a relatively small number of creditors. These are not legally binding and can be with some or all of your creditors.

You can add the debts of some or all of your creditors into this type of agreement but it is worth noting that interest and charges will not be stopped unless you make a separate arrangement with your creditors.

You should never overpromise the amount you can pay and you will need to provide realistic timescales, explanations of your situation and an open communication channel with your creditors.

Benefits of an informal deal

  • It costs less in fees than an IVA or a bankruptcy
  • It can be stopped at any time so if your situation improves you can come out of the deal
  • Pressure from your creditors normally disappears when you are in an informal deal providing you stick to the terms agreed.
  • If you use a debt management provider, then they will deal with your creditors on your behalf

Drawbacks of an informal deal

  • It is not seen as a solution to long-term cash flow issues for your business, and offers no protection from creditor action
  • If a default notice has been issued against you, it will stay on your credit file for six years
  • Interest is not likely to be frozen so that debt will continue to grow despite your agreement with your creditors
  • It can last indefinitely although in practice creditors sometimes lose patience and pull out of the agreement
  • It can have a detrimental impact on your ability to obtain credit in future

Time to pay arrangement (TTP)

A TTP arrangement is only suitable for HMRC debts but it can be a good way of managing the debt which you owe in taxes. They have been designed to help viable businesses which are facing temporary cash flow problems which could be making it difficult to meet tax liabilities.

TTP’s usually last for between 6 and 12 months and they will allow your business to negotiate a longer term to pay its tax bill. All types of businesses can use a TTP arrangement to deal with their tax bills but you will need to put together a proposal which shows why a TTP will be beneficial for your business.

At Wilson Field, we are experienced at negotiating with HMRC on behalf of businesses that are dealing with VAT, PAYE or Corporation Tax arrears. When putting together your proposal, we will check your sales and cash flow forecasts to make sure you are proposing an offer to pay what you can afford per month.

Benefits of a TTP

  • It gives your business breathing space when it is dealing with temporary cash flow problems.
  • Payments will be set at a rate which is easier for your business to manage over a longer period of time.
  • You may be able to avoid insolvency procedures if a TTP is successful
  • Legal action, such as statutory demands and CCJs, could be avoided.
  • It gives you time to make your cash flow management more efficient
  • TTP’s can be agreed before any penalties are added to your company.

Drawbacks of a TTP

  • A TTP can be cancelled at any point if you do not fulfil the requirements and HMRC may then take action against you
  • If you operate in a high-risk industry, such as construction, then this may affect your ability to obtain a TTP in the first place
  • Interest is likely to be added to the money you owe and any late penalties will still stand
  • All repayments should be made on time and in full.

For more information on TTP arrangements, go to our webpage


If you own business assets such as equipment or vehicles it may be possible to arrange to refinance them to inject cash into the business. Similarly, if your own home has value in it, it may be feasible to arrange to increase your mortgage. However, in either situation you need to be satisfied that your business is viable as simply pumping cash into it when it is loss-making will not improve the situation in the long term and you may be worse off.

Benefits of re-finance

  • Refinancing an asset could help your business to a much-needed injection of cash
  • The cost can be spread over a period to further help cash flow
  • You retain the use of the asset involved

Drawbacks of re-finance

  • Depending on the asset it may take some time to arrange
  • If the underlying issues which caused the financial difficulties have not been addressed then ultimately you will be worse off and the problem will re-emerge
  • The asset will be at risk if you are unable to maintain repayments

If you are a sole trader who is struggling with business debt, get in touch with us on 0800 901 2475. We can provide you with the help and advice you need as well as finding you the solution to help you deal with your business debts.

Authored by Phil Meekin

Phil Meekin

Head of Marketing

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