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Help For Sole Trader Debts

As a self-employed sole trader, you are the business. It is not a separate legal entity, meaning your personal finances are just as much a part of the business and you are personally responsible for any losses your business makes.

Self-employed sole trader

Being a sole trader can be a lonely existence. On a day-to-day basis, there can sometimes be no one to share your troubles or successes with and put simply, if you don’t work you don’t get paid, which means no holiday pay. You are also responsible for keeping records of all your business expenses, sales and completing a self-assessment tax return every year.

One of the most significant risks involved in being a sole trader is that you are personally liable for business debts. This contrasts with businesses which operate as limited companies where the directors have the benefit of limited liability. Without the signing of personal guarantees, limited liability assures that the owners’ loss is limited to the amount of their investment.

Dealing with debts

As a sole trader, you do not have the security of limited liability meaning you are accountable for all of your business debts. This means if things go really wrong for the business, and you are issued with a bankruptcy petition from one of your creditors, you could be made bankrupt and your personal assets could be sold to make up the shortfall. This would also remain on your credit history for six years making it difficult to secure future finances.

If the business has a genuine future and is going through a difficult spell, there are various re-financing options available. However, it will all depend on what circumstances the business finds itself in.

What happens if I go bankrupt

If you go bankrupt as a sole trader, your creditors have every right to receive the benefit of your personal assets to repay their debts. Being self-employed, you do not have the security of limited liability and are responsible for all of your business debts.

Part of bankruptcy means your assets can be used to pay debts, however, if there is still a shortfall you will enter into a repayment plan. This can last for up to three years and is called an Income Payments Agreement, it takes into account your income and expenditure then works out what can realistically be paid to creditors.

Creditors can apply for a bankruptcy petition against you if there is £5,000 or more owed.

Avoiding Bankruptcy

Often, sole traders want to avoid going down the route of bankruptcy because it can result in losing personal assets and will remain on your credit history for six years. There are various options to consider, but it depends on what financial situation you find yourself in.

Time To Pay Arrangement

If you find yourself behind on your tax arrears and HMRC are your only creditor, you could arrange to have a Time To Pay Arrangement (TTP). This is an informal arrangement which allows struggling businesses to repay their outstanding PAYE/ NI or VAT liabilities in instalments, rather than all at once. Usually, time to pay arrangements last either 6 or 12 months. However, they can last longer if there is a realistic prospect that the debt will be repaid eventually.

Re-financing and paying the debts

If the business model you have is sound and you are hitting a temporary bad spell, refinancing could be an option when it comes to rescuing the business. This will depend on how far creditors have pushed the matter. If you have already received CCJs or bailiffs have visited, refinancing is unlikely to be an option. However, if you tackle the problem early enough, you could trade your way out of trouble.

Individual Voluntary Arrangement (IVA)

An IVA is a formal arrangement made with your unsecured creditors. The proposal may be flexible depending on your circumstances. An IVA will often involve making regular, affordable payments with all of your creditors, over an agreed period, generally five years. In some situations, it may include a lump sum payment or a combination of regular payments and then a lump sum. This could be a result of the sale of an asset, or receipt of an insurance claim. Commonly, as part of the arrangement, the creditors may have to write off part of what is owing to them at the end of the procedure.

Secured creditors (e.g. your mortgage) are not included within the IVA. However, payments to them will be part of any calculations regarding what you can afford each month. Creditors may be suppliers who have given you credit. These could include your landlord for rent, HMRC for income tax or VAT, or other business debts. It can also include personal debts such as credit cards, store cards or other consumer debt.

Current PositionProposed Position
Halifax Bank (mortgage)£1,670.00Halifax Bank (mortgage)£1,670.00
Business OutgoingsBusiness Outgoings
Including HP (van)£2,630.00Including HP (van)£2,630.00
HMRC arrears payments£960.00*
Arrears payments to suppliers£950.00*
Credit cards£280.00*
Bank loan (unsecured)£540.00*
Store Cards£90.00*
IVA Payment£850.00*
Total Expenditure£7,1120.00Total Expenditure£5,150.00
Total Disposable Income-£1,970.00Total Disposable Income£00.00
* Consolidated into one IVA payment.


Bailiffs are usually one of the last resorts for creditors as they look to see their debts returned. Should you fail to make the necessary payments, bailiffs can repossess belongings and sell them at auction. Bailiffs can either be court officials or work for a private bailiff firm and are often referred to as ‘enforcement agents’. However, they are not employees of the creditor but act as their agent.

Although bailiffs have some powers, they do have strict regulations they must stick to and only under certain circumstances would they be able to take any belongings. Bailiffs working on behalf of a private firm would not be able to take any assets, only bailiffs working on behalf of the courts have the right to repossess items. As a sole trader, enforcement officers would have the power to not only take business assets, but they would also be able to take your personal assets to recoup any debt.

In summary

A sole trader unable to pay their creditor debts has the serious prospect of facing bankruptcy. In some circumstances, the only scenario is to go bankrupt, which can potentially result in the loss of personal assets. Bankruptcy is sometimes seen as the worst-case scenario for sole traders, as there are rescue options available. A TTP or an IVA are formal arrangements which can be made, allowing a sole trader to pay off creditors on a monthly basis, making affordable, manageable payments, based on income.

How we can help

If you are a sole trader facing the prospect of bankruptcy or you believe the business could be heading down that route, having a proactive approach and taking advice quickly is vital in helping you make the right decision. We can help you assess your current business and personal situation, then work on creating the best solution, based on your finances.

Authored by Ruth Jacks

Ruth Jacks

Licensed Insolvency Practitioner & VA Department Manager

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