Being unable to pay creditors is one of the scariest, most stressful positions for a small business owner to be in. It is important to remember that you are not alone, and support is available to help you should you decide to file for or be made bankrupt.
What is sole trader bankruptcy?
The term ‘bankrupt’ is applied when a sole trader business does not have enough cash to pay its debts or has more liabilities than assets. In the case of a company in the same position, the term ‘insolvent’ is applied.
You can choose to file for bankruptcy protection voluntarily or a creditor can force bankruptcy on you if they have been unsuccessful in obtaining payment via the issuing of a Statutory Demand and/or a County Court Judgment.
The early stages of bankruptcy are normally handled by an Official Receiver who is employed by the Insolvency Service and is attached to the Court. They will act as your trustee unless an Insolvency Law Solicitor is appointed to take over that role. The trustee is responsible for selling your assets during the 12 month bankruptcy period in order to pay back your creditors what you owe. Once the bankruptcy period ends any remaining debts will be written off.
What is the downside of filing for sole trader bankruptcy?
The main disadvantage of filing for or being made bankrupt as a sole trader is that, unlike a limited liability company, you are personally liable for your business’s debts. Personal assets such as your home, car, and any surplus family income can be used by the Official Receiver to pay back your creditors.
Another disadvantage of filing for bankruptcy protection is that the bankruptcy will remain on your credit rating for six years and during that time you will be unable to act as the director of a company.
Can I still operate my small business if I file for bankruptcy?
The good news is you can continue to operate your small business as a sole trader after you have filed for bankruptcy protection. There are, however, certain consequences of bankruptcy which may affect your day to day operations:
- You must trade under your own name as opposed to a made-up business name
- If you lease a premises your landlord will be informed of your bankruptcy and may cancel your existing lease and ask you to sign a new one. In practice, most landlords are happy to do this
- If you have employees their contracts will be terminated on the date you go bankrupt. You can, however, re-employ them but be sure to speak to an Employment Law Solicitor before your bankruptcy date, otherwise, your employees may be left out of pocket
- It is likely the Official Receiver will let you keep one work vehicle, especially if it is second hand and worth less than £2,000-£3,000. If the vehicle is on finance, however, it is up to the lending company whether or not you will be allowed to retain it. If the value of the vehicle is worth less than the amount owed on it, most lenders will allow the existing arrangement to continue as long as you meet the payment schedule
- During the bankruptcy period you cannot borrow more than £500 without advising the lender you are bankrupt
Should I consider an IVA?
An Individual Voluntary Arrangement (IVA) is a bankruptcy alternative. Under an IVA you propose a payment plan to your creditors which, to have any hope of securing an agreement, must result in your creditors receiving more than what they would get if you were made bankrupt. If your creditors approve the IVA, a Supervisor will be appointed to administer the process and ensure all the terms and conditions of the IVA are met.
IVAs come with fewer restrictions and less stigma than bankruptcy and are well worth considering if your sole trader business is in financial trouble.
Wrapping up
Our Bankruptcy Solicitors are available to advise you on all your options. If you are facing financial difficulties, below are three steps to take immediately:
- Make an appointment with one of our experienced Solicitors who can provide expert advice on the best steps to take
- Have your home, car, and any other assets valued to get an idea of what the Official Receiver is likely to take control of and sell to pay your creditors
- Research IVAs and discuss the advantages and disadvantages of this option with one of our team
Some of the most successful people in the world have survived bankruptcy. Our Solicitors will be by your side ensuring your interests are protected.
