You are individually liable for all of your debts, both personal and business-related, whether you operate as a sole proprietor or are self-employed. Consumer debt, mortgage payments, supplier obligations, HMRC fees, and hire purchase payments are some examples of single proprietor debts. Since a sole proprietor’s personal and business funds are treated equally under the law, regardless of how the debts came to be, you would be held personally responsible for them if they went unpaid, and creditors might pursue you for payment.
What can happen to sole traders in debt?
Contrary to a limited corporation, a lone trader’s business is its own distinct legal entity. Sole trader debts might have an impact on your personal finances without the restricted responsibility of a limited business.
- You must use your own resources to settle any debts as there is no separation.
- If you don’t make payments, your creditors may file a lawsuit against you. Your personal and corporate funds might be in jeopardy if this occurs.
- For the amount you owe, creditors may bring County Court Judgements (CCJs).
- If you disregard these judgments, bailiffs may visit your home or place of business and your credit report may be impacted.
How can we assist with sole proprietor debt?
Act as soon as you can if you are concerned that your sole proprietor debts might harm you or your company or could force you into personal bankruptcy. We can assist you in determining what would be in your best interests and provide free, unbiased advice that is completely private.
You can decide to carry on with your business, paying back by refinancing or establishing a formal payment schedule. Alternatively, you can decide that shutting the company is the wisest course of action since you don’t think it has a future. Even if this is the case, you could still choose to use a repayment plan to pay off part of your single proprietor obligations.
- Personalized Voluntary Arrangement (IVA)
A formal repayment agreement between you and your creditors is called an Individual Voluntary Arrangement (IVA). They combine all of your unsecured sole proprietor obligations into a single payment each month that is payable over a five-year period.
An IVA is legally binding if it is approved, giving you extra protection against creditors’ demands and legal action for the length of the agreement. Any outstanding debt is cancelled off once the arrangement is over.
An IVA must be set up by a certified insolvency practitioner, because it is a formal arrangement.
- Temporary Payment Agreement (TTP)
For sustainable businesses with brief cash flow issues, a Time to Pay Arrangement (TTP) is a monthly repayment plan that enables them to pay their tax obligations to HMRC. TTPs, in contrast to IVAs, are unofficial agreements that typically last between six and twelve months.
All business types can utilise a TTP arrangement to pay their tax payments, but you must create a proposal outlining how a TTP will benefit your company.
- Refinancing
Owning commercial assets like equipment or automobiles may make it easy to refinance them and put funds into the company, resolving any short-term financial problems. Similar to this, it would be possible to raise your mortgage payments if your own property has worth. In any case, you must be confident that your firm is viable since just injecting cash into it when it is losing money won’t help the problem in the long run.
Refinancing is probably not a possibility if you have already obtained CCJs or had bailiffs visit you.
- Alternative methods of debt alleviation
You might be able to work out a non-binding informal debt management plan with your creditors if you have a limited number of creditors or temporary cash flow problems.
As an alternative, you can file for bankruptcy if you don’t have any high-value assets and your obligations don’t need other debt-relief choices. Your credit score will suffer as a result, though.
To sum up
As a sole proprietor, you are solely responsible for any business debts because there is no limited liability protection for sole proprietors. Due to the absence of separation, your personal assets, including homes and vehicles, may be utilised to settle those obligations. Depending on the amount outstanding, recovery alternatives include refinancing, a Time to Pay Arrangement (TTP), and Individual Voluntary Arrangements (IVA). Debts from a sole proprietorship can result in personal bankruptcy, when your personal assets may be taken in order to pay off the obligation. Speak with us for free, unbiased help if you are battling with sole proprietor debts before they have a severe effect on your personal finances.
