Sole Trader Insolvency – What happens to me and my business?

If you are a sole trader and you can no longer pay your debts, you may be insolvent and wish to enter insolvency. This means that your debts are greater than the value of your assets.

If you are insolvent, you have two options: formal insolvency and informal insolvency. Formal insolvency is when you make an agreement with your creditors to repay your debts over a period of time. This could be through a debt relief order, an individual voluntary arrangement, or bankruptcy.

Informal insolvency is when you reach an agreement with your creditors to repay your debts without going through the formal insolvency process. This could be through a payment plan or debt management plan.

If you are struggling to pay your debts, it is important to get advice from a qualified insolvency practitioner to find out which option is best for you.

The difference between a limited company insolvency and a sole trader insolvency is that sole trader businesses are not regarded as separate legal entities. 

Should a sole trader wish to enter insolvency they personally are liable for the debt, so it becomes a personal bankrupcy should you be unable to repay creditors.

When a sole trader business becomes insolvent

Businesses become insolvent slowly as a decline can occur due to various factors, including late invoicing, slow collection of debts, and holding excessive amounts of stock.

Even if you are making a profit, it does not change the fact that there is insufficient cash to sustain day-to-day business operations, and that is often why businesses fail. 

A business decline can occur due to many factors, and sometimes alarmingly quickly one example maybe can’t afford to repay your sole trader bounce back loan. Seeking professional advice from an Insolvency Practitioner (IP) is vital as soon as you know there is a problem, because if the business enters insolvency, business and personal debts of the sole trader will be combined and they may have to declare bankruptcy.

Should a sole trader become insolvent there are only two formal routes:

Individual Voluntary Arrangement (IVA)  

An Individual Voluntary Arrangement, or IVA, is a formal agreement between a debtor and their creditors to repay debts over a fixed period of time and was originally designed for sole traders.

This arrangement is typically used by individuals who are unable to repay their debts in full, but who have a regular source of income and are able to make monthly payments.

An IVA can last for up to five years, and during this time the debtor will make monthly payments to an insolvency practitioner, who will then distribute the funds among the creditors. If the debtor fails to make the required payments, the IVA may be revoked and they may be declared bankrupt.

However, an IVA can offer a number of advantages over bankruptcy, including protection from creditors, the ability to keep your home, and a manageable repayment plan.

A few benefits to an IVA are:

• Can improve cashflow as personal debts can be included in the arrangement, apart from your mortgage.
• The repayment of an IVA can come from future profits of the business, or from the sale of an asset/refinancing.

Bankruptcy

If one of your trade creditors is owed £750 or more, they may have issued a County Court Judgment or a Statutory Demand to recover the debt, if you have not paid or set aside the claim they can petition for your bankruptcy through the courts. 

This is sometimes referred to as enforced bankruptcy. It’s a tough decision to make, but sometimes bankruptcy is the best solution for dealing with unmanageable debt.

If you’re considering bankruptcy in the UK, it’s important to understand the process and what it will mean for your financial future.

Bankruptcy is a legal process that allows you to discharge your debts and make a fresh start. Once you are bankrupt, your assets will be seized and sold off to pay your creditors. You will also be subject to certain restrictions, such as being unable to obtain credit or travel abroad.

While bankruptcy can offer relief from debt, it should not be viewed as an easy way out. It will have a major impact on your credit rating and will stay on your credit file for six years. You should only consider bankruptcy as a last resort after you have explored all other options for dealing with your debts.

Declaring bankruptcy

If you are thinking about declining bankruptcy, this is usually the last resort, but to some it will a relief, bankruptcy can relieve a period of extreme stress and pressure for sole traders, even though personal and business assets are lost.

• You can declare yourself bankrupt through the courts or online, this will hand over control of your assets to an appointed supervisor.
• These may be sold in order to repay creditors once they have been valued.
• If you are a home owner you may not automatically lose your home, it is dependent on the amount of equity available, and whether it is worthwhile for the supervisor to realise it.
• Bankruptcy periods generally lasts for 12 months, subject to having no restrictions placed, you are then released but it stays on your credit file for six more years.

Completing the sole trade insolvency process can be a complexed issue, you may with to get an insolvency professional to look over it before you issue your petition to declare yourself bankrupt. 

Read more: Am I insolvent

F.A.Q’s

Can a Sole Trader declare Insolvency?

A Sole Trader can declare insolvency but they only have two insolvency options these are either an IVA or Bankruptcy.

Are Sole Traders personally liable?

A sole trader is personally liable for their business's debts, unlike a Limited Company which is regarded as separate legal entities.

Can a Sole trader loose their house?

Sole traders are liable to loose their house if they are in debt and declared bankrupt.

Conclusion

In conclusion, the unique nature of a sole trader business brings with it both advantages and inherent risks. The absence of a legal distinction between the individual and the business means that financial concerns within the business directly impact the owner’s personal finances.

In cases of insolvency, where the business is unable to meet its financial obligations, the owner’s personal assets and financial well-being can be at stake. This emphasizes the importance of prudent financial management, proactive planning, and seeking professional guidance.

Whether considering strategies to avoid insolvency or navigating the complexities of personal insolvency options like an IVA or bankruptcy, seeking expert advice is crucial to safeguard both the business and the individual’s financial future.