Debt help for sole traders

What is a sole trader?

If you run a business which is not registered as a limited company or partnership, then it is likely that you are a sole trader.

You may be the only employee of the business or you may have a number of people working for you. However, the business still falls within the category of "Sole Trader".

A sole trader business is different to a limited company in the sense that the owner is personally responsible for any debt that the business cannot afford to repay.

This is the case even if you run the business under a different trading name.

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Debt solutions for sole traders

As a sole trader, if your business has debts that it cannot afford to repay, you are personally responsible for the repayment.

If you do not have the means to repay the debts in full yourself, you may have to consider a personal debt management solution:

Debt management plan (DMP)

A debt management plan is an agreement with your creditors to pay them reduced amounts each month until the debt is repaid in full.

This will give you a breathing space while you concentrate on building up your business. However, while you are in a debt management plan, your creditors may continue to add interest and charges so the outstanding balance may continue to rise.

You can often use a DMP to successfully reduce the monthly payments towards a business loan or overdraft or other debts to suppliers.

However, if you have debts to HM Revenue and Customs, it may be very difficult to negotiate a monthly payment plan.

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Individual Voluntary Arrangement (IVA)

An individual voluntary arrangement is an agreement allowing you to settle debt over a fixed period of time - normally 5 years.

You make monthly payments to your creditors based on what you can afford. At the end of the agreement, any outstanding debt is written off and you are left debt free.

Because an IVA is a formal legally binding agreement, all interest, charges and legal actions against you must be stopped.

However, if you own a property, you may be required to release equity from it for the benefit of your creditors. In addition, if you fail to make your agreed payments, you could be at risk of being declared bankrupt.

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Bankruptcy

Bankruptcy is often regarded as something to be avoided at all costs. However, if you are not a home owner, or there is very little equity in your property, bankruptcy can be a very effective method to resolve a debt problem.

On declaring bankruptcy, all of your debt is taken away from you and your creditors must stop any further collection activities.

In general you are allowed to keep all of your household goods and any item you use as tools of your trade - for example a van or other specialist vehicle.

As a sole trader, you are allowed to carry on your business when you are bankrupt.

It is unlikely that you will choose the bankruptcy option if you are a home owner as if there is any equity in your property, your house may have to be sold to release this for your creditors.

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Business banking

Opening a new bank account

If your business owes money to the bank in the form of a loan, overdraft or even credit card, it is likely that you will have to change the business bank account if you carry out a personal debt management solution.

This is because if you continue to deposit money into the old account, the bank has the right to take this towards any unpaid debts that are outstanding.

A new bank account will therefore protect any assets that you have.

The downside to moving your business bank account is that it is almost certain that you will not be offered a new overdraft facility.

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Borrowing more money in the future

If you default on your agreed debt payments, this will be recorded on your personal credit file.

Such defaults will show up if you try and borrow more money in the future and will probably mean that your application is rejected.

For this reason, it is unlikely that you will be able to have an overdraft facility if you open a new bank account with a different bank. As such, changing your business bank account should always be a last resort or part of a debt management solution.

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