What Are Your Options When Debt Becomes Unmanageable?
Being self-employed as a sole trader comes with a kind of freedom that working for someone else doesn’t. It also comes with financial exposure that’s worth understanding clearly, because when things get difficult, the options available to you differ from those available to a limited company, and knowing the difference matters.
The Key Difference: Personal Liability
A limited company is a separate legal entity from its directors and shareholders. Its debts belong to the company. A sole trader has no such separation: the business and the individual are legally the same thing. That means sole trader business debts are personal debts, and they sit alongside any personal financial commitments in exactly the same way.
This isn’t a reason to panic, but it is a reason to understand your position accurately if the business is under pressure. The debt doesn’t belong to a company you can walk away from. It belongs to you.
Informal Options First
Before formal insolvency procedures come into the picture, there are often informal steps worth taking. Talking directly to creditors about extended payment terms or temporary arrangements is sometimes possible, particularly with HMRC, which has a Time to Pay scheme that can allow arrears to be spread over a period of months. Creditors generally prefer a realistic plan to a formal insolvency process.
Debt consolidation and working with a debt adviser to restructure payments are also options worth exploring if the overall level of debt is manageable but the current repayment structure isn’t working.
Breathing Space
The Debt Respite Scheme, known as Breathing Space, gives individuals and sole traders a 60-day period of protection from creditor action, during which most enforcement action and interest charges are paused. This can create the time needed to take proper advice and consider options without pressure escalating in the background. A money adviser needs to apply for this on your behalf.
Individual Voluntary Arrangement
If informal approaches aren’t viable, an IVA (Individual Voluntary Arrangement) is the formal voluntary route available to sole traders. You agree to pay what you can afford over a period of typically five to six years, creditors holding 75% of the debt by value need to approve the arrangement, and any remaining unsecured debt covered by the IVA is written off at the end. You can, in many cases, continue to trade and run your business during an IVA, though this should be discussed with your insolvency practitioner at the outset.
Bankruptcy
If an IVA isn’t a realistic option, either because creditors are unlikely to agree or because the debt level makes an arrangement unworkable, bankruptcy is the final formal option for a sole trader. It provides a clear resolution but carries more significant short-term implications, including for your ability to continue trading in certain capacities and for any assets you hold.
Discharge from bankruptcy typically happens after twelve months, after which most of the restrictions end, though the record remains for six years.
What Isn’t Available to You
It’s worth being clear that CVAs (Company Voluntary Arrangements) and administration are limited company procedures. If you’re a sole trader, these aren’t options. This is one of the reasons some sole traders consider whether incorporating as a limited company makes sense for them going forward, but that’s a separate conversation to have once the immediate situation is addressed.
If the business is under pressure and you’re not sure where to start, a conversation with an insolvency adviser who understands sole trader situations is the most useful first step. Our team at Adcroft Hilton works with self-employed people as well as businesses. Get in touch and we’ll give you an honest picture of where you stand and what’s available to you.
Adcroft Hilton: Debt, Insolvency & Bankruptcy Specialists
Helping you make the right choice for your financial future.
