Debt options for the self-employed: IVA and bankruptcy

Are a sole trader's business debts personal debts?

Sole traders have unlimited liability (opens in a new tab), so the debts of the business are their own personal debts: GOV.UK says the owner is personally responsible for all of the debts of the business.

There is no separate business that owes the money. The supplier who has not been paid, the bank behind a business overdraft and the finance company on the van are all creditors of yours, in the same way as a credit card provider or the council.

That is why the formal solutions for a sole trader are the personal ones: an Individual Voluntary Arrangement (IVA) or bankruptcy. Each one can deal with business and household debts together. If the trouble started with a pandemic loan, see bounce back loans taken as a sole trader. If you run the business with someone else, read partnership debt and the partnership voluntary arrangement: partners are each jointly liable for all the firm's debts.

Can a sole trader keep trading in an IVA?

A sole trader can propose an IVA that includes business debts and keep trading, but the IVA Protocol (opens in a new tab) lists a “sole trader with trade debts” as a sign that a standard protocol IVA is unsuitable, so this is normally a bespoke IVA with its own terms.

GOV.UK says that in an IVA “you may still be able to keep your business running, if you have one” (opens in a new tab). Your insolvency practitioner works out what you can afford to repay each month and how long the arrangement lasts, and the proposal notes it where self-employed income is uneven.

The proposal goes to your creditors, business and household alike. It starts if three quarters or more, by value, of the creditors who vote agree, and once approved it binds every creditor who was entitled to vote (opens in a new tab), including any who voted against it. James Kaye or Nick Morgan would act as your nominee and then your supervisor, which are roles only a licensed insolvency practitioner can hold.

Self-employed income rises and falls, and that matters here. The IVA can be cancelled if you do not keep up your repayments, there is usually a set-up fee and a handling fee each time you make a payment, and your credit rating may be affected. We go through those risks, and every other option, before anything is proposed.

For the full picture, read how an IVA works.

What happens to a sole trader's business in bankruptcy?

If you go bankrupt as a sole trader, GOV.UK says your business is very likely to be closed (opens in a new tab) unless the trustee decides to keep it open.

You can trade again, but you must tell the people you do business with the name you were made bankrupt in, as well as any business name, and you must not obtain credit of £500 or more (opens in a new tab) without telling the lender you are bankrupt. GOV.UK lists these among the restrictions while you are bankrupt (opens in a new tab), with a bar on acting as a company director without the court's permission.

The trustee collects what you own for your creditors. You can usually keep the “tools, books, vehicles and other items of equipment” (opens in a new tab) you personally need for your work, which section 283 of the Insolvency Act 1986 leaves out, although GOV.UK says you might have to give them up if they are worth more than a reasonable replacement. Stock and money customers owe you can be collected and sold.

Bankruptcy usually ends one year after it starts (opens in a new tab), when you are discharged from most of your debts. If you have spare income, you may be asked to pay some of it for up to 3 years under an income payments agreement. Debts that came from fraud are not released by discharge (opens in a new tab). Our guide to bankruptcy covers the process and the costs.

Neither option suits everyone. Fees apply to both, and both may affect your credit rating.

What if I trade through a limited company?

If you trade through a limited company, the company's debts belong to the company, because GOV.UK describes company debts as “debts taken on in the name of the company” (opens in a new tab), so the options for the business itself are company procedures such as liquidation.

Our group's corporate practice handles those. See help with company debt if you trade through a limited company. NTF Corporate Solutions Limited is part of the NTF group and run by the same two practitioners, so the group benefits from any work it takes on.

What stays with you as a director is different: a personal guarantee you signed, an overdrawn director's loan account, or a claim for wrongful trading. Read when a director is personally liable for company debts and personal guarantees after a company fails.

Can a sole trader get a debt relief order?

Yes, a sole trader can get a debt relief order (opens in a new tab) if their debts are no more than £50,000, their spare income is £75 a month or less and their property is worth £2,000 or less. It costs nothing, you apply through an approved debt adviser, and NTF cannot arrange one.

While it lasts you cannot act as a company director, and you must not manage a business under a different name without telling the people you deal with about the order. Read how a debt relief order works.

Where can self-employed people get free debt advice?

Business Debtline (opens in a new tab) gives free debt advice to self-employed people and small businesses, and NTF's licensed insolvency practitioners can advise sole traders on IVAs, which they can propose and supervise, and on whether bankruptcy may suit them better.

Business Debtline is run by the Money Advice Trust charity and covers England and Wales. You can reach it at Business Debtline (opens in a new tab). NTF Financial Solutions is a commercial insolvency practice rather than a debt advice agency, and fees apply to an IVA and to bankruptcy.