Whether you’re a limited company director or a sole trader, writing off what’s unaffordable can sound appealing if you’re struggling to repay your business debts when they’re due.
While it’s always better to stay atop your business’ finances before it reaches a point where you can’t repay, in the UK, you can write off your unaffordable business debts to an extent. How you’ve set up that business will have some bearing on how you achieve it.
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What Can Happen If I Don’t Pay My Business Debts?
Whether your business is incorporated in a limited company or you operate as a sole trader, failing to repay your business debts can have severe consequences.
While it might sound tempting to bury your head in the sand and hope the problems will sort themselves out, this is the worst thing you can do. Feigning ignorance won’t stop creditors from pursuing you to repay those debts.
This pursuit could start as repayment reminders by phone, letter, or email but can quickly escalate. Creditors can issue County Court Judgements (CCJs) or Statutory Demands. These can harm your business’ credit rating and your chance of obtaining additional funding if not dealt with in a timely manner.
Failing to address this action means your creditors can send debt collectors and even bailiffs depending on the debt type and to whom it’s owed. In the worst-case scenario, your creditors can force your company into compulsory liquidation, freezing the company’s bank accounts with a winding-up petition and making trading impossible.
How Can I Write Off My Business Debts?
The good news is, in the UK, support is available to help you write off business debts you can’t afford to repay. There are several ways to do this, and which one is best for your business depends on your level of debt and how the business is set up.
Businesses incorporated in limited companies can explore repaying their unsecured debts at a rate they can afford. A popular method of doing so is through a ‘Company Voluntary Arrangement’ (CVA), wherein a licensed insolvency practitioner acts as a median between the company and its creditors.
The procedure usually lasts five years and sees all creditor pressure paused for the duration, and once it concludes, the remaining unsecured debt is written off.
If the company would benefit more from restructuring, directors can explore administration as a possible solution. During this process, an insolvency practitioner acts as an administrator while implementing the necessary changes to make the company profitable again, and to make it appealing to potential buyers.
Sometimes, a company’s debts can be of such a level that recovery isn’t a feasible way out of insolvency. Should that happen, you can put the company into voluntary liquidation. Doing so closes the company in an orderly manner, writing off its unaffordable debts.
Sole traders have different options. A similar solution to CVAs exists for the self-employed and people with personal debt; an Individual Voluntary Arrangement (IVA), allowing them to repay what they can afford in monthly instalments.
While bankruptcy may seem like the worst option for anyone, for sole traders unable to afford a repayment plan, it can be a useful way of writing off their debts. It doesn’t last as long as an IVA, writing off the debts in as little as one year.
However, bankruptcy will have an extremely negative impact on your credit rating, and depending on your profession, it could affect your ability to work. It’s also worth noting that in the UK, bankruptcy only applies to sole traders and individuals, not companies, as it does in America.
Can I Be Held Personally Liable for My Business Debts?
Whether you’re liable for your business’ debts largely depends on whether the business was incorporated as a limited company or if you operated as a sole trader.
Limited company directors benefit from limited liability protection, separating the company’s finances from the director’s personal funds. This means the company’s debts will not personally affect the director financially.
Exceptions to this rule could include if the director was found guilty of wrongful trading, trading whilst insolvent, or if they’d signed personal guarantees in exchange for loans or other forms of business finance.
Sole traders have no such separation. They are their business, so its and their personal finances are one and the same.
Can I Start Again After Closing a Business?
In most circumstances, you can start again once the insolvent business is closed, whether that involves starting a new company or seeking employment with an existing one. That said, there can be circumstances that could affect your ability to start again.
The Insolvency Service has a list of ‘unfit conduct’, and if you’re found to have committed such action, you could face disqualification from being a company director.
Additionally, there are strict guidelines around reusing the old company’s name in any subsequently founded. As previously mentioned, if you’re a sole trader undergoing bankruptcy, then depending on your profession, you could find yourself unable to practice.
If you find your business falls behind on repaying what it owes, being able to write off those unaffordable debts can sound appealing. Different procedures exist for limited companies and sole traders depending on the debts’ severity, as will your liability for the business’ debt.
In most circumstances, directors of liquidated companies can start a new limited company or pursue employment in an existing one.
Whichever way you choose to approach the situation, you should avoid burying your head in the sand. Doing so will only worsen the problems and can lead to creditors taking action to recover what’s owed.