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Practical self employed debt advice. Immediate help for sole traders and partnerships.

Arcadia and Debenhams hit the headlines at the end of 2020 when the former went into administration and the latter into liquidation. But it’s not just corporate giants reeling from the effects of the coronavirus pandemic. When it comes to the self employed debt advice is needed – and now. 

Sole traders and partnerships (especially micro businesses) are equally, if not more, vulnerable to the vagaries of the economy. Along with personal liabilities, these businesses often have limited cash reserves and limited access to capital.

Are you a sole trader or partnership firm that ran into trouble in 2020 and are suffering the consequences today? If so, our self employed debt advice explains what insolvency procedures are open to you, explaining how they work and the benefits they can bring.

Insolvency options for sole traders

Informal arrangements

When we’re giving self employed debt advice, the first step is always to try commercial negotiation with your creditors (those you owe money to). Such informal voluntary arrangements will buy precious time for business rescue solutions to be put in place.

Basically, an informal arrangement will see you pay back your debt to your creditors in regular (usually monthly) instalments over an agreed period of time.

When you approach your creditors about an informal arrangement you should go prepared. Produce financial forecasts in advance to show the projected financial position of your company in the coming trading period. 

Be careful that your sales/income forecasts are conservative ones. You don’t want to make your position look any rosier than it is, as your creditors might expect larger monthly repayments than you can actually afford.

You should explain clearly to your creditors why they should agree to such an arrangement and why your business is worth supporting. 

It’s crucial that your repayments are affordable because you must be able to keep up with them. Any missed payments could lead to a loss of goodwill and prompt your creditors to take action that could have serious consequences for your business, even culminating in a winding-up petition being issued. This could lead to the closure of your business and you would also most likely incur substantial legal and other costs too.

Be aware of your liabilities: sole traders have no protection for their personal assets from their creditors. To translate, this means that anything owned personally can be sold and the money used to pay both money owed personally by you and money owed by your business.

If you have a number of creditors it’s important that you approach them all at the same time and treat them equally when it comes to devising your repayment scheme.

One big advantage of an informal arrangement is the money it will save you on fees, compared with more formal routes. If you have the time you can set one of these agreements up yourself. But if you’re too busy running your business or don’t want to approach your creditors directly (for personal or professional reasons) then a licensed insolvency practitioner (IP) can do it for you. They’ll also guide you through the various stages, helping you to avoid the traps small business owners often fall into.

Insolvency options for sole traders

A business Individual Voluntary Arrangement

A business Individual Voluntary Arrangement (business IVA) follows the format of a personal Individual Voluntary Arrangement. The main differences between the two are the source of payments to creditors and the type of creditors who are owed money.

A business IVA will typically be funded by income into your business (in a personal IVA repayments will be made by the individual concerned from their private income). A company’s creditors in a business IVA will typically – and naturally – be business creditors. But it’s not uncommon for personal creditors to have lent money to a sole trader, to help them cope with trading losses. Both types of creditors could be included in an IVA.

In simple terms, an IVA is a legally binding compromise agreement between you and your creditors, where you commit to pay off an agreed percentage of your debt over an agreed period of time. The whole process is overseen by a licensed insolvency practitioner (IP).

The advantages of an IVA include:

  • Once agreed, you are free to run the company – after all, no one knows your business better than you. 
  • You’re free from the burden of historic debt, instead paying off a reduced percentage of it in monthly instalments. 
  • You are protected from legal and enforcement action from creditors.
  • Cash flow in the business should improve.
  • You can re-engineer your business, cutting costs and closing loss-making parts. Contracts with suppliers can be renegotiated or terminated.
  • Creditors like them, as they get more of what they are owed than if your business collapses.

Insolvency options for sole traders

Bankruptcy

Bankruptcy is an effective method to clear unresolvable personal debt, whether as the result of trading as a sole trader or from personal borrowing.

Once declared bankrupt, all your creditors, whether business or personal, will no longer deal directly with you, and are passed to the trustee overseeing the bankruptcy proceedings. 

You are then left without creditors and with assets of any value above what is owed. In all cases, you will be left with necessary assets to live and work but not anything that is considered to be of excess value.

For advice and help with self employed debt and guidance on all aspects of insolvency procedures, call 01455 555444 to speak to one of our licensed insolvency practitioners, email us at [email protected] or request a call back

 Insolvency options for partnerships

As with sole traders, the best way to solve your debt problems is to negotiate directly with your creditors (see the section on informal arrangements above).

If this is not possible there are other avenues open to you.

Partnership Administration Arrangement

This is an arrangement open to partnerships that have been active in the past three years. 

To implement one you must apply to the court for a Partnership Administration Order, which the court will grant if it’s satisfied that the partnership is unable to pay its debts and where:

  • the company can continue to exist as a going concern.
  • the debt can be restructured with the agreement of the creditors through the setting up of a Partnership Voluntary Arrangement.
  • creditors will receive more of the debt owed to them than if the partnership ceased trading.

A petition for a Partnership Administration Order can be presented to the court by members of the partnership or its creditors. If you choose to take this route for your partnership it’s vital you engage the services of a licensed insolvency practitioner, who will give you self employed debt advice and guide you through the process.

Once a Partnership Administration Order is granted, an administrator is appointed. They effectively take control of the business and its affairs. At this point creditors can take no further action against the partnership (unless it’s specifically allowed by the administrator).

The administrator’s job is to work with you and your partners to come up with a plan to repay your debt that is acceptable to creditors. This can be in the form of a Company Voluntary Arrangement (CVA) or a pre-pack administration.

Company Voluntary Arrangement (CVA) and pre-pack

A Company Voluntary Arrangement (CVA) is a formal agreement between you and your creditors that sets out a debt repayment plan. We can often use a CVA to give you valuable breathing space to make essential changes to your business and equip you for a more successful future – free of debt. 

You can read more about CVAs in our dedicated article.

A pre-pack administration is an insolvency procedure for companies that have a viable core business. This part of the business is ‘packed up’ and sold to a third party. The benefit is that you can keep the business running smoothly throughout the pre-pack process to preserve its value. You are also able to have your debts written off. 

Our article on pre-packs explains the process in more detail. You can read it here.

Bankruptcy

The procedure for bankruptcy is outlined earlier in this article. It’s important to note, however, that if the partnership has limited liability then the partners’ personal assets are protected from creditors.

For advice and help with self employed deb and guidance on all aspects of insolvency procedures, call 01455 555444 to speak to one of our licensed insolvency practitioners, email us at [email protected] or request a call back