Business and self-employed debt: your options

Running a business that is losing money is stressful, and the debts can feel tangled up with your home and family finances. The first question is always the same: whose debt is it, legally? The answer decides who can chase you, what they can take, and which debt solutions can deal with it.

Are you personally liable for business debts?

Limited liability has exceptions. Business Debtline says a director or shareholder can be personally liable for a company’s debts where:

• you signed a personal guarantee. Banks, landlords and suppliers often ask for one. If the company stops paying, the lender can come to you. A guarantee secured on your home puts the home at risk.
• the company goes into formal insolvency and you are found to have been wrongful or fraudulent trading, or guilty of other offences.
• your director’s loan account is overdrawn, meaning you owe the company money. A liquidator can ask you to repay it.

If you signed something in your own name rather than for the company, a creditor may try to treat it as your personal debt. Keep copies of every agreement.

Which business debts should you deal with first?

Some business creditors have powers that ordinary lenders do not. National Debtline, run by the same charity as Business Debtline, says to treat these as priorities:

• Tax owed to HMRC: income tax, National Insurance and VAT. HMRC is likely to act more quickly than many other creditors. See HMRC debt and Time to Pay.
• Business rates. The council can get a liability order from the magistrates’ court and use enforcement agents. Unlike council tax, it cannot take business rates from your benefits.
• Gas and electricity if you traded from home and still live there, because of the risk of disconnection.

Once you have stopped trading, National Debtline says business rent arrears, equipment lease payments and money owed to suppliers can usually be treated as non-priority and negotiated like other debts. Our guide to priority debts explains the general rules.

Where can you get free help with business debt?

Business Debtline is a free debt advice charity for self-employed people and small businesses, run by the Money Advice Trust. It covers England, Wales and Scotland. Call 0800 197 6026, Monday to Friday, 9am to 8pm, or use webchat, Monday to Friday, 9am to 5pm. It can advise on limited company debts as well as personal ones. In Northern Ireland, it refers people to Advice NI.

For personal debts alongside business ones, free, impartial debt advice is also available from MoneyHelper, StepChange, Citizens Advice and National Debtline: see where to get free debt advice.

If your limited company cannot pay its debts, the options belong to the company, not to you: formal procedures such as a company voluntary arrangement, administration or liquidation. Carrying on trading when there is no reasonable prospect of the company recovering can be wrongful trading, which can make you personally liable. If a liquidator decides your conduct was unfit, you can be banned from being a director for 2 to 15 years. Get advice early.

Can business debt go into an IVA, DRO or bankruptcy?

It depends on whose debt it is. Debts you owe personally, including a sole trader’s business debts, a partner’s liability for partnership debts, and personal guarantees, can go into your own IVA, debt relief order (DRO) or bankruptcy. A limited company’s own debts cannot.

IVA. Business Debtline says an IVA can deal with the debts of a sole trader or partner, or a director’s personal debts, but not the debts of a limited company. The IVA Protocol, which standardises most consumer IVAs, lists “sole trader with trade debts” as a sign that a protocol IVA is not suitable, and says a bespoke IVA may be considered instead. Uneven self-employed income has to be noted in the proposal. Some tax debts, such as VAT and PAYE you collected from employees, are preferential in an IVA and are paid before other creditors. An IVA does not by law stop you trading or being a director. Our guide to IVAs if you are self-employed covers how payments are worked out when your income varies.

Debt relief order. You can stay self-employed as a sole trader or partner in a DRO, but Business Debtline says you cannot get one if you are a director of a limited company. You must tell the official receiver about income increases during the 12 months, which can be hard to predict with self-employed income, and you cannot borrow more than £500 without disclosing the DRO.

Bankruptcy. GOV.UK says your business is very likely to be closed unless the trustee decides to keep it open. You can usually keep tools and a vehicle you need for work. While bankrupt you cannot act as a company director without the court’s permission, and you must tell people you do business with the name you were made bankrupt under. See bankruptcy and IVA or bankruptcy? for the trade-offs.

Whether any of these suits you depends on whether you want to keep trading, what you own and what you can afford, which is why specialist advice matters here. IVAs are available in England, Wales and Northern Ireland; in Scotland, see debt solutions in Scotland.

What to do next

1. Work out whose name each debt is in: yours, a partnership’s, or a limited company’s. Find any personal guarantees you signed.
2. Deal with HMRC, business rates and any energy supply at your home first. If you are still trading, keep up with new tax and bills.
3. Call Business Debtline on 0800 197 6026 before you close the business or sign anything new with creditors.
4. If you are starting again after a debt solution, read can you start a business during an IVA? first.

For other kinds of debt, see types of debt. If you use our checker, we may pass your details to a licensed insolvency practitioner or debt adviser.