If you’re a small business owner worried about bankruptcy, you need to understand all the options available before making a decision that might affect not only your business but your personal finances too. Here are answers to some of the most common questions asked by businesses facing financial uncertainty.
What Exactly Is “Business Bankruptcy”?
In the UK, the term “bankruptcy” is used only to describe individuals who become personally bankrupt. Businesses that become insolvent – either because they don’t have enough money in the bank to cover their debts or their expenditures outstrip their assets – without hope of rescue are put into “liquidation”. Liquidation can be either voluntary or compulsory with Creditors Voluntary Liquidation (CVLs) being the most common route.
Am I Personally Liable for My Company’s Debts?
The extent of your personal liability will depend on your trading status and the kind of financial guarantees you have in place. If you’re trading under limited company status, you can liquidate your company without being held personally liable for the company’s outstanding debts. However, you’re still liable for any debts you have personally guaranteed. As the director of a limited company, you should also be aware that continuing to trade when your company is technically insolvent may make you personally liable for losses.
If you’re trading under a sole trader or self-employed status and your business goes bust, you’ll usually be held personally liable for your businesses’ outstanding debts. In the event that you’re unable to clear off those debts, you may be forced to declare personal bankruptcy and this will affect your ability to continue trading, even under a different name. If you’re the director of a company and undergo personal bankruptcy, you’ll be forced to resign.
How Do I Check My Personal Guarantees?
Personal guarantees for business loans have become increasingly common since the 2008 crash, as banks have sought to minimize the risks on their returns. This means that even if you’re registered as the director of a limited company, you may well have had to personally secure any bank loans your company received. Before making the decision to liquidate your company, check your personal liability carefully by studying all agreements and contracts for business-related property, leased equipment, and bank and credit card loans.
Is Bankruptcy the Only Option?
If you face personal bankruptcy due to your business debts, consider all the options. Negotiating with your creditors before seeking liquidation may yield surprisingly positive results as lenders may slash your debt in the hope that they can get more later on. Individual Voluntary Arrangements (IVAs), in which you pay back a reduced amount of debt for a limited period (after which the remainder is written off), are another popular alternative to bankruptcy.
Business bankruptcy can negatively affect your personal credit score as well as your chances of getting a mortgage or other personal loan in the future, so consider all the options and get professional business insolvency advice before you opt for liquidation.