Self employed people (sole traders) are allowed to go bankrupt and continue to run their business. However there are various implications.
Included in this article:
- Can you be self employed if you are bankrupt?
- What happens to your work tools?
- Do you have to change your bank account
- What happens to your premises and employees?
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Can I still run a business while I am Bankrupt?
The affect of Bankruptcy will depend on the type of business you run. Can you continue to run your business if you are a sole trader? What happens if you are a Company Director? To find out more please visit: http://beatmydebt.com/bankruptcy-frequently-asked-questions/what-is-the-affect-of-bankruptcy-on-my-business
Can you go bankrupt if you are self employed?
As a self employed person or sole trader you are allowed to go bankrupt and continue running your business.
You must only trade under the name in which you went bankrupt. This will normally be your own name. If you have a trading name this can be used in advertising and business correspondence only if your own name is stated first.
In addition all debts in your name are included (including any business debts). You are no longer allowed to directly repay any debts you owe to trade creditors.
Struggling to get your head round all of this? We can help. Call us (0800 077 6180) or complete the form below. The advice is free and confidential.
What happens to your Work Tools?
Most hand tools that you use personally to continue the running of your business are exempt from Bankruptcy. You are allowed to keep these to enable you to carry on working as long as they are not of excessive value.
As such if you are a plumber you will be able to keep the tools in your van. If you are a web designer you will be able to keep computer equipment.
You can also keep a vehicle which you require to carry out your work even if it is worth more than £1000. Having said that a car that you use to drive to and from an office may be at risk unless it is worth less.
If you own machinery, plant or tools of excessive value you will have to buy these back from the Official Receiver or allow them to be sold if you no longer need them.
Do you have to change your Self Employed Bank Account?
Your business bank will find out that you are bankrupt even if you do not owe them money. Any current account you have with them is likely to be closed.
It is therefore likely that you will need to open a new account to run your business through. However there are very few banks which offer business facilities for bankrupt people.
Generally speaking the way round this is to open a normal current account in your name for business purposes. There should be no issue because you will not be applying for any credit facilities.
You will no longer be able to operate an overdraft facility or credit card. If you have been using these facilities to help with your cash flow then you will have to rethink your business strategy.
What happens to your Premises and Employees?
If you work out of a business premises it is important to understand that your current lease will be terminated on the date of your bankruptcy. You will then have to agree a new lease with your landlord.
Your landlord will therefore be made aware that you have gone bankrupt. As such if you are planning this course of action you should discuss it with your landlord beforehand so you can manage any concerns they may have.
If you have employees you will have to make them redundant on the day you go bankrupt. You can then re-employ them immediately if you need them. However they will be informed of your bankruptcy by the Official Receiver.
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Hi
I’ve been self-employed for many years. I have a small fashion shop which makes a living. Due to no fault of my own but simply how my accountant dealt with the tax returns I’m very likely to face a huge tax/vat bill shortly which will be impossible to meet and maybe bankruptcy is the only way out!
I have, up to now, an excellent credit record with suppliers, bank, landlord etc. I don’t have any assets and the business makes a little profit but is my only source of income.
If I file for bankruptcy, can I carry on running the business? I lease the premises and my rent is paid 3 months in advance, as most commercial leases are, and all up to date and never been in arrears. Can I still trade at the same premises?
There seems to be conflicting information regarding this. Some sites (such as business debtline and citizens advice) say that OR may close the business, sell the stock and terminate the lease. However on your page it says a sole trader can carry on trading at the same premises under some restrictions.
Could you please advise.
Hi Tess
There is no question that you can continue working as a sole trader after you go bankrupt. However whether or not you can continue running your business will depend on its nature and viability.
First lets consider your leased premesis. I have assisted a number of sole traders through the bankruptcy process who have operated from rented / leased premises. In these cases the Official Receiver (OR) has not acted to terminate the lease and the business owner has been able to continue to trade. The lease would only be terminated if the business is not profitable and or you no longer want to operate it.
Of course you would need to check your lease agreement in terms of whether you have to tell the landlord if you become insolvent. However even if you do most landlords are not worried as long as the rent continues to be paid.
Regarding your stock. As a sole trader this is owned by you personally and therefore is an asset which forms part of your bankruptcy estate. As such the Official Receiver is entitled to sell it and use the proceeds to help repay your debts. As such if you want to continue trading your business you must anticipate this before you go bankrupt. You should get an independent valuer to value it. You can then plan to offer the OR an equivalent sum once you are bankrupt to “buy back” your interest in the stock thus allowing you to continue to trade with minimal disruption.
In my experience the second hand “fire sale” value of stock will be far less than you paid for it and considerably less than the total debt you will write off by going bankrupt. As such even if you have to pay something to retain it overall you still remain financially better off having gone through the bankruptcy process.
Hi. Can you advise me on a vehicle matter with regards to my bankruptcy
Basically, I own a van that I use for work. Without it, I can not work. I’m a self employed window cleaner and I need it to carry my water tank. Along side this, it has 6 seats and I have a family of 6 living in my home, one of which is a disabled father in law.
Is this enough to make my van exempt exempt from being sold if I was to go bankrupt?
Hi Simon
Given you are a self employed window cleaner and your van is essential for the running of your business it will be classed as a tool of your trade. As such it is exempt from bankruptcy and the Official Receiver (OR) would allow you to keep it.
The only exception to this is if the van you own is very valuable and you could get by with something cheaper. For example if your van is not very old and worth £20k the OR might demand that you sell it and buy something less expensive and then hand over any cash left over to them. However if the value is reasonable it should not be a problem.
James Falla
Does that mean if you get the cash, you can be a buyer in buying back your own stock from the bankruptcy people?
Hi A
Yes. If you are able to get the cash together you can certainly buy back your own stock from the OR. However it is important to consider where the money to do this will come from. Generally speaking it cannot be money from your own bank account as this would be regarded as an asset and would have to be given to the OR as part of the bankruptcy. As such the cash would normally have to come from a friend or family member who you agree to pay back at a later date (normally after you are discharged).