Self employed business people are personally liable for any debts that their business cannot repay. However there are a number of solutions that may be considered to avoid personal financial crisis.

If you are self employed, you may work on your own as a sole trader or you may be in charge of a larger business with a number of employees. However, you are defined as self employed by the fact that your business is not registered as a limited company.

Because the business is not limited, if it gets into financial difficulty you cannot use a company solution such as a Company Voluntary Arrangement or Liquidation to resolve the problem. As the owner you remain personally liable for any debt that the business incurs which it cannot repay.

If your business fails or is struggling and you cannot afford to repay its debts, the solution you need to use will be a personal debt management solution. There are 3 main options to consider.

1. Debt Management Plan (DMP)

A DMP is an informal agreement with creditors to reduce debt repayments to an affordable manageable level.

One advantage of a DMP is that it is flexible. This means that some debts, either business or personal can be left out of the plan. However, the downside of this agreement is that all of the debt has to be repaid in full which will often take many years.

2. Individual Voluntary Arrangement (IVA)

For larger debts (generally £12,000 and above) it will normally be sensible to consider an IVA. This is an agreement with creditors to settle the debt owed over a period of 5 years. After the end of the plan, what has not been paid is written off.

This solution has the advantage over a debt management plan in the way that debt is written off and therefore there is a fixed date when the debts will be gone for good. However it is less flexible than a DMP in the sense that all debts both business and personal need to be included. The arrangement may also require equity to be released from the family home.

BMD Tip: Since this article was written it is now possible to start an IVA if you have debts of £8000 or less and can only afford to pay £100 per month towards them

3. Bankruptcy

Unlike directors of limited companies, self employed business people can also consider going bankrupt. Being bankrupt does not prevent a self employed person from carrying on their business and can write off 100% of debt.

The great disadvantage of bankruptcy is that if you are a home owner, your property is at risk. However, if you are a sole trader with no property, bankruptcy could be an ideal solution.

In today’s economic environment, many self employed business people are finding it increasingly difficult to survive. If you find that your business gets into financial difficulty you need to be aware that you are personally responsible for any business debt.

If you find yourself in this situation, it is important to get advice about your options as soon as possible. The sooner you take action to employ a debt management solution, the more likely it will be that you can avoid disaster and continue to trade your business without the worry and burden of debt.