Sole Trader Debt: Personal Liability If Your Business Fails

Sole trader businesses have 'unlimited liability', which means owners are personally responsible for all of the debts of the business. If something goes wrong, you will have less protection, and you may be able to get more protection with business insurance.

In a partnership, you and your partners personally share responsibility for your business, including any losses it makes and bills for things you buy for it. Section 9 of the Partnership Act 1890 says every partner in a firm is liable jointly with the other partners, and in Scotland severally also, for all debts and obligations of the firm incurred while they are a partner.

If you are made bankrupt, GOV.UK says these are among the things that can be affected:

• Your family home: the trustee might sell it, depending on how much equity would be left after any secured debts such as a mortgage were paid. If your equity is more than £1,000 the trustee can sell the property or apply for a charging order
• Your possessions: you can usually keep things you need for your job, like tools or a vehicle, and essential household items, like clothing, bedding and furniture, but you might have to give them up if they are worth more than a reasonable replacement
• Your income: if you and the trustee agree you can afford it, you may make monthly payments from your spare income for up to 3 years under an income payments agreement, which the trustee will not normally ask for if your main or only income is from state benefits
• Your bank accounts: the bank will usually freeze them, although you can usually keep any money you have previously put into a UK pension
• Your business: it is very likely to be closed unless the trustee decides to keep it open, although you can trade again with restrictions on what you can do

If the trustee has not started to deal with your family home within 3 years it will usually be transferred back to you. Our bankruptcy guide sets out the process in full.

MoneyHelper says priority debts are those that carry the most serious consequences if you do not pay them. They can include Income Tax, National Insurance and VAT, mortgage, rent and any loans secured against your home, hire purchase agreements if what you are buying with them is essential, and missed payments owed to DWP or HMRC. Our priority debts guide explains how to order your payments.

If you cannot pay your tax bill in full, you may be able to set up a payment plan to pay it in instalments, which GOV.UK also calls a 'Time to Pay' arrangement. HMRC will check if a payment plan is affordable for you, and if you cannot agree one they will ask you to pay the amount you owe in full.

What to tell HMRC if you cannot set up a payment plan online:

• Whether you can pay in full, and how much you can repay each month
• Whether there are other taxes you need to pay
• How much money you earn and how much you usually spend each month
• What savings or investments you have

If you have savings or assets, HMRC will expect you to use these to reduce your debt as much as possible. You will usually be asked to pay around half of what you have left over each month towards the tax you owe, after rent, food, utility bills and fixed outgoings. Paying your debt quicker means you pay less in total because you pay less interest, and there is no time limit on how long a payment plan can last.

If you do not contact HMRC or cannot agree an instalment plan, GOV.UK says HMRC may:

• Ask a debt collection agency to collect the money
• Collect what you owe directly from your wages or any monthly pension payments you get
• Take things you own and sell them, or take money directly from your bank account or building society savings, if you live in England, Wales or Northern Ireland
• Take you to court, make you bankrupt, or close down your company if the tax is a business tax

If you are in England or Wales, MoneyHelper can give you more information about debt management and where to get free debt advice. In Scotland you can get free debt advice from Scotland Debt Solutions, and in Northern Ireland from Advice NI. See our guide to HMRC bailiffs and enforcement agents.

GOV.UK says to speak to a debt adviser to get help choosing the best way to deal with your debt, and MoneyHelper has information about debt management and free debt advisory services.

An IVA under the Insolvency Service protocol means regular payments over 5 or 6 years, with payments lasting 6 years instead of 5 if your home equity is £10,000 or more. GOV.UK also says you may have the option of reaching an informal agreement with your creditors. Our IVA guide, DRO guide and bankruptcy guide cover the options in detail.

• County court claim: the general rule is that the period for filing a defence is 14 days after service of the particulars of claim, or 28 days if you file an acknowledgment of service
• Statutory demand: you have 21 days to pay the debt or reach an agreement to pay, and if you do not the creditor can start bankruptcy proceedings against an individual who owes £5,000 or more
• Challenging a statutory demand: you can apply to have it set aside, within 18 days if you were in the UK when you got it
• Bankruptcy petition: someone you owe money to can apply to a court to make you bankrupt if you do not pay your debts and you owe £5,000 or more, and the court sets a hearing date at least 14 days after you were given the petition
• Opposing a petition: you must do this at least 5 days before your bankruptcy hearing, with no court fee, but you might have to pay costs if you are not successful

If a statutory demand is served on a business partnership, the creditor needs to fill in a form for each partner. Our CCJ guide and bailiffs guide cover what follows a court claim.