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Paying Off Business Debt

19 February 2019 - Posted by TalkAboutDebt

Owning a business with debt can be extra stressful, as you may have to manage your own personal debts and business debts. This article explains how to pay off your business debts and who is liable for paying off business debt.

 

Who is liable for business debt?

 

If the business was set up in your name only, then you will be liable for the business’s debt, such as VAT and income tax during the lifetime of the business. If the business is in joint names, both parties are severally liable for the debt. To make matters more serious if the business is in personal names (not the business name), then the landlord can follow the court process and have your property used as security for the amount outstanding.

 

Another situation could be that you recently bought a limited company already in debt. In this case, when a Limited Company is bought as long as the purchaser is not misled, it is their responsibility to take due diligence. They should ensure they are aware of the full financial situation of the company they are buying into.

 

If your company is going into liquidation, then you will be liable for any debt if you were the guarantor. A bank will generally ask you to sign a guarantor document and advise that you seek independent financial advice prior to signing the document. Therefore, you should be aware when signing to be a guarantor.

 

In some rare circumstances, if you were not aware of being a guarantor for a company, then you need to complain to the lender regarding their conduct. Once you have exhausted their internal complaints procedure you can then complain to the Financial Ombudsman regarding the lender’s practice. The lender will have a copy of the agreement and you should have been provided with one initially. They are not necessarily obliged to provide a copy on request. If they start enforcement action through the courts and you dispute that you owe the money but later they provide evidence that you were a guarantor you will be seen to have lied to the court which can lead to serious consequences.

 

How can I pay off my business debt?

 

There are several options available to you, but all of them will have repercussions on your future finances and credit score. It may be that if you own a Limited Company and it is still trading, it can help pay off your debts. This way your business debts may never become a personal liability for any of your family members. If the Limited Company has to close and can pay off all of its debts then the debts will cease to exist. If the Limited Company requires an insolvency practitioner to close it down as it cannot continue or pay its debts, then there may be some debts that arise as personal liability debts to you and potentially your family members.

 

Please note, there is no simple way to have credit card/loan debt wiped clear, you need to make arrangements to pay off the debts or look at insolvency options.

 

How much of the business debt should I repay?

 

For a limited company, the amount you repay will depend on your shareholding in the company. If we assume that there was only a nominal value to your shares such as 1p or 10p and assuming you were not negligent in taking out this finance when you knew the company was already insolvent or close to insolvency. Then you will only be liable to repay the value up to the total value of your shareholding. However, if this is not the case then you may be liable to repay some or all of the loan and will need to seek more specialist advice.

 

Can I become a company director while I am in debt?

 

If you are bankrupt this may mean that you cannot take the position but it really is going to be a question that you would have to raise with the company itself. To put your mind at ease you can ask if your personal credit rating has any impact on your role or any impact on the business. They will be able to tell you if there are any implications and it should be clear from your employment terms and conditions.

 

What is the process of administration?

 

For the first 12 months of administration, the administrator can run the business as it was before. At the end of the 12 months, the business must either go into liquidation or be sold as a going concern. If the business is restored within the 12 month period, they will have the chance to pay their debts. If the business fails and goes into liquidation all assets will be sold and a dividend paid out to all parties owed. Therefore creditors may receive a pro-rata payment along with any other individuals or companies who are owed money from the company. Following that the company’s liability will cease and creditors will receive no further repayment.

 

Who is liable for sole trader debt?

 

Liability for a debt is defined by the named parties to the agreement, the company bank accounts are not relevant. If you are not a party to the agreement then you will not be pursued for the recovery of the debt.

 

However if you are married or live with someone, the Official Receiver (the court official that will oversee the bankruptcy) would be interested in any beneficial interest you may have in your property. Beneficial interest can arise irrespective of whose name the legal title of the property is in. If there is equity in your property and if you have contributed to the purchase of the property, the repayment of the mortgage or the improvement in the property then they will investigate. If none of those things have happened then the Official Reciever will have no interest in the property.

 

Will debt affect my ability to open a basic business account?

 

For some banks being in debt may affect your ability to open up a basic business account. However, it is difficult to know for certain. There are so many accounts available with so many different banks and over a period of time, the banks will offer new accounts with terms and conditions that are different than in previous years. You could look at the Money Advice Service website or one of the comparison sites to get an idea of what accounts are available and how they compare.

 

We also suggest speaking to your existing bank, as it is sometimes easier to deal with a bank where you are known and they can see a history of how you operate your bank account today, regardless of your previous credit history. However this could restrict your choices to only the account available from your bank and this may be the best, or the worst, on the market.

 

In addition to the above advice, when you apply for an account with a bank you are asked to fill in an application form and prove your identity and address. The bank will then undertake different checks depending on their own requirements. If an account is only available to those who have a good credit rating then the answer may depend on what is showing on your credit report and the only way you can know this is by getting a copy from the credit reference agency. Each credit reference agency can give you guidance on improving your credit rating.

 

Can a creditor take company property without permission?

 

Taking goods without a company’s consent is likely to land you in trouble and lead to arrest. If you believe a company owes you money and they are not willing to give you this money, then it would be wise to let a court decide who is right or wrong in this instance. Depending on the amounts involved you can use the small claims court to keep costs down.

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