Paying Off Business Debt

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.

Who is liable for business debt if the company goes into liquidation?

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.

Please read our article on filing complaints against a bank for more information.

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.

If my ltd company goes bust will I lose my house?

There are some occasions where a property can be at risk after a company has ended but without a lot of additional information, it would be difficult to answer with any certainty. If this leaves you in a position of being unable to pay the mortgage then the property may be at risk. If you have given personal guarantees for company debts and these debts are then pursued by way of petitioning for your bankruptcy, or seeking a charge on the property. You may need to speak to an adviser to help you with any personal debts that arise after the business has ceased trading.

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 you have to raise this with the company itself. To put your mind at ease you can ask if your personal credit rating has any impact on your role. 

And if any impact on the business. They will be able to tell you if there are any implications. 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, 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. Following that the company’s liability will cease. This means creditors will receive no further repayment.

Who is liable for sole trader debt?

Liability for 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 debt.

However if you are married or live with someone, the Official Receiver (OR) would be interested in any beneficial interest you may have. A 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 property in some way, then they will investigate. If none of those things have happened then the OR 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.

Over a period of time, the banks will offer new accounts with terms and conditions. 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. Sometimes its easier to deal with a bank where you are known.

They can see a history of how you operate your bank account today, regardless of previous credit history. However, this could restrict your choices to only the account available from your bank. This may be the best, or the worst, on the market.

Also when you apply for an account with a bank you are asked to fill in an application form. You will also need to 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 your credit report. 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.

What happens to business debt when a business owner passes away?

When a business owner or sole trader passes away their liability for any debts owed from their business passes to their estate (and anyone who acted as guarantor). Normally the person who is the executor of the estate should deal with their debts.

Dissolving a limited company with debt – What will happen to the debt?

In most cases, you will not be liable for the debt.  The only way the creditor can get their money back is from the sale of company assets. If the company assets are not enough to cover the debt, then the remaining debt will be deemed uncollectable.  For more information, please read our article on dealing with HMRC debt.

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