Declaring bankruptcy can seem like a drastic step. And it does indeed have some serious long-term repercussions. But if your finances are in dire straits, you–and your business—can begin a fresh start after getting past the bankruptcy order.Here's a look at how bankruptcy for business owners works in the UK and a rundown of its pros and cons.
What is bankruptcy?
Bankruptcy is a way of dealing with debts you can't afford to repay. In the UK, you can only file for bankruptcy as an individual. Different rules apply to partnerships and limited liability companies.
How do I become bankrupt?
You officially become bankrupt after a bankruptcy order is issued. This mandate can happen in one of the following ways:
- You apply for one yourself because you can't afford to pay your debts
- Your creditors apply for a bankruptcy order against you because you owe them more than £5,000
An insolvency practitioner applies for a bankruptcy order against you because you made an arrangement to pay your debts—called an individual voluntary arrangement—and breached its terms.
What are the pros of declaring bankruptcy?
Declaring bankruptcy is a tough decision, especially when you've worked hard to build a successful business. Although, it does have some benefits, including:
- You can keep working as a sole trader, as long as you use the same trading name you were using when you were declared bankrupt (however, do note that your business will be closed down when you're declared bankrupt, and you'll need to start over).
- It takes the financial pressure off because creditors will no longer be chasing you for payment.
- Creditors can't threaten you with legal action, which means you won't risk making your financial situation worse by racking up court and solicitors' fees.
- Any outstanding debts you can't pay out of your assets will be erased.
What are the cons of declaring bankruptcy?
Unfortunately, declaring bankruptcy also comes with some serious disadvantages. And this is why you need to think very carefully before you decide to go ahead.The cons of declaring bankruptcy include:
- Both your business and personal assets may be sold to clear off your debts. Which means you may lose equipment you need to do business, such as your laptop or your car.
- The bankruptcy will show on your credit report for six years. This period can make it very difficult to get any credit—not just a loan or overdraft, but also any service you'd usually pay for later, such as electricity (your provider may ask that you switch to a pay-as-you-go tariff, which is generally more expensive).
- You may be disqualified from being a member of your professional body, for example, if you're an accountant or a solicitor. This exclusion can affect your ability to continue doing business.
- You may find it difficult to get a job in specific sectors, especially if the job involves handling money.
When should I declare bankruptcy?
When to declare bankruptcy depends on your situation. There's no hard and fast rule.That said, one thing's for sure. Debts have a way of spiralling out of control. Thus, if you're struggling, it's best to speak to someone as soon as possible so they can walk you through your options.The Business Debtline is a charity that offers free, independent and confidential advice.