Bankruptcy and self-employment — what it means for sole traders

Bankruptcy and self-employment often go together — many people who go bankrupt are sole traders whose business debts have become unmanageable. How bankruptcy treats you depends on your business structure.

Sole traders and partnerships

If you trade as a sole trader or in an ordinary partnership, there is no legal separation between you and your business. Your business debts are your personal debts, and bankruptcy deals with both at once.

• Your business assets (stock, equipment, a van) become part of your bankruptcy estate and may be sold by the Official Receiver (OR).
• Tools of your trade up to a value threshold (currently £1,350) are protected, so essential equipment for earning a living may be kept.
• Your business bank account will usually be frozen. You will need a new, basic personal account after the bankruptcy order.
• You can usually keep trading as a sole trader, but the OR will look at whether your business is viable and whether ongoing trade creates new debts.

Limited company directors

If you are a director of a limited company, the rules are stricter:

• You cannot act as a company director while bankrupt without court permission.
• You cannot be involved in the promotion, formation or management of a limited company without permission.
• The company itself is separate from you — your bankruptcy does not bankrupt the company — but it usually forces you to step down.
• If the company is also insolvent, it may need to be placed into liquidation or administration separately.

Many directors resign before filing for personal bankruptcy. Take advice before doing so.

VAT registration

• If you are VAT-registered as a sole trader, your VAT registration usually continues, but the OR may review whether it is still needed.
• Outstanding VAT owed to HMRC is an unsecured debt that is written off in bankruptcy (for the period up to the bankruptcy date) — but ongoing VAT on trade after the bankruptcy date remains your responsibility.
• HMRC is a creditor like any other for pre-bankruptcy debts.

Keeping your business going

It is possible to continue trading through bankruptcy as a sole trader, but:

• You must disclose your bankruptcy if you seek credit above £500 for the business.
• You must not trade under a different name to hide the bankruptcy.
• The OR will assess whether ongoing trade is creating fresh debts you cannot pay.
• If the business is genuinely viable and earning enough to live on, keeping it going is often the sensible option.

Business debts that survive

Most business debts are written off in bankruptcy, but some are not:

• Debts from fraud survive.
• Certain tax penalties may survive.
• Joint and several liability — if you had a business partner, they remain liable for the full debt.

Before you file

• Gather a full list of business debts and personal debts together — the OR needs the complete picture.
• List business assets separately with estimated values.
• Consider whether to close the business first or keep trading — a debt charity can help you decide.
• Do not move business assets to family or sell them below value — the OR can reverse this.

Get free advice

Self-employed bankruptcy has extra moving parts. StepChange (0800 138 1111) has a dedicated self-employment debt team, and Business Debtline (0800 197 1002) specialises in sole traders and small businesses across England & Wales.

England & Wales only. General information, not legal advice.