If you are struggling to pay your bounce back loan, going bankrupt could be the answer. The process will allow you to write off your loan and other debts and continue operating your self employed business.
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What happens to your bounce back loan if you go bankrupt?
If you were running a self employed business during Covid, you may have taken a bounce back loan. But what can you do if you are now struggling to repay this debt? One of the options you can consider s to go Bankrupt.
Your bounce back loan is a business debt. However, because you took it in your name, you are personally responsible for its repayment. This means you can include it in your bankruptcy. You treat it no differently to any other bank loan you are liable for.
Going bankrupt writes off all unsecured debts in your name – including your bounce back loan. This means you no longer have to repay them.
The process will also write off any other business debts you owe. These could include a normal business loan, a business overdraft, debt to HMRC (including VAT) and suppliers.
Does it matter what you spent your bounce back loan on?
Your bounce back loan was made available to you specifically to support your business through Covid.
Once you are bankrupt, the Official Receiver (OR) will ask you what you spent the loan on. They need to check that you used it for business purposes.
You may have used the money to pay rent, suppliers, employees or contractors. This is absolutely fine. Also, consolidating other debt and supporting your own income to ensure you could continue trading are legitimate uses of the funds.
However, there could be a problem if you used the loan for non business purposes – for example if you bought a new car or extended your home. If you transferred the loan funds from your business account directly into your personal account, this would potentially indicate that the loan was misused.
Where you did not use your bounce back loan to support your business, the OR will consider whether you took the loan fraudulently. These circumstances may be a reason for you to avoid going bankrupt.
When you use our self employed bankruptcy service, we will help you draw up a schedule of your bounce back loan expenditure and ensure you show it was used for business purposes.
What if you borrowed more than you were allowed?
One of the main criteria for the bounce back loan scheme was the maximum amount you could borrow. The Government set this at 25% of your previous year’s business turnover.
If your business was new and had not previously been running a year, you could borrow up to 25% of your estimated 1st year’s turnover.
That said, it was relatively common for people to borrow more than the maximum amounts because there were very few checks. Once you applied for the loan, the bank would generally approve the amount almost automatically. You did not have to prove anything.
However, if you go bankrupt, the Official Receiver will check the amount you borrowed.
The OR does not usually have a major problem if you borrowed more than you were entitled to. This is as long as the extra amount you took was not excessive and you can show that you used the funds to support your business. However, if there is no clear history of using the funds for business purposes, this could be an issue.
Contact us for advise you about your bounce back loan limits and whether the amount you borrowed could cause an issue if you go bankrupt.
Can you continue to run your self employed business?
The fact that you have gone bankrupt does not mean you have to stop trading. You can continue to run your self employed business pretty much uninterrupted.
You can still operate a bank account and you will normally be able to keep your works vehicle and tools (as long as they are not of excessive value).
A significant advantage is that you will be able to continue trading without the weight of any debt repayments. Your bankruptcy will write off not only your bounce back loan, but all of your unsecured debts (including money owed to HMRC). This means you should be able to start drawing a sensible amount from your business to support your personal living expenditure needs.
If you have a lease agreement for your business premises, have employees or significant stocks you can still go bankrupt. However, there are very specific actions you will need to take to ensure your business is protected before you apply. Speak to us for further assistance in these circumstances.
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What we can do
Assistance with going Bankrupt
- Application form completed correctly
- Preparation for Official Receiver interview
- Ongoing 12 month support
Self Employed Bankruptcy
- Business income and expenses forecast
- Bank account advice
- On-going support with 3 line accounts
Switch from IVA to Bankruptcy
- Help with cancelling IVA
- Support through bankruptcy process
- On-going support during bankruptcy
Support if Already Bankrupt
- Completion of PIQB questionnaire
- Preparation for OR interview
- Assistance with OR info requests