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Self Employed Bankruptcy – Ultimate Guide

Published: 26 January 2024

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Are you self employed and considering the option of going bankrupt? Bankruptcy Guide specialises in assisting people like you get through the bankruptcy process while continuing to run your business.

Contents

Can you still run a self employed business if you go bankrupt?

If you are self employed, you are allowed to continue running your business if go bankrupt.

You don’t have to tell your customers about the situation. The only thing you need to ensure is that you now trade under your own name.

You must keep monthly records of your business income and expenses. This is because the Official Receiver can ask to review these at any time during your bankruptcy. They use this information to help work out if you can afford to make payments towards your debts.

If you have outstanding invoices you won’t be able to collect and keep this money. You will have to hand it over to the Official Receiver. For this reason, it is essential that you plan the timing of your bankruptcy carefully.

Want help with your bankruptcy? The Bankruptcy Guide self employed assistance service will ensure you have everything in place to keep your business running.

Using a trading name if you are bankrupt

Section 360 of the Insolvency Act 1986 states that you must ensure that anyone you do business with knows the name in which you were made bankrupt.

This sounds very formal. But all it really means is that you have to trade in your own name.

If your business has a trading name you can still use this. However, you must always add your own name as well.

So if your name is John Smith but your self employed business name is JS Plumbing, you must ensure you sign off any communications and raise invoices like this: ‘John Smith trading as JS Plumbing’.

Are self employed business debts written off by bankruptcy?

In addition to your personal debts, bankruptcy also writes off any business debts you owe.

This includes things like your business overdraft, business loans or a credit card.

The reason for this is that as a self employed person, you are personally liable to pay the debts you borrowed through your business.

Your personal liability for your business debts means that they have to be treated in exactly the same way as any other unsecured debts you owe.

When you go bankrupt, any tax or VAT debt you owe to HMRC is also included.

Business finance agreements and bankruptcy

If you have machinery or equipment on finance, you can’t automatically include this debt in your bankruptcy. If you need the financed item to continue your self employed business, you will have to keep making the payments.

The Official Receiver will not be interested as long as the second hand value of the item is less than the outstanding amount you owe on it.

You should check in advance that the finance company will be happy to maintain the agreement once you are bankrupt. You must do this because some companies are unable to continue with their agreement if you g bankrupt. In these circumstances, they will demand the return of the item regardless of your ability to keep paying.

You can use bankruptcy to get out of finance agreements for services or equipment you no longer need. You simply stop paying. Any shortfall after you have returned the item is then written off.

Bounce back loans and bankruptcy

As a self employed person, if you took a Covid bounce back loan, you are personally liable to repay it. Because of this, the loan is included and written off when you go bankrupt.

That said, you do need to be prepared to answer questions about the loan.

The Official Receiver will investigate the amount you borrowed to ensure it was within the rules (up to a maximum of 25% of your previous year’s turnover)

They are also likely to ask you what you used the money for. If you used it to pay for business expenses that is fine. However, if it was used for non business purposes, this could lead to a BRU and in very rare cases, prosecution for fraud.

What happens to your self employed business vehicle?

White van to showcase what happens to a business vehicle if you go bankrupt

The rule of thumb here is that you will be able to keep a vehicle (car or van) that you need for business purposes. This is the case even if it is worth more than the standard vehicle allowance.

That said, your vehicle can’t be of excessive value. This is defined as being worth more than the cost of a reasonable replacement.

So for example, if you are a plumber and own a van worth £3000, you should be able to keep it. However, it if it worth £6000, there is a risk that you will have to sell it and get a cheaper one.

If your van is on finance, the Official Receiver will not be interested in it as long as the balance outstanding is equal to or more than its value. However, careful forward planning is required. This is because some finance companies will demand the return of the vehicle if you go bankrupt. 

The Official Receiver will not allow you to keep two vehicles. So if you have a car and a van, you will have to plan to sell one before going bankrupt.

What happens to your work tools?

As a general rule, you will be allowed to keep the hand tools you use to carry out your self employed work. The Official Receiver (OR) will not be bothered with them.

For example, if you are a plumber, a kitchen fitter or electrician, the tools you are likely to have in the back of your van will not be an issue.

Larger, more valuable equipment and plant could cause a problem however. The OR is interested in items that are individually worth more than £500 (on the second hand market).

You may have items like this which you need to keep running your self employed business. Where this is the case, you will have to ‘buy them back’ from the OR at the equivalent of their second hand value.

Self employed business Stock

Any stock that you keep within your business is regarded as part of your personal assets. This means that if you go bankrupt, the Official Receiver could take your stock and sell it.

You can prevent this from happening by buying back the stock you want from the Official Receiver yourself. They will be happy for you to do this as long as you pay a fair second hand price.

Given this situation, it is important that you estimate the value of any stock you own before you go bankrupt. You can then plan how you will buy back what you need.

Stock is most commonly something you will need to consider if you run a shop. However, other examples are paintings if you run an art gallery or entertainment equipment if you run a party business.

Can you have a business bank account when you are bankrupt?

Mobile banking to showcase what happens to a business bank account if you go bankrupt

One of the things you might be worried about most in regards to going bankrupt is whether you can have a self employed business bank account.

You don’t have to be concerned. You can.

That said, not all banks will let you continue to use their business facility. It is therefore likely that you will have to open a new account for your business even if you don’t owe money to the bank you use now.

There are a number of banks that do offer business accounts for bankrupt self employed people. The ones that Bankruptcy Guide is aware of include:

  • Monzo on-line bank
  • Starling on-line bank
  • TSB Bank
  • Tide bank

What happens to your employees after you go bankrupt?

Where you have employees in your self employed business, there is an extra level of planning you will need to consider.

After you go bankrupt, their contracts of employment become void and they must be made redundant.

That said there is no need to panic. If you want to continue employing your people you can. You just need to issue them with a new employment contact the day after you go bankrupt. They can then continue to work for you as if nothing has happened.

The only real downside is that they will become aware of your situation.

You may be employing people you can no longer afford to keep. In these circumstances, their employment is simply terminated. Any claims for redundancy against you will be included as debts in your bankruptcy.

Can you remain in your business premises?

Very often, you may be simply running your self employed business from home. If so there is nothing you need to do.

However, you are leasing a premises, the current agreement you have in place with your landlord becomes void once you are bankrupt.

If you want to remain in the premises, you will need to agree and sign a new lease starting the day after you go bankrupt.

Unfortunately this does mean that your landlord will be told about your situation. However, this is not normally a problem as long as you you are on good terms with them. They are unlikely to want the inconvenience of asking you to leave and then having to find a new tenant who they don’t know.

You may no longer need your business premises but can’t leave due to an onerous lease. Once you are bankrupt, you can simply vacate. Any outstanding rent arrears are include and written off.

   Written by James Falla

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