My United Kingdom Business Cannot Pay Its Debts. What Are My Options?

If your business cannot pay its debts, you may have several options available to you. The best course of action will depend on the size of your business, the extent of your debt, and what kind of business structure your business operates under. Although debt problems and financial difficulty can be stressful, there are many ways to get out of debt, regardless of how bad the situation may seem. This article will outline some of the options that may be available to you and the pros and cons of each.

Talking to Creditors

Before exploring any debt solutions, it is advised that you talk to your creditors. You may be able to restructure your debt and come to an agreement on how to pay them off over time. Alternatively, you may also be able to seek out more time to work out your situation. 

Creating a Plan

The first thing to do in analysing debt is to create a plan. A starting point might be to make a clear list of your debts, differentiating between high priority debts and non-priority debts. High priority debts have more significant consequences if they are not paid and will include:

• mortgage;
• rent;
• secured bank loans;
• tax; and
• court-ordered payment.

Non-priority debts, on the other hand, will include debts such as:

• credit cards;
• hire purchase agreements;
• unsecured bank loans; and
• loans from family and friends.

Generally, paying high priority debts will be essential to keep your business running. For example, a failure to make payments toward a secured debt might mean that the bank seizes your collateral. If the collateral is the business itself, then you risk losing your business entirely. As such, you should create a list of which debts you should prioritise and try to make regular payments towards them first, so you can keep your business running.

Keeping your business running will be valuable if you can repay your debt over time through the regular performance of your business. In addition, you can try to improve the amount of money that your business makes through various strategies, such as reducing your outgoings. 

Debt Management Plan

If you decide to try paying off your debts, you might want to set up a debt management plan. A debt management plan is an agreement between you and your creditors to pay off your debt in instalments. Further, it is managed by a financial company and is effectively a repayment plan. Specifically, a debt management plan is usually granted when: 

• you can afford to pay your creditors smaller monthly payments starting immediately; or
• your debt problems are such that you can start making repayments in a few months, but you cannot pay anything back immediately.

This might be the best option if, as mentioned above, you can pay back your debts over a long time through the regular amount of money that your business brings in. However, note that if you are making a debt management plan, you will have to give details about your financial situation to the debt management company. This may include details about your:

• assets;
• debts;
• income; and 
• creditors.

Administration Order

If your debt is for less than £5,000, is owed to at least two creditors, and is ordered through a county court or High Court judgement against you, then you can pay in instalments through applying for an administration order. The instalments are in the form of monthly payments, which the court divides between your creditors. 

Individual Voluntary Arrangements

An individual voluntary arrangement (IVA) is an agreement with creditors to pay your debts through regular payments to an insolvency practitioner. The insolvency practitioner then divides the money between your creditors. 

Your insolvency practitioner will work out what you can afford to pay and for how long. For an IVA to work, your creditors must agree to it. This might be the best option if you would like more control over your business assets than in bankruptcy. This process allows you to slowly start to pay back your debts without your creditors taking action against you.

What If I Cannot Pay at All?

If you cannot pay your debts at all because you do not have a steady income or enough assets you can sell, then you can apply for a ‘debt relief order’ or a ‘bankruptcy order’.

Debt Relief Order

You can use a debt relief order if you owe less than £30,000, do not have spare income, and do not own your home. If you get a debt relief order, you will not have to pay certain kinds of debt for a specified amount of time (usually for a year). At the end of the debt relief order, the debts will be written off, and you will not have to pay them. 

Bankruptcy

Alternatively, you can use a bankruptcy order if you cannot pay your debts at all. This is usually the last resort option, as it means that you lose all of your assets. It will also mean that you become subject to restrictions on money that you can borrow. However, at the same time, a bankruptcy order can be very liberating as it will remove all of your debts completely. 

Key Takeaways

There are many ways of dealing with debt. Although it might be a stressful position to be in, you should seek help regarding the options available to you. In any case, it is advised that you start by creating a plan with a list of your high priority debt and non-priority debt. If you think you might be able to pay back your debts over time, you should either speak to your creditors or seek to set up a debt management plan. However, if you cannot pay off your debts at all, then your best option might be to seek a debt relief order or a bankruptcy order. 

If you need help with business debt, our experienced disputes lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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