Handling a company with severe business debt is not an easy task. Between creditor pressure, the future of the company, and other factors, it’s difficult not to feel overwhelmed. In addition to these stressors, you might be worried that your personal finances are under threat, or that losing your home is a possibility.
While these worries aren’t unfounded, your company’s debt does not automatically put your personal finances at stake. There are a variety of factors that influence how business debt impacts external finances. As such, it’s a good idea to understand how your company’s debt affects you before taking further action.
In this article, Clarke Bell will discuss company debt, how you can handle it, and whether business debt can make you lose your home.
Business debt in a limited company
The first factor to consider is your company itself. Your company’s classification determines where the responsibility for debt ends. If your company is a Limited Company, you will be afforded certain protections that other companies aren’t. With a Limited Company, responsibility for business debt starts and ends with the company itself. You and your company are legally distinct entities with completely separate finances. This means that, generally speaking, what happens to your company won’t have much of an impact on you.
This is not true for some other classifications of a company, such as a sole trader. If you operate as a sole trader, you and your company are considered the same legal entity. This extends to your finances, and any debts, meaning whatever affects one affects the other. If your company accrues significant amounts of debt, it will be considered the same as personal debt, thereby affecting your personal finances.
This can lead to creditors turning to your personal assets for debt recovery, and could result in personal bankruptcy, or the loss of your home. However, creditors are only likely to target your home if you have some equity in it. You stand a good chance of keeping your home if you have recently purchased it and have very little equity.
Business debt and personal guarantees
Although a Limited Company protects directors from having their personal finances affected in most cases, there are exceptions to this rule.
One such exception is personal guarantees. If you sign a personal guarantee to secure a loan, limited liability does not offer its usual protections. By signing a personal guarantee, you directly involve your personal finances, making you responsible for business debt if your company cannot make repayments. If your business debt is particularly extreme, and you have signed personal guarantees for much of it, you could stand to lose your home.
How to deal with business debt
There are several methods of dealing with business debt, each with its advantages, disadvantages, and prerequisites for use. If your company is struggling with its debt, you should act cautiously, but swiftly, to avoid the problem developing into something worse.
One of the most effective methods of dealing with business debt is voluntary liquidation. For insolvent companies, this takes the form of a Creditors’ Voluntary Liquidation (CVL). This is an insolvency procedure that provides both companies and directors with significant benefits. Directors are entitled to appoint an insolvency practitioner of their choice to fill the role of the liquidator. In this role, they will take the reins of the company and carry out its liquidation.
They will be responsible for identifying and making note of company assets, communicating with outstanding creditors and other parties, then finally disposing of any company assets. Any proceeds will then be distributed amongst outstanding creditors according to a repayment hierarchy, with secured lenders at the top and shareholders at the bottom. Once all payments are made, the company will be wound up and struck off from the Companies House register. At this point, the company will cease to exist.
In addition to an efficient and reliable method of liquidation, the CVL procedure offers a series of legal protections. Firstly, outstanding creditors cannot take legal action against the company while the CVL procedure is active. Essentially, this acts as a protection from the serving of a winding-up petition and compulsory liquidation. Secondly, if any debts remain unpaid at the end of the procedure, they will be written off. However, personal guarantees are still an exception to this, and will require you to pay for any debts secured by a personal guarantee out of your personal finances. While a CVL is an incredibly effective solution for insolvent limited companies, it is not an option for sole traders. If you operate as a sole trader, you’ll have to seek another solution.
If you are a sole trader, you won’t enjoy the same advantages as a Limited Company. The law considers you and your business to be the same entity, meaning your business debt and personal debt are exactly the same. If you incur enough business debt for your company to struggle with repayments, you will be expected to cover the debt with your personal finances. In some cases, this could make you lose your home, if the debt is large enough.
However, you do have options available to handle business debt if you are a sole trader. You could opt for an Individual Voluntary Arrangement (IVA), a procedure very similar to a Company Voluntary Arrangement (CVA), though created specifically for individuals, rather than companies. Both procedures aim to renegotiate company debts into a more affordable package, ensuring both the company and its creditors benefit.
While this is certainly an effective solution for some companies, it isn’t always appropriate. Some companies will simply be unable to repay what is owed, either because their debt is too large, or their income has sharply declined. In such cases, bankruptcy is likely the only option left. As a sole trader, filing for bankruptcy may make you lose your home, depending on how much equity you have. If you have a large amount of equity in your home, there is a good chance that it will be repossessed and sold to recover some of the debt. However, if you have very little equity in your home, you may be allowed to keep it.
Clarke Bell can help
If your company is struggling with financial problems, let Clarke Bell be there to help. We have more than 28 years of experience in helping companies find the best solutions to their financial problems, and we can do the same for you. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.