Can creditors come after my business for personal debts?

If you’re experiencing debt problems on an individual basis, and you have your own business, you may have been threatened by creditors that they can target your business for personal debts. In some circumstances, creditors can make a claim against your business to recover their debt. However, if you have a limited company, it is less likely to happen. That said, if you have signed a personal guarantee as a director, you are personally liable for that debt.

Types of personal debt

In early 2020, it was revealed that more than half of UK adults had personal debt up to £100,000. Indeed, 63% have entered the decade with some level of personal debt, excluding mortgages. Much of the debt includes overdrafts, loans, credit card and store card debts.

The most common form of personal debt is credit card debt. Creditfix’s survey showed that the average level of debt on personal credit cards is £3,000; men tend to owe £300 more than women. Additionally, most people don’t pay off the balance in full every month, with 22% of people paying just the minimum payment, or less.

Personal and business debt for sole traders and partnerships

Whether your debt is personal or business-related, when you are a sole trader, i.e. self-employed, you are liable for all your debts. In the eyes of the law, you and the business are one legal entity; your business is not separate from you. This means that any business or personal debts you incur will have to be paid by you.

Creditors are within their rights to take action not only against your business, but also against you personally. This will put your personal assets, such as your family home, and your business assets at risk.

As with sole traders, a partnership of two or more people is also considered one legal entity. That means that all partners are jointly liable for any debts. Creditors are entitled to take action against any of the partners to collect the debt, or all at the same time. In addition to this, if one partner pays more than their share, according to the partnership agreement, that partner is allowed to recover the extra money they’ve paid from the other partner, including taking court action. However, there are exceptions to this situation. Read more...